BUSINESS
10/20/2010 12:55 pm ET | Updated May 25, 2011

Big Banks Explain Why They Won't Give You A HAMP Modification

Lawyers for homeowners who have been denied mortgage modifications under the Obama administration's Home Affordable Modification Program make a straightforward argument when they sue banks.

As a class-action complaint in Massachusetts puts it, "when 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. This is especially true when the financial institution is acting under the aegis of a federal program specifically targeted at preventing foreclosure."

Under HAMP, a program funded with $50 billion from the Wall Street bailout, eligible homeowners at risk of falling behind on their mortgages can ask their mortgage servicers for a modification that reduces monthly payments to 31 percent of their monthly income. If they make their monthly payments during a "Trial Period Plan" that's supposed to last for three or four months, then the modification is supposed to be made "permanent" for five years. Most trial periods drag on for longer than three months, however, and more homeowners have been bounced from the program than have been granted permanent mods.

The banks' broadest legal counterargument against unhappy HAMPers' lawsuits has been that homeowners can't sue to enforce the Servicer Participation Agreements between mortgage servicers and the Treasury Department, which administers HAMP. It's an argument to which judges have been receptive. But servicers are now also responding to legal arguments that they've acted in bad faith. When homeowners argue that they should be granted permanent modifications because they've successfully made their trial payments, banks say homeowners actually don't know what they're talking about.

In motions to dismiss suits seeking class-action status in Massachusetts and Arizona, for instance, JPMorgan Chase and Bank of America first point out that the Treasury Department has made a lot of changes to HAMP, which Bank of America calls "a constantly evolving new federal program" with near-monthly supplemental directives from the government.

The most important change to the program has been the Treasury Department's late-January requirement that as of June 2010, borrowers would be required to provide documentation before being put in a trial plan. Before June, servicers could put borrowers into trial plans with a mere phone conversation.

"Although reliance on the applicant's initial, verbal representations allowed servicers to
expedite the [Trial Period Plan] process, it also resulted in some borrowers, who were originally extended TPPs, being ultimately found ineligible for permanent modifications, once their information was later verified," Chase argued in July.

Even before Treasury required it, servicers typically asked borrowers to provide some solid documentation. For instance, Troy Taliancich of New Orleans was put in a HAMP trial after a phone call in January. He submitted tax forms and pay stubs -- the very material required by the supplemental directive. But even though he'd already sent that stuff, the bank told him he'd have to start over anyway because of the new guideline. "We changed the procedure and you are one of the homeowners that fell into the middle of when the process changed," he was told.

"Not all mortgage loans are eligible for HAMP, and a participating servicer is not required to modify every HAMP-eligible loan," Bank of America's lawyers argued in August in response to a lawsuit in Arizona. "If borrower eligibility is satisfied, the servicer is obligated to consider the borrower for a HAMP modifiation, assuming it is not precluded from doing so by its other contractual arrangements or investor requirements."

Chase's lawyers argue that borrowers should know that even if they qualify for a Chase Trial Period Plan under the most recent guidelines, there's still a trap door: "The cover letter accompanying the TPPs also makes it clear that the borrower may not ultimately qualify for a permanent modification: 'We have enclosed a customized Home Affordable Modification Trial Period Plan ('Trial Period Plan'). If you qualify under the federal government's Home Affordable Modification program and comply with the terms of the Trial Period Plan, we will modify your mortgage loan.'" (Emphasis in original.)

A federal judicial panel recently consolidated several class-action HAMP lawsuits against Bank of America (including the one from Arizona) and the class-action against Chase in Massachusetts will have a hearing in November.

Chris Peterson, a law professor at the University of Utah law, said the recent revelations about bogus documentation that led both Bank of America and Chase to briefly halt foreclosures could give homeowners an advantage in their HAMP lawsuits.

"If there are fraudulent affidavits being filed, it gives the whole situation the patina of bad faith that makes their arguments more plausible," he said. "It's hard not to feel sympathy for the homeowners' argument. Their efforts to get their mortgages modified reflective of a reasonable interest rate and principal amount feels like some sort of a bizarre Kafka parable."