Lenders should get what’s due them

A distressed U.S. homeowner with a temporarily modified mortgage made every payment on time for 13 months. That’s 10 months past the standard three-month trial period, but the servicer was predicting a permanent modification, so the homeowner kept paying.

A couple says that they, too, made all their modified mortgage payments and submitted every piece of paperwork required — multiple times because the servicer claimed to keep losing it, despite proof of delivery.

Neil Barofsky, special inspector general for the Troubled Asset Relief Program, testifies at a House Oversight and Government Reform Committee hearing March 25. Bloomberg News photo by Brendan Hoffman

This is a frequent complaint by borrowers who, like the homeowners mentioned here, have sought adjustments through the U.S. Treasury Department’s Home Affordable Modification Program, or HAMP.

In this case, the couple had been told they were approved for a permanent modification, only to be informed by letter they’d been rejected. Why? The servicer said they had failed to sign and return documents the couple says they never received.

What servicers want

These are among complaints piling into the Troubled Asset Relief Program, which administers HAMP and other programs aimed at helping homeowners. These cases are among examples quoted in Special Inspector General Neil Barofsky’s report to Congress last week, which slammed HAMP.

A cynic might conclude from these and similar horror stories that abound in the news that servicers are simply milking as much money from the borrower as they can before taking the house, which they knew they would do all along.

As long as they keep the payments coming, the servicer gets paid as well as the investor.

For some homeowners who don’t get permanent relief, they lose more than the house and the money they’d been laying out for the adjusted mortgage payments. Even if they paid the modified trial sums on time, they get hit with late fees for not making the full, pre-adjusted payments during that period.

That’s right. They get penalized for doing what they thought they were supposed to be doing.

Plus, servicers can tack on other fees and charges. Homeowners can end up with more principal owed after going through a government-backed program meant to help them, and less ability to pay it.

About 467,000 homeowners have permanent HAMP mortgage adjustments, which last for five years. When it began in 2009, the program aimed to help 3 million to 4 million borrowers.

“A program that began with much promise now must be counted among those that risk generating public anger and mistrust,” the inspector general’s report says.

About 700,000, or roughly half, of the trial modifications were cancelled, with another 173,000 in limbo, according to the report.

To be sure, HAMP and the servicers can’t be blamed for all of the failures. And some who didn’t get permanent HAMP modifications got adjustments from banks or otherwise were able to keep their homes.

Plus, as Treasury points out, the program aided in less measurable ways. HAMP set standards for debt-to-income ratios and market value to mortgage value, which have helped private lenders decide whether and how to modify mortgages.

What Treasury does

But you can’t explain away so many stories of borrowers following program guidelines and making payments, only to see their home taken away, anyway. And what about complaint after complaint that no matter how often they submitted paperwork, no matter how much proof of delivery resulted, they were told that their documents had been lost? Sounds like a stall to me.

So, what does Treasury do in the face of such failure? It declares success.

“While many of these borrowers did not convert to permanent modifications, they were afforded much needed breathing room,” Phyllis Caldwell, the chief of the Treasury Department’s Homeownership Preservation Office, told Congress this week.

With more homeowners staying put longer, perhaps in hopes of landing a job, neighborhoods and the housing market didn’t experience the degree of instability they otherwise would have.

Hence, failure is actually a success.

Banks caught forging signatures on foreclosure documents and claiming ownership of mortgages that aren’t theirs like to shift attention to the deadbeat homeowner. They were going to be foreclosed on, anyway, so what’s the big deal about sloppy paperwork?

They promised to make payments and didn’t. They violated their contracts with lenders. They got what was coming to them, the banks are essentially saying.

But banks, too, made certain promises. Those that took in billions of dollars in TARP funds were contractually obligated to help homeowners, participate in HAMP and follow its rules. It looks like they haven’t.

When will the banks and their loan servicers get what is coming to them?

Ann Woolner is a Bloomberg News columnist.