This article first appeared in the St. Louis Beacon, Sept. 14, 2012 - Rick and Karen Hoffman of St. Peters, who fended off foreclosure for three years, say they are relieved they were finally able to secure an affordable mortgage modification, but they have lingering questions about the process that is intended to help struggling homeowners.
“It’s been a terrible ordeal,” said Rick Hoffman. “Luckily, we hung in there and didn’t give up. What scares me is we’re not an isolated incident. We know there are millions of people going through this.”
The Hoffmans’ assessment of their experience with CitiMortgage echoes complaints that homeowners have been making since the U.S. housing bubble burst in 2007 unleashing a tsunami of foreclosures that forecasters warn will continue for several more years:
- Borrowers must submit and resubmit paperwork to lenders and servicers who say they are overwhelmed by the volume of foreclosures.
- These homeowners are seldom given a single point of contact by their servicers so they rarely talk to a representative more than once.
- The modification process is confusing, complex and dual track; while homeowners are negotiating to get a modification, the foreclosure process is also in motion.
Attorney Diane Thompson of the National Consumer Law Center says the Hoffmans’ story is not uncommon and is not limited to one lender. In May 2011, she testified before a Senate banking committee about the need to set national standards for mortgage servicers. She presented a list of cases that she said pointed to abuses by the nation’s top servicers, including Chase, Bank of America, Wells Fargo and CitiMortgage.
In addition to establishing national standards, Thompson recommended:
- Elimination of the two-track system; the foreclosure process should not be initiated or continued while a homeowner is being evaluated for a loan modification.
- Funding of foreclosure mediation processes in every community. Mediation is particularly vital in non-judicial states such as Missouri where court action is not required on foreclosures, she said.
(Mayor Francis Slay said Wednesday that he supports efforts to establish a foreclosure mediation program in St. Louis City. Such programs usually bring together homeowners and lenders with a neutral third party. St. Louis County recently approved a mediation program and Madison County has a court-supervised program.)
Although the Hoffmans' case eventually ended positively for them, Thompson said that delays in the foreclosure process are often used to benefit servicers not homeowners.
“Homeowners go through and do all of this, thinking it works — and it comes at a tremendous cost,” she said. “One of the narratives out there is that homeowners are using the process to delay, but my experience is that homeowners are desperate and are not served well by delay. The fees mount up; the anxiety mounts up. They are left in limbo and are not able to move forward with their lives.”
Mark Rodgers, a public affairs spokesman for CitiMortgage, the Hoffmans' servicer, provided the following statement regarding their case: “Modifications must conform to established guidelines, and we continue to work with customers over time to find potential solutions. Often, qualifiers such as the borrowers’ income change over time, so what might not be compliant at one point in time, may allow the borrower to become eligible for a program as those numbers change. We are pleased to have resolved this situation and understand that the customers are satisfied with the results.“
Government-backed effort falls short
Thompson is critical of the Making Home Affordable Program (HAMP), the government-backed modification program, because she says it has barely made a dent in the problem.
Despite early forecasts by the Obama administration that 3 million to 4 million American homeowners would be eligible for HAMP, which was launched in 2009, just over 1 million homeowners have received a permanent modification, according to its June performance report.
In a study published in August, researchers suggest that 800,000 more U.S. homeowners could have received HAMP modifications if some of the nation's largest servicers had completed them at the same pace as other lenders. Servicers are paid certain incentives by the HAMP program — $1,000 for completing modifications and additional “pay-for-success“ payments after a homeowner stays current on the new mortgage for three years.
The study, titled “Policy Intervention in Debt Renegotiation: Evidence from the Home Affordable Modification Program,“ was written by economists from the Chicago Federal Reserve, the Office of the Comptroller of the Currency, Ohio State, the University of Chicago and the Columbia School of Business in New York. It concluded that HAMP would fall significantly short of its target “largely because a few large servicers, with pre-program organizational design that was less conducive to conducting renegotiations, responded at half the rate of others.“
The report did not identify the servicers.
Thompson noted recent enforcement actions taken by the U.S. attorneys general, the Federal Reserve and the Office of the Comptroller of the Currency to stem robo-signing and other abuses in the foreclosure process, but she said that more work must be done to establish standards and limit fees.
In August, the new federal Consumer Financial Protection Bureau proposed rules for mortgage servicers intended to give homeowners clearer information regarding outstanding balances and pending interest rate changes. Servicers would be required to respond to homeowners’ calls or complaints within five days and provide early outreach to delinquent borrowers, advising them of all their options.
Thompson believes that any efforts to improve the modification process must come with teeth. Despite various revisions to the HAMP program, it has remained ineffective because it lacks a compliance mechanism, she said.
And, she points out, servicers have offered more proprietary — private — modifications to homeowners than HAMP modifications. Proprietary modifications aren’t governed by HAMP, which sets income-based limits on mortgage payments.
“One of the reasons that people expect the foreclosure process to go on is that many of these modifications that were offered by the servicers are not sustainable,” she said.
While recent HAMP revisions boosted financial incentives for investors to encourage them to approve principal reductions on underwater mortgages, Thompson said the government-sponsored enterprises Freddie Mac and Fannie Mae continue to be holdouts.
