Why Have Home Mortgage Modifications Been So Difficult? Ask Sheriff Green
This is a crucial story that I have wanted to write on for some time. The feds allocated a ton of money for reworking mortgages, to a program called Making Home Affordable, but which goes by the acronym HAMP -- $75 billion. But only a few homeowners, tens of thousands out of the half million in progress in early November, have received a permanent adjustment to principal. (That's per the Journal; thanks to Calculated Risk for pointing it out.) From the NYTimes:
"The banks are not doing a good enough job," Michael S. Barr, Treasury's assistant secretary for financial institutions, said Friday. "Some of the firms ought to be embarrassed, and they will be."While the lenders and the feds have taken their time with relief to homeowners, local governments have not waited to act. Five years ago in Philadelphia, John Green, the city's sheriff and the man in charge of foreclosing and auctioning off homes, had seen things go too far. He declared an end to sheriff's sales in the city:"We're seeing a failure by some of the bigger banks on execution," Mr. Barr said. "We're going to be quite focused and direct on particular institutions that are not doing a good job."
The sheriff first made his mark in the foreclosure issue in 2004, when he noticed a spike in the number of delinquent properties the court was ordering sold. He postponed one month's auction and then went to Judge Annette Rizzo of the Court of Common Pleas seeking to legalize the move.Sheriff Green's line in the sand in 2004 has grown into a full-fledged and beneficial, if painstakingly slow, Mortgage Foreclosure Diversion Pilot Program."We have to stop the bleeding," the judge recalls the sheriff saying in a courtroom crowded with worried homeowners. The sheriff says he doesn't remember making such a statement.
"Really what he did was not legal," Judge Rizzo says of the sheriff's decision to stop the auction.
During a recess, she summoned the lenders' lawyers, the sheriff, consumer advocates and the city solicitor into the back room. She asked them to form a committee to determine which individual homeowners deserved a delay, aid through existing government programs, or just a graceful exit from their house. But she declined to order a blanket moratorium on sales.
Foreclosures in the city started rising again in 2007, and in early 2008 reached 1,000 per month. From the efforts of Judge Annette Rizzo and Court of Common Pleas president judge, C. Darnell Jones II, as well as several members of the city council, a program was formalized in April 2008, this time with a legal cover story from Philadelphia's city council. (Government interfering with private contracts is prohibited by the U.S. Constitution - you may remember hearing that during the AIG bonus fracas.)
In brief, the city will not allow any home to be foreclosed on until there is a face-to-face meeting among the lender that owns the mortgage, the servicer (the company that collects the payments), the borrower, and a lawyer or credit counselor representing the borrower. Imagine how long it takes to get these sessions prepared for and scheduled, especially when one of the parties has a reasonable fear that their home will be taken away.
I visited Philadelphia's city hall a few times last year to see the program in operation. My good friend David, an attorney in town who contributes time to the program, shepherded me into the sessions (with everyone's permission, of course), and got me an interview with Judge Rizzo.
The real-life stories that I heard were difficult to listen to, of course. In every case, as I recall, someone had fallen ill and lost their job, or a divorce or other grave cause had taken away an income from the household's cash flow. In the snapshot I saw on just a couple of days, it was these non-mortgage factors that caused the delinquencies, not a ballooning monthly payment from a predatory adjustable-rate mortgage.
Today, I'm told, there are many more people coming to the program for the sole reason that they're unemployed. They don't need rate reductions; they need jobs. Unfortunately the programs aren't really designed to solve that problem.
The federal program, HAMP, has 650,000 modifications in the works. The lenders that have been the most expeditious in introducing their 60-day or longer delinquent loans are: Aurora Loan Services (33 percent); giant CitiMortgage (40 percent); GMAC Mortgage (35 percent); JPMorgan Chase (32 percent); Nationstar Mortgage (32 percent); and Saxon Mortgage (44 percent).
The laggards are Bank of America, Ocwen and One West, all with participation below the 20 percent average.
With all that as background, there are several reasons that make adjusting, or remediating, or delaying the foreclosure of a mortgage so difficult. These I learned from another attorney knowledgeable in real estate, my friend Diane.
Most of the process is automated: you send your payment on time, a computer notes the payment and sends out the next bill. If you're late, the computer follows up that too. Even the legal notices are automated, Diane says.
When your payments are sufficiently overdue, the servicer hands over the loan to a special servicer, one that I figure has more people on hand, due to all the up-close-and-personal work that goes into a loan that is headed for foreclosure. That triggers a lot of other hand work, and with all the advanced delinquencies the special servicers are swamped, and no one can figure out who owns what.
Cleaning this up will take awhile, especially if the feds emulate the Philadelphia model. Aren't there a lot of out-of-work investment bankers that could help with the credit counseling?