Mortgage lenders call it "dual tracking," but for homeowners struggling to avoid foreclosure, it might go by another name: the double-cross.
Dual tracking refers to a common bank tactic. When a borrower in default seeks a loan modification, the institution often continues to pursue foreclosure at the same time.
Lenders contend that dual tracking simply protects their investment if the homeowner is unable to qualify for new loan terms. Mortgage servicers can lose money if they don't foreclose in a timely manner, and repossessions often are complicated and lengthy.
But regulators and consumer advocates say the practice lulls some homeowners into thinking they are no longer at risk of having their homes taken away. Regulators are now aiming to curtail the practice as part of an overhaul of the foreclosure system.
"We don't think that a homeowner who is making a good-faith effort to work through their troubled mortgage should have the roof ripped out from over them while they are negotiating, or trying to negotiate," said Geoff Greenwood, a spokesman for Iowa Atty. Gen. Tom Miller.
On Wednesday, federal banking regulators issued settlements with major banks and home-loan servicers that would, among the many provisions, stop foreclosure once a homeowner is approved for a temporary mortgage modification. In ordering the changes, the regulators said they found "critical weaknesses" in the way the lenders handled foreclosures.
The settlements drew immediate fire from activists who said they did not go far enough, particularly in addressing the two-track foreclosure process. A separate coalition of state attorneys general and federal agencies including the departments of Justice, Treasury and Housing and the Federal Trade Commission is still negotiating details of a foreclosure-system overhaul that could include a near-ban of the practice.
"The dual-tracking issue is of major concern," said Greenwood, whose boss is leading the negotiations for the attorneys general of all 50 states and federal agencies.
The state attorneys general have issued their demands in a detailed, 27-page term sheet. Banks have responded with their own proposals. Negotiations between the two groups continue.
The demands by the attorneys general would prohibit lenders from starting the foreclosure process on a home if a borrower has submitted an application for a loan modification. That is a significant step beyond what the federal regulators have ordered, according to consumer advocates, because often borrowers struggle even to get their loan modification packages reviewed.
"The settlement policy on dual tracking completely misses the point," said Alys Cohen, attorney for the National Consumer Law Center, referring to the deal cut Wednesday by banking regulators. "You have to obtain the loan modification before they stop the foreclosure."
Shirley Robertson of Oxnard has firsthand experience with dual tracking.
Robertson learned last summer that her home was scheduled to be sold at a foreclosure auction, so she contacted her lender, JPMorgan Chase & Co. Robertson said she had fallen behind on mortgage payments for her home and a rental house because the economic downturn put her catering business in a tailspin.
Chase postponed the sale so that Robertson could file for a modification of the loan she could no longer afford. She filed the paperwork to the bank and twice was asked to file new packages because the bank said information was missing, according to a lawsuit Robertson filed against the bank and copies of letters she shared with The Times.
She said she faxed her third paperwork package to Chase on Aug. 23, the day before the deadline set by Chase. But that same day, the home was sold at a foreclosure auction. Robertson said she still had equity in the home, meaning the amount owed to the bank was less than the price the house could have brought.
"They have stolen that equity from me," said Robertson, 64. "If I had known they were going to do this, I would have sold the damn house myself, and not be penniless."
Chase declined to comment on the details of Robertson's situation.
Robertson now lives in the house that was once a rental. Chase granted her a loan modification on that home, she said, but she is struggling to make thosepayments because work is hard to find.
The proposed terms from the attorneys general regarding dual tracking require that mortgage servicers provide homeowners a written list of any missing documentation from their modification package within 10 days of submission. Mortgage servicers would also be required to immediately notify a homeowner in writing of any new sale date if the foreclosure clock has already begun when a borrower reaches out for a modification.
If a loan modification is denied, then a mortgage servicer would be required to submit an affidavit in court summarizing all of the efforts to work with a borrower and the basis for denying a modification. In states such as California, where a court order isn't required to foreclose on a property, the mortgage servicer would be required to send that sworn statement directly to the borrower.
The Obama administration in effect banned dual tracking in most cases last summer under its signature foreclosure relief initiative program. But the vast majority of mortgage workouts now occur outside of that initiative through banks' in-house programs.
Lenders completed about 1.24 million of those proprietary modifications in 2010 compared with nearly 513,000 through the government's Home Affordable Modification Program, according to Hope Now, a private-sector group of mortgage servicers, investors, insurers and nonprofit counselors. Banks took back 1.07 million homes from delinquent borrowers last year.
"The biggest problem is that a majority of the modifications today are proprietary," said Peter Swire, a former economic advisor to President Obama specializing in housing issues. "The banks are not on the hook for their non-HAMP modifications."
Homeowners seeking to get their loans modified are confronted with cases of lost paperwork and difficulties communicating with their lenders. Often two separate departments within a bank are pursuing the different tracks, Swire said.
"They have their foreclosure people and then somewhere else they have their modification people," said Swire, now a senior fellow at the Center for American Progress. "They are often in different cities."
Vicki Vidal, associate vice president of public policy for the Mortgage Bankers Assn., said that many times borrowers are unwilling to face reality and ignore overtures from lenders until foreclosure begins.
"Getting that foreclosure notice is a wake-up call to a lot of borrowers," she said. "To some degree that pressure is not necessarily a bad thing."
Most major banks service loans for investors who have set up specific rules governing how and when they must proceed with a foreclosure. If a bank doesn't follow those guidelines, it can lose money.
Furthermore, depending on the jurisdiction, certain states can set up strict timelines for when certain steps in a foreclosure must be taken. If those deadlines aren't met, duplicate costs can result.
"These are state-imposed limitations that we have that can be very real in our world," Vidal said.
Times staff writer E. Scott Reckard contributed to this report.