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Lawsuits Reflect Widespread Frustration With Government's Mortgage Modification Program

First Posted: 10/19/10 05:47 PM ET Updated: 05/25/11 07:05 PM ET

Mortgage

A federal judicial panel recently consolidated class-action lawsuits from across the country alleging that Bank of America treated homeowners with bad faith when they applied for mortgage modifications under the Obama administration's Home Affordable Modification Program.

"What this demonstrates is that homeowners across this country have grown frustrated with Bank of America's inability to comply with regulations put out by HAMP," Ira Rheingold, director of the National Association of Consumer Advocates, told HuffPost.

Under HAMP, the Treasury Department gives mortgage servicers $1,000 incentive payments to reduce borrowers' monthly payments, mostly by cutting interest rates. If an eligible borrower makes his or her reduced payments for three or four months during a trial period, the modification is supposed to become permanent. Often, trials drag on for much longer.

"Rather than allocating adequate resources and working diligently to reduce the number of loans in danger of default by establishing permanent modifications, Bank of America has serially strung out, delayed and otherwise hindered the modification processes that it contractually undertook to facilitate when it accepted billions of dollars from the United States," says the complaint seeking class action filed in July by Teresa Follmer of Mesa, Ariz.

Follmer's suit is one of eight putative class actions that will be consolidated as one case in federal court in Massachusetts. Bank of America supports the consolidation, according to ProPublica, which first reported the consolidation.

"We feel that there are people who are entitled to HAMP modifications who are not receiving them," said Stuart Rossman, director of litigation for the National Consumer Law Center. "It's a breach of contract and it's not fair dealing."

Rossman represents several Massachusetts homeowners who sued Bank of America this year after the bank didn't deliver modifications that the homeowners expected. "[W]hen a large financial institution promises to modify an eligible loan to prevent foreclosure, homeowners who live up to their end of the bargain expect that promise to be kept," says the complaint. "This is especially true when the financial institution is acting under the aegis of a federal program specifically targeted at preventing foreclosure."

Rossman is also representing several Massachusetts homeowners in an almost identical case against JPMorgan Chase, which he said will be moving forward in November. The goal of the litigation is to stop foreclosure proceedings against the homeowners and to force the banks to grant the permanent modifications.

The judicial panel considered six cases that will not be consolidated, including one in Pennsylvania in which Bank of America refused to honor the permanent modifications granted borrowers by another bank it subsequently acquired.

Bank of America argues that borrowers don't have standing to sue because they aren't parties to the Servicer Participation Agreement between the bank and the Treasury Department. In its motion to dismiss Follmer's suit, Bank of America notes that Treasury has made lots of changes to its "constantly evolving new federal program" and if a borrower is eligible, "the servicer is obligated to consider the borrower for a HAMP modification" -- not necessarily to grant it.

HuffPost reported last week that a Bank of America employee told Troy Taliancich, who has been in a HAMP trial for most of the year, that his modification had stalled because of Treasury's changing rules. "Right now, at this point, the government changed the process a little bit," the employee said. "We changed the procedure and you are one of the homeowners that fell into the middle of when the process changed."

"This all gets back to the fact that Treasury seems to be captured by the banks and is unwilling to do anything more forceful than to cajole them into complying," said Alan White, a professor at the University of Valparaiso law school. "It is astounding that after all the evidence of shortcuts, errors and fraud, Treasury hews to the banks' story that there are no erroneous foreclosures or HAMP denials."

The Treasury Department declined to comment on the lawsuit. Phyllis Caldwell, director of Treasury's Homeownership Preservation Office, defended HAMP last week. "You have to think about HAMP in the context of who it was supposed to help and why," she told the Washington Post. "It set a framework for evaluating mortgage modifications that moved the industry to a standard modification able to reduce payments and gave more than a million homeowners immediate relief through trial modifications that had the potential to become permanent. So what it set out to do worked."

When President Obama announced HAMP in 2009, he said it would "enable as many as three to four million homeowners to modify the terms of their mortgages to avoid foreclosure." HAMP has delivered 448,937 "permanent" five-year modifications so far and 663,538 homeowners have had their trial modifications canceled.

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