THE BLOG
08/25/2010 02:59 pm ET | Updated May 25, 2011

Government Tactic: Help Banks by Lying to Homeowners

Last April, when I visited the Treasury, I told the Deputy Director of the National Economic Council, Diana Farrell, that the reports treasury was putting up on their web site touting the success of HAMP were crap. I said that in front of thirty people in a Treasury briefing room and she blew me off. "We'll take that under advisement," Farrell said.

Three month later Treasury announced that those same reports were in fact crap. According to Treasury officials they'd been relying on Fannie Mae to compile the reports and Fannie Mae surprisingly didn't know what they were doing -- at least not when it came to generating accurate and honest reports. "The error caused inconsistent reporting of permanent modifications during the snapshots reported. These omissions have impacted our previous analysis... with respect to the performance of HAMP permanent modifications," Treasury spokesman Mark Paustenbach said. Fannie Mae knew full well what they were doing however, when they used the Making Home Affordable program to their advantage to sink struggling homeowners, rather than help them as the program was supposedly intended to do. According to a whistle blower in a recent report on NPR :

"Fannie Mae concentrated on the work that made money for Fannie Mae: giving new applicants ‘trial modifications' -- a few months of reduced mortgage payments.

"Those applicants are meant to be moved from trials over to five-year relief plans. But Fannie made money on the trial modifications -- and thousands of homeowners got stuck there."

To add to the homeowner's stress and assure Fannie Mae of a continued open season on American Families, Executive Vice President for Credit Portfolio Management, Terence Edwards issued an outright threat to homeowners, creating a new rule punishing anyone who stops paying their mortgage and walks away from their home by not allowing those who choose that path to get a Fannie Mae loan for seven years." So not only did Fannie Mae purposely string homeowners along with no end in sight, and draining savings and causing millions of people sleepless nights while they  wait for the shoe to drop, they essentially closed the exit to the burning building while they lit the wick.

I also wrote another post in January called "Loan Modifications: A $4 Billion Con Game" in which I accused banks and servicers of using HAMP, the Administration's loan modification program, to bilk struggling homeowners out of what little money they had  before inevitably foreclosing. A tactic referred to as extend and pretend. In an article by the same name in Huffington Post earlier this month, a Merrill Lynch/Bank of America analyst is quoted as saying, "We have asserted many times in the past that the program has both an explicit goal (help 3-4 million borrowers) and an implicit goal (make liquidations orderly)."

John Burns, a real estate consultant quoted in that same article had this to say:

This is nothing more than a fully documented version of the same garbage that took down the banking system two years ago, and this time the federal government rather than Countrywide and New Century are underwriting it. Almost all of these borrowers will eventually re-default.

It is very obvious that the architects of HAMP are short-term focused, and are tricking us into thinking they are solving the problem by calling these permanent modifications. Until these loans are renamed, let's call them 'Liar Loans 2,' except this time the liar is the Bank of the United States rather than the borrower because this modification is anything but 'permanent'. We do believe that stabilizing home prices and the banking system are critical to the recovery of the U.S. economy, but let's at least tell the truth about what is being done.


I'm not implying that I knew more than anyone else. I'm saying that even I could see this coming. A lot of us did. Martin Andelman's been writing about this for some time, as has Steve Dibert, Jorge Newbery, and Denise Richardson. Jack Wright and Mike Dillon have been warning about this for nearly eight years. None of us are prophets. All we had to do was pay attention and know that the banks, particularly when it comes to helping or screwing American families and homeowners, will always choose screwing when given a choice.

The most recent and surprisingly disgusting blow came last week, when Treasury officials spoke candidly and with the cowardly shroud of anonymity to reporters and bloggers from different publications. Here's a quote from HuffPost's Shahien Nasiripour's detailed article on the meeting:

The official touted the ever-growing pipeline of homes likely to enter foreclosure as a success in the administration's fight to stem the rising tide of home foreclosures. It's taking longer for homes to enter foreclosure, and it's taking longer to evict homeowners once they enter foreclosure. The so-called "shadow inventory" of homes -- those with severely delinquent mortgages, in foreclosure or already repossessed that have not yet been put on the market -- has significantly grown since the administration took office and is estimated to range from 5 to 7 million homes. Through June, borrowers in foreclosure have been delinquent for an average of 461 days before being evicted from their homes, according to Jacksonville, Fla.-based data provider Lender Processing Services.

