If 76-year-old Gloria Schrager lives to be 100, she will get the worst birthday present ever: a bill from JPMorgan Chase for $199,052.
Schrager was behind on her mortgage payments and in danger of losing her Orlando home to foreclosure when she accepted a modification plan from Chase that made her monthly payments much more affordable. But the Peruvian immigrant feels like the house she has lived in since 1985 isn't really hers anymore. Rather than forgiving a portion of her debt as she requested, Chase modified her loan so that most of her principal would be due in one gigantic balloon payment at the end of the loan's term.
"It is a painful thing at the very end to have balloon payment," said Schrager, who lives on her Social Security checks and by working part time for $9 an hour at a medical clinic for children with autism and Down syndrome. "It's like I am paying rent on this house, but if something breaks, I cannot call the landlord. I am so scared that I am going to get sick and not be able to keep up" with the payments.
As part of the national mortgage settlement signed in March, five large banks -- Chase, Bank of America, Citigroup, Wells Fargo and Ally Financial -- agreed to offer at least $10 billion in loan forgiveness, or principal reduction, to some of the estimated 11.1 million homeowners who owe more on their mortgage than their home is worth.
But three months later, the banks' progress in distributing that relief is slow, said housing counselors at 12 agencies, mostly in Florida, surveyed by The Huffington Post. At nine of the agencies, counselors reported that the banks had granted just one or two principal reduction offers out of dozens requested. Counselors at three other agencies -- in North Carolina, Ohio and Florida -- said that they had no clients who had received a bank's loan forgiveness offer as a result of the settlement. Banks are not saying how much principal they have written off, though a report to the government on their efforts is due in September.
Since February, Linda Smith of Consumer Credit Counseling Service of West Florida has advised about 75 Pensacola homeowners seeking a loan modification. Just one bank offered a single client a principal reduction: As part of an ongoing trial modification, Bank of America knocked $68,000 off one client's outstanding loan balance, she said.
"Principal reductions are few and far between," Smith said. "I have not found another bank who has worked with a client on a reduction."
Much more common are principal forbearance plans, such as the one that Schrager received, housing counselors and attorneys say. This moves payment of most of the debt to the end of the loan's term -- in one lump balloon payment.
During the first few years of the housing crisis, banks and other institutions that service loans made life miserable for hundreds of thousands of homeowners who tried -- and failed -- to receive a loan modification. The institutions lost paperwork, made accounting mistakes and even pushed into foreclosure some homeowners who were current on their payments.
Though it's still far from perfect, banks in recent months have improved their communications with borrowers and are now more likely to restructure seriously delinquent loans, say counselors and attorneys who work with homeowners. But principal reduction, to bring loan debt more in line with a home's current worth, is still very rare, even though it's required as part of the widely publicized settlement with several state attorneys general. The deadline for compliance is within three years with incentives for the banks to fulfill the principal-reduction and other homeowner-relief promises the first year.
Part of the explanation for the limited progress lies with the restrictions baked into that deal.
For starters, Fannie Mae and Freddie Mac, the government-backed mortgage giants that control about 60 percent of the mortgage market, have refused to participate in principal reduction except in very limited circumstances, despite arm twisting by the Obama administration. These two entities now hold 29.2 million mortgages, including roughly 3.3. million underwater loans. The biggest obstacle to their participation is their government regulator, the Federal Housing Finance Agency; its acting director, Edward DeMarco, has said that loan write-downs are a "moral hazard" since the practice might encourage borrowers now current on their mortgages to stop making payments.
DeMarco has also argued that principal reduction will cost taxpayers money in the long run, though several studies, including one by the Treasury Department, conclude this isn't the case.
The mortgage settlement also doesn't make clear whether private investors, such as state pension funds, which own about 20 percent of the outstanding mortgage debt, would participate in principal reduction. So far, the answer appears to be mostly no, though Bank of America is offering partial loan forgiveness for mortgages owned by investors "who delegate authority," according to spokesman Rick Simon.
