Mortgage Modification in the Foreclosure Crisis

Is mortgage modification a viable option for hard-pressed homeowners facing possible foreclosure?

When the Obama Administration first announced the Home Affordable Modification Program (HAMP), the expectations were high. The program was designed to assist struggling homeowners with mortgage loan modifications. Many of those homeowners are now worse off than when they applied to the program.

Where HAMP Went Wrong

How did HAMP get so off track? Or was it not set up effectively in the first place?

When lenders approved the "trial" loan modifications that decreased monthly mortgage payments for thousands of borrowers, they continued to list their mortgages as delinquent or in default. And when the time came for the lenders to make the modifications permanent, the lenders cancelled the loan modifications, reinstated the original mortgage terms, and demanded back payments that were often in the tens of thousands of dollars.

As of November 2010, lenders had cancelled 729,109 trial modifications nationwide. Outraged borrowers claim that they were misled by lenders. The borrowers contend that lenders never had any intention of permanently approving their loan modifications. They also claim that they had to expend thousands of dollars in fruitless efforts to fend off foreclosure.

Lenders were also apparently reporting modified payments under the plan as delinquent to credit agencies, further damaging borrowers' credit. Many lenders claim they made full disclosure to borrowers, who knew the lenders could terminate a plan at any time and begin foreclosure. The sheer number of confused and outraged borrowers, however, shows a possible lack of adequate disclosure or a failure to simply communicate the material terms of the modified loan agreements.

Role of Loan Servicers

Another issue with HAMP was the servicers hired by lenders to collect monthly payments. They apparently collected more money on foreclosures, so the servicers had no incentive to keep borrowers in the HAMP program.

Reform Proposal

Senator Jeff Merkely of Oregon has proposed a six-point program that he hopes will fix the shortcomings of the HAMP program and put the housing market back on the road to recovery. His program would simplify the HAMP program and mitigate foreclosures by offering these amendments:

  • Allowing families to refinance to an FHA-guaranteed mortgage based on property values and interest rates;
  • Suspending foreclosures while borrowers seek a modification;
  • Creating an independent third-party review of any foreclosure and possible mediation between borrower and servicer;
  • Instituting bankruptcy reform to treat primary residences like any other asset; and
  • Creating a homeowner's tax credit for first-time buyers;

It is hoped that these changes could restore confidence in home buying and stop the tide of foreclosures that continues to hamper the economic recovery.

In the meantime, if you have questions about loan modification or foreclosure, contact an attorney experienced in real estate law, such as one of the experienced lawyers at Burns & Hansen, P.A..