THE BLOG
11/03/2010 03:29 pm ET Updated May 25, 2011

The Predatory Nature of Home Loan Modifications

(Note: This is a reposting of a piece which ran August 2010, in Counterpunch)

Zobari Kina and his wife were trying to live 'the American Dream,' namely owning their own home. Like far too many people these days, the economic tsunami caused by Wall Street had reduced his income and as a result forced Kina and his wife into the federally funded 'loan modification' program. Lured by promises of a new monthly payment meant to reflect these economic times; Kina and his wife signed the closing papers with the most honest of intentions.

They did not question the fact that the closing documents were incomplete as their bank, JP Morgan Chase in St. Louis, assured them this was only a technicality. Before anyone criticizes their naivete--far too many consumers have done the same thing.

Unfortunately, for Kina and his wife--the loan modification appears to have never been finalized in terms of the reduced payment and they found their mortgage checks sent to an escrow account and NOT credited to their monthly mortgage requirements. They were facing foreclosure and immediate eviction on Tuesday, July 27th, for 'failure to make payments.'

Kina and his wife made numerous calls to Chase which were never returned. Finally, out of desperation they turned to the St. Louis Branch of Legal Aid, and a local activist group, Missourians Organizing for Reform and Empowerment (MORE), in an attempt to save their home. The results were mixed. Kina was told by St. Louis Legal Aid that only one attorney handled 'foreclosures,' and that person was on vacation, literally unavailable until AFTER he would become homeless. The local activist group MORE, was ready to help.

Armed with only the best of intentions and an almost naive belief in our system; activists staged a protest/sit-in at the only Chase location in St. Louis--situated in an office building in affluent, suburban Chesterfield, Missouri. What happened that morning was a disgrace to the very idea of democracy.

Within 10 minutes of the group entering the small bank area while chanting slogans--both building and bank security called the Chesterfield police department. Conservative bloggers from the Tea Party movement were present and have provided video online. The conservative bloggers made allegations that MORE was a rebranded ACORN group, but no proof was offered. The videos on conservative sites have repeatedly 'outed' MORE as the 'new ACORN,' and to be sure, two of the organizers did work for the now defunct ACORN, ALONG WITH SEVERAL OTHER PROGRESSIVE GROUPS. Apparently to the right wing, ANY affiliation not allied with Andrew Breitbart or Rush Limbaugh is worthy of ...'the PR guillotine.' So much for sanity in the right wing.

After identifying myself as an online journalist in the office lobby, I began asking questions when building security told me to leave or risk arrest. I asked why I had to leave and I was told that my presence was 'disruptive' and that I was 'disrupting business,' and 'frightening customers. Chesterfield police began to arrive within some 15 minutes after this exchange.

Now the conservative blogs are all 'atwitter', outraged over this type of protest, even though many conservatives face the same economic disaster of losing their homes to predatory lending practices. The sad truth lies in the fact that Mr. Kina and so many others have been refused reasonable accountability from banks regarding this loan modification program.

According to a recent Los Angeles Times article, homeowners in danger of foreclosure who have entered the loan modification program have reported banks repeatedly requesting documents already in their possession, losing documents and altogether refusing to make the trial modifications permanent. Even after participants have followed all the requirements the law demands--trial loan modifications are frequently declined for permanent modification. Usually the homeowner is never given the reason for denial or how the decision was rendered.

ProPublica Investigated

To add further insult to injury; a report by ProPublica found that 97,000 homeowners have remained in 'trial modification' status beyond the six months timeline mandated by the government's regulations. Of these 97,000 borrowers, some 60,000 have their mortgages with JPMorgan Chase & Co. (http://latimesblogs.latimes.com/money_co/2010/02/in-an-eye-catching-report-wednesday-t)

After the Obama administration committed some $75 billion in taxpayer funds to subsidize this program; reports such as the expose done by ProPublica have documented massive refusal by the big banks to provide reasonable accountability and transparency regarding these contracts. ProPublica has further documented that after analyzing data provided by the US Treasury department, almost 500,000 homeowners have been ..."in loan mod limbo," for over three months, beyond the timetables required by this program. (http://latimesblogs.latimes.com/money_co/2010/02/in-an-eye-catching-report-wedensday-t)

The program mandates that once the homeowner in question makes the reduced payments on time, and documents their finances--the TRIAL MODIFICATIONS WERE TO BE MADE PERMANENT. The big banks, such as Chase have argued that borrowers fail to provide necessary documentation especially regarding proof of income. For borrowers like Kina, documenting proof of income includes the all too real situation of rapidly changing income. Loss of a job, or being reduced to part-time status can result in sudden income changes. Kina had such a reversal. Being a small business owner, he and his wife lost a larger client which changed their income. Kina reported the change, but never heard from Chase. Ironically, this program was set up to save the homes of people who have suffered such financial reversals, yet stories such as Kina's are all too common. In many cases, the homeowner is denied the permanent modification when they need it the most.

During this time, the banks collect the checks from homeowners such as Kina and either deposit them in an ill-defined 'escrow' account, or simply return the checks months later, to the confused homeowner. In Kina's case; he was told that the checks were in an escrow account by one bank official, yet when he spoke with a different bank official-- was told that his mortgage was ten months behind. In any case, Kina, like far too many people in this badly policed program was hit for the mortgage payment, while the bank refused to credit his mortgage account. According to reports in ProPublica, the Los Angeles Times and the Wall Street Journal; this practice isn't unusual and the explanation is deceptive.