She dismisses concerns over moral hazard — that principal reductions encourage homeowners to default so they can modify their mortgages.
“Average homeowners don’t default on their mortgage because they are worried about their credit score. They are worried about where they will end up with a loan modification,'' she said. “They understand the risk, and they are very wary of defaulting unless they have no other choices.”
Although $29 billion of the federal government’s Troubled Asset Relief Program (TARP) was targeted to pay for HAMP, only about $3 billion had been spent through 2011, according to program reports.
And, Thompson points out, lenders were the beneficiaries of the initial $700 billion bailout in 2008.
“The moral hazard that has been completely unaddressed is the moral hazard for servicers and for the large banks who are able to drive the world market financial system into collapse without paying any significant penalties,” she said. “If I were a banker the lesson I would take from this is that I can continue not to behave in a fiscally responsible way going forward, and I will be bailed out again. I think there’s a real moral hazard, but I don’t think it’s about homeowners.”
'If there’s no middle-class …'
The Hoffmans say that while they are embarrassed to discuss their ordeal, they hope their story might encourage other families who are facing foreclosure to persevere and check out all options available to them.
“We’re making it. Is it easy? No? But it’s well worth it,” Rick Hoffman said. “You’ve just got to ride it out and do what you got to do until times get better.”
He believes the economy is slowly improving, but he worries about the nation’s future.
“I feel sorry for everybody who’s lost their house, who are going to lose their house because of the way things are,” Hoffman said. “It’s tough out there right now. If there’s no middle class — I don’t understand what these big companies think. Who’s going to buy their products? Lower-income people can’t afford a $30,000 car. They better start bringing the jobs back.”
A recent report by the Pew Research Center solidifies what middle-class Americans have been feeling for some time, said Bob Cropf, who chairs the department of public policy studies at Saint Louis University.
“There has been a steady erosion in the living standards of what the middle class can afford to spend and consume ever since around 1980, and that trend has just accelerated in the last four to five years,” Cropf said.
According to the report titled “The Lost Decade of the Middle Class,” the net worth of middle-income families dropped 39 percent during the late 2000s, wiping out advances that had been made since 1992. From 1983 to 2010, only upper-income families saw strong increases in their personal wealth. The report also noted that from 2007 to 2010, the mean debt level for middle-income families fell by 11 percent but the value of their assets fell by 19 percent. The loss was attributed to the housing market crash and unemployment spurred by the Great Recession.
“One reason that upper-income families fared better than others is that they are less dependent on home equity, which has been the main source of declines in wealth since 2006,” the report stated. “Home equity accounted for at most 24 percent of the mean assets of upper-income families from 1983 to 2010, compared with at least 40 percent of the assets of middle-income families during the same period.”
Cropf said that economic discontent will continue to play a large role in the political process with both Democrats and Republicans striving to connect with the middle class, but the concern voiced by Rick Hoffman reaches beyond November’s elections.
“It is the stagnation of the middle class, which is problematic for our country because we pride ourselves on being a country of the middle class,” he said. “The American dream is a middle-class dream: two cars in the garage, having your own home, a little garden, a backyard. To be able to send your kids to college. But what happens to the American sense of identity and to our political process if we stop being middle class? That’s the more philosophical question. That’s the tougher nut to crack.”
Who’s to blame?
Rick Hoffman says plenty of people are to blame for the foreclosure mess.
“I blame the banks. I blame the government for not regulating the banks for letting them get too big to where the banks are doing what they want to do,” he said. “I’m not a bank person or a political person, but as a layman listening to all the stuff I wish some of these people would have went to jail. They knew what they were doing was wrong, and the people who were watching them knew what they were doing was wrong. It didn’t happen overnight.”
But Hoffman said he also blames himself for listening to financial advisers who recommended that he invest much of the severance pay he was given when his plant closed in 2001; he lost much of those investments. Given a chance to do it over, he would have put that money into his house.
Karen Hoffman is bothered by the long-term forecasts for foreclosures.
“Three to five more years of this? I think that is so incredibly sad, scary and depressing,” she said.
Although she still has questions about her family's foreclosure experience, Karen Hoffman said she refuses to allow herself to believe that her lender’s representatives didn’t have her best interests at heart.
“People say to me, 'How could you have been in this process this long?' That’s why part of me believes that people really were going to try and help us,” she said. “I have this basic fiber in me that says people don’t want to harm other people.”
Foreclosure forecast is grim
Analysts warn that for the near future, foreclosures will continue to be a drain on U.S. housing prices and sales, even as the nation inches toward economic recovery:
- Since the financial meltdown of September 2008, there have been 3.8 million completed foreclosures in the U.S.; 58,000 of those were completed in July, according to CoreLogic, an analytics company that publishes a monthly national foreclosure report. The national inventory of foreclosure homes was 1.3 million, or 3.2 percent of all homes with a mortgage.
- The Mortgage Bankers Association reported in August that delinquency rates on U.S. home mortgages edged higher in the second quarter of 2012 — to 7.58 percent from 7.4 percent in the first quarter — but were still down from 8.4 percent a year ago.