Removing Fannie, Freddie and most privately held loans from the pool of those potentially eligible for principal reduction means that the mortgage settlement, even in a best-case scenario, isn't set up to help very many people. The loans most eligible are the 10 percent or so of U.S. loans currently underwater on the books of the five banks that participated in the settlement. The number of underwater borrowers possibly eligible for a principal reduction through the settlement has been estimated at 500,000 to 1 million.
The focus on bank-owned, or "portfolio" loans, concerns Joseph Sant, an attorney at Staten Island Legal Services in New York City. These borrowers are more likely to be white and middle class than the troubled homeowner population at large, and less likely to be minorities and immigrants, who were disproportionately subjected to abusive lending practices, he said.
"Portfolio loans tend to be made to prime borrower populations that skew white middle class, while nonprime mortgages are generally securitized and skew non-white, immigrant, or non-native English speaking," Sant stated in an email.
Wells Fargo, Citigroup, and JPMorgan Chase did not respond to requests for comment about their principal reduction efforts.
Ally Financial's GMAC Mortgage unit, has solicited about 15 percent of the population eligible for possible principal reductions and plans to complete these overtures before the end of the summer, said spokeswoman Susan Fitzpatrick. The bank would not disclose how many borrowers this represents.
Bank of America has been the most open about its activities. The bank plans to offer to 200,000 "likely eligible borrowers" a principal reduction by the end of the third quarter, Simon said. Solicitations have already been sent to 32,000 customers, he said. So far, about 10,000 trial modifications involving principal reduction have begun, he said.
The experience of two borrowers in southern Florida -- who have won what amounts to the housing lottery -- illustrates how principal reduction combined with a lowering of the interest rate can dramatically lower monthly payments.
In Biscayne Gardens, Ocwen Loan Servicing, which was not a part of the national mortgage settlement, wrote off $96,000 of what Sherylyn Rolle owed on her deeply underwater home, bringing her principal down to $50,000 from $147,000. Her new monthly payment is $559, reduced from $1,100.
In Hialeah, Fla., Chase cut Elizabeth Bernal's debt by $72,000, bringing her balance to $188,000. Her monthly payments dropped to $1,225 from $2,268.
And Schrager, the elderly Orlando woman, saw her payments drop dramatically as a result of her Chase loan modification. In 2010, she paid $1,600 a month, which roughly corresponds to what she takes in each month from Social Security, part-time work and a small annuity combined. Her payments are now just $540 a month. The catch is that a massive the balloon payment looms in the future, effectively preventing Schrager from selling her home.
Schrager owned her home free and clear before she made an unwise investment in a condo in 2006 at the urging of a mortgage broker, who grossly inflated Schrager's income on the loan application, Schrager said she later learned. She took out a mortgage on her house to do so. Unable to find tenants, she soon sold the condo for $50,000, less than one quarter what she had paid for it.
The Huffington Post previously reported about Mira Tanna, a housing advocate for Community Legal Services of Mid-Florida, who has tried to find someone at JPMorgan Chase to help Schrager lower her principal. In March, after speaking with two employees at the Chase Homeownership Center in Orlando who said they had never heard of the mortgage settlement, Tanna called Chase's corporate offices.
According to Tanna, Ernest Franklin Jr., a Chase executive, said that the Orlando home would be evaluated once procedures to assess home loans for principal reduction were in place by the end of April. On June 7, after several unanswered queries from Tanna, Franklin responded by email to say that Schrager did not qualify "due to exceeding forbearance limits of the program."
Asked for a clarification, Chase told Tanna that Schrager "doesn't qualify due to the amount of forgiveness/forbearance required at her income level to achieve the targeted Debt to Income (DTI) ratio."
Chase did not respond to recent queries about Schrager's case or to a request to further explain what this answer means.
Tanna said that she fears that Schrager, by accepting the loan modification in March, disqualified herself from consideration for loan forgiveness -- precisely the situation that Tanna had tried to avoid by contacting senior management at Chase before Schrager signed the agreement.
For now, Schrager will continue to work and pray that she does not fall ill, she said. She does not have immediate family members to call on for help, she said.
"I don't trust anybody anymore, I don't know what to do," she wrote in a letter to Chase not long ago about her third attempt to obtain a loan modification. "I am terrified because I don't want to end up on the street."
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