Explanation of Deception

Since the homeowner isn't paying the full amount each month, but a negotiated lesser amount, the mortgage balance continues to grow during the trial period. There isn't any freeze on 'missed payments', which is what banks consider any payment less than the full amount. In essence--the clock is still ticking on the foreclosure process, but the homeowner isn't informed of this little detail.

As a result of this procedural 'miscommunication,' homeowners can find themselves in worse financial shape if the modification doesn't become final. They can still face immediate foreclosure after making the trial payments and following the rules to the letter--since there appears to be little to no mandated accountability demanded of the banks. If the bank 'loses' required paperwork, or stalls by demanding additional copies--there is no mechanism to protect the consumer.

"Predatory Lending With a Smiley Face" in Salon

An investigative piece published in Salon entitled 'Predatory lending with a smiley face,' explains how this ill defined program lacking any consumer protection or transparency could be considered a thinly disguised alternate form of predatory lending. In the early stages of the loan modification, the monthly payment is reduced substantially, but the full amount of the debt still remains in effect.

Nothing has been reduced in terms of money owed; the only thing that changes is the timeline for payment. Furthermore the homeowner faces YEARS OF ADDED INTEREST which must be paid. In essence, the interest rate is reduced on paper, but the added interest over the full life of the loan has been DRASTICALLY INCREASED, sometimes exponentially. It may not be the type of predatory lending associated with payday loans, but the effect is the same. (http://www.salon.com/print.html?URL=/news/feature/2009/03/04/loan_modifications)

The Real Problem : No Cramdowns Allowed

The problem with the present loan modification program lies in the fact that these 'modifications' do NOT decrease the actual principal owed for hyperinflated properties which were never worth these prices. Congress has considered forcing the alteration of bankruptcy rulings by using a tool known as "cramdowns." "Cramdowns" give a bankruptcy judge the power to force a reduction of overall principal mortgage debt, in much the same manner they do for car or student loans. Without such help; these modifications won't work and will only serve as another tool of predatory lenders. The financial industry has been fighting this issue, predictably screaming 'foul.'

The "cramdown" amendment was offered in Senate Bill 61, sponsored by Senator Dick Durbin. After a sucessful vote in the House of Representatives early March of 2009, the legislation was defeated in the US Senate, and done so WITH THE HELP OF 11 DEMOCRATIC SENATORS.

Among the democrats charging in league with Republican Senator Jon Kyl, were Sens. Jon Tester (Mont), Mary Landrieu (La.), Ben Nelson (Neb.), Blanche Lincoln (Ark.), Arlen Specter (Pa.), Michael Bennett (Colo.), Tim Johnson (S.D.), and Max Baucus (Mont.).

Even now deceased Sen. Robert Byrd (W.Va.), arranged to be wheeled into the senate chamber, so he could point his thumb in the air as if voting 'yes,' then done with the mean teaser--signalled a dramatic 'thumbs down.'

Missouri's own Claire McCaskill finally voted for the cramdown legislation after watching the vote tally the entire time, much as an alcoholic heads to the nearest watering hole--anticipating that first drink. So much for the integrity of the US Senate. Sadly, if the cramdown legislation had passed, some 1.69 million foreclosures could have been prevented according to latest estimates.

The Net Present Value Secret Formula

Another problem with this program again speaks to the inadequate regulation needed to hold banks accountable. The loan mod process revolves around a single mathmatical formula dubbed the "net present value (NPV) calculation. This formula was created by the Treasury Department and, according to ProPublica--various unidentified "other government agencies." The formula used is kept secret and is required by the modification program.
(http://www.propublica.org/article/the-secret-test-that-ensures-lenders-win-on-loan-mods-915)

The NPV formula was designed to determine whether the modification of a troubled home loan will be more profitable than a foreclosure. According to Alys Cohen at the National Consumer Law Center, a large number of homeowners seeking permanent modifications are wrongly denied ..."because of the lack of transparency in the program."

To add further insult to injury, servicers in the financial industry frequently run the formula incorrectly. According to a report in ProPublica,..."Fifteen of the largest 20 servicers in the program have not followed 'various aspects' of its rules concerning the formula, according to the Government Accountability Office."
(http://www.gao.gov/new.item/d10634.pdf)
(http://www.propublica.org/article/in-financial-regulation-bill-increased-transparency-for-lo...)

Where does all this leave people like Mr. Kina? How can the government expect the average citizen to navigate this maze of exotic secret formulas? There is no way to deal effectively with this program until the program has full accountability and transparency, no secret formulas allowed. Furthermore, the modification is nothing but predatory UNLESS the principal is reduced and not merely delayed with multiple fees and exploding interest rates down the financial road.

Ultimately, citizens like Mr. Kina will not find relief until THERE IS A FEDERAL MORATORIUM ON ALL HOUSING FORECLOSURES. This is the 'bailout' of main street that the taxpayers demand and deserve.

This erstwhile program is nothing more than a full employment plan for predatory brokers on the taxpayer's dole. It isn't merely outrageous--it is the ultimate financial injustice to homeowners.
As for Mr. Kina--the future is bleak. While a bank representative DID meet with him--he was denied the right to have an advocate present--BY THE BANK. The only reason he was granted the meeting was BECAUSE of the protest and the promise of media exposure.

So much for accountability.