The home loan modification mess

Last year, Noel Sandoval, an accountant in San Mateo, Calif., who is disabled from epilepsy, asked Bank of America to ease the terms of his $369,000 mortgage under a federal program designed to help homeowners in distress. After almost 12 months of back and forth, the bank told him no. Its explanation: The mortgage was owned by an investor who wouldn’t permit any modifications.

It turned out, though, that the bank wasn’t telling the truth — something Sandoval’s legal services lawyer discovered only after she finally obtained a copy of the mortgage servicing agreement. There in black and white was a list of conditions under which loan modifications were possible.

“That is an error on our part,” Barbara Desoer, president of Bank of America Home Loans, acknowledged Tuesday in testimony before the U.S. Senate. “We are not perfect.”

One of the seeming mysteries of the mortgage foreclosure crisis has been the enormous obstacles distressed homeowners encounter when they ask for modification of their mortgage terms — even in cases in which modifying a loan would appear to leave the bank better off than foreclosure.


There’s a Treasury Department program that’s supposed to make modification easier, but it has fallen short of expectations. Officials hoped the Home Affordability Modification Program would help at least 3 million homeowners, but it has produced only about half a million permanent loan modifications so far.

Homeowners struggling to keep their homes have reported every conceivable nightmare: lost documents and delayed responses, foreclosure proceedings that chug ahead even after loan modifications have been promised, “robo-signed” affidavits — and, in Florida, a house that was seized and sold in foreclosure even though the homeowner had no mortgage at all.

In response to the horror stories, banks and other mortgage servicers have offered all the predictable responses. They say they have been overwhelmed by the wave of mortgage defaults the Great Recession unleashed; they simply weren’t prepared to deal with this many requests for modification. In many cases, they note, a mortgage can’t be saved from foreclosure — when borrowers’ incomes have fallen so low that they can’t qualify for any terms, for example. And, of course, there’s the catchall excuse of human error.

All of these things are true in many cases. But none of that explains a situation like Sandoval’s. Bank of America not only told him wrongly that his loan couldn’t be modified; it even sent his lawyer an excerpt from the servicing agreement, from which someone at the bank had carefully cut out the lines that showed when modifications were allowed.

“I apologize for that error,” Desoer said grimly at a hearing of the Senate Banking Committee.

Bank of America has earned a reputation among lawyers and housing advocates as among the hardest to deal with of the nation’s big mortgage servicers. Customers complain that getting answers from the company is difficult; housing advocates say the bank often seems reluctant to negotiate seriously over requests to modify loans.

BofA says it has resolved to do better. Desoer told the senators that the bank has launched a series of reforms, including a commitment to give every homeowner “a fair opportunity” at loan modification and a new “case officer” system so customers need no longer explain their case to a different bank officer on every call. (The bank did not explain why it took a crisis to prompt such a simple innovation.) But even these reforms won’t be enough, experts on mortgage law say. They say there’s an underlying flaw in our system of bundled, resold mortgages: The companies that service mortgages can sometimes make more money from foreclosure than from modification. “In many cases … foreclosure is either less costly or more profitable,” said Adam J. Levitin, a professor at Georgetown Law School.

A mortgage servicing company makes money by charging fees based on the principal amount of the loan; reducing the principal reduces the servicer’s income. Foreclosure guarantees reimbursement of a servicer’s fees and costs; modification can make reimbursement harder. And when a loan is in default and heading toward foreclosure, a servicer can collect late fees and other charges. “For servicers, the true sweet spot lies in stretching out a delinquency without either a modification or a foreclosure,” notes Diane E. Thompson of the National Consumer Law Center.


What’s the remedy? In the best of all possible worlds, Congress would be seriously looking at legislation to fix some of these problems. It could change the bankruptcy law, which currently makes a first mortgage the only kind of loan that bankruptcy judges are barred from shrinking. (The House approved that change in 2009, but the Senate balked.) It could require banks to offer loan modifications before foreclosure, limit foreclosure fees and push states to expand mediation programs. These are all proposals made by Sen. Jack Reed (D-R.I.) in a bill he introduced in September.

But in the current deadlocked Congress, even measures as voter-friendly as protecting distressed homeowners against foreclosure abuses appear beyond our legislators’ ability.

Instead, the best hope for better foreclosure practices may lie with the 50 state attorneys general, who jumped on the scandal over “robo-signing” and are using their leverage over mortgage servicers in state courts to negotiate a broader set of reforms.

“It started as a mess, the robo-signing,” said Iowa Atty. Gen. Tom Miller, who’s leading the effort. “We want to figure out a way that it leaves the whole situation much better than when the mess started.”


That would come as welcome news to Sandoval. In September, after more than a year of negotiations, he turned down an offer from Bank of America that would have turned his $2,400-a-month mortgage into an interest-only loan for five years — but then increased his payment to about $3,000 a month after that. “My only source of income is disability, and that’s not going up,” he said. “The good thing is that I’m cheap. I don’t spend money on much of anything besides the mortgage and property tax.” He’s still making his payments, in part by renting a room to his father – and still hoping for a better deal.