That's a good thing, the official said, because it gives the market time to absorb these homes gradually -- without leading to a dramatic drop in home prices. While analysts disagree -- prices will decline when those homes flood the market, which many, like Mark Hanson, a housing industry analyst based in California, believe to be a virtual certainty -- the official pointed to the futures market where traders are betting that home prices will remain stable through the fall of 2014.


In other words, it was a good thing to bilk homeowners out of a few more months of payments by giving them false hope and lying to them about the possibility of permanently modifying their loan, knowing all along that the modification is never going to happen --what the analyst from Bank of America so aptly described as an "implicit goal."

When President Obama delivered his speech in Arizona in February, 2009, nowhere in the speech did he come close to implying that this plan was intended to help the banks and servicers get more money out of homeowners before taking their homes. What he said was, "This will enable as many as three to four million homeowners to modify the terms of their mortgages to avoid foreclosure." It wasn't followed by, "...for a couple of months."

Here's one of the more egregious statements to come out of this discussion (also from Nasipour's article):

One of the reasons why HAMP has been effective ties back to the foreclosure pipeline. The official said that because some 1.2 million homeowners entered the program and immediately benefited from a trial period of lower monthly payments, not only were their foreclosures delayed but they also received what was essentially a tax cut of more than $500 a month -- all without cost to the taxpayer, the official boasted. Even though nearly half of those borrowers have been booted from the program, they still benefitted from lower monthly payments courtesy of the Treasury Department with the cost borne by lenders and investors of those mortgages. Plus, at the very least, those homeowners got a chance at a permanent modification, the official said.


The problem with the Treasury guy's statement (aside from the obvious fact that he has a crystal clear view of his own colon), and something he fails to mention is that the $500 savings is not a savings at all and hardly a tax cut. Unless by tax cut he means money you're going to have to pay back. If that's the case I guess we'll be getting all the money back from the Bush tax cuts.

Here's what really happens: The trial modification lasts three months according to the rules. Banks and servicers string the borrower along for longer than the requisite three months, sometimes going as long as nine months. At one point, after the homeowner has made all the payments on time at the lower monthly rate fully expecting to be granted a permanent modification the bank pulls the rug out from under them and denies the modification. They give no reason for this and claim that they are under no obligation to provide one. At this point the mortgage goes back to the original terms and amount and here's where the "tax break" argument falls apart. The homeowner now owes the difference between the trial payments and the original payments. So a six month trial modification with a $500 "tax break" is now a $3000 bill on top of the original unaffordable monthly payment. In addition, servicers will add monthly charges, late fees, and reports to credit agencies further burying the homeowner who is now broke, humiliated, and desperate.  In many cases, like my loan with Ocwen for example, the trial payments never get recorded or applied to any of the interest or principal - they simply disappear.

"Being in a trial modification if you don't get a permanent modification is worse than having not been in a trial modification. Period," said Diane Thompson, an attorney with the National Consumer Law Center to Probublica. Worse yet, people "may have a hard time finding alternative housing because some renters check credit scores," she said.

There are hundreds of stories at shamethebanks.org from homeowners who have had this happen to them. In my case Ocwen Bank, who services my loan, has added close to $30,000 to the original principal on a home that's worth $150,000 less than it was three years ago when I bought it. I have no paperwork itemizing the junk fees; have not received any paperwork confirming whether or not I'm still in the trial or if my loan has in fact been modified despite having made all of my payments on time since November 2009.

Add to that the staggering numbers behind underwater homes, the plummeting sales figures, estimates that home values will continue to drop another 20-30 percent,  parasitic lawyers are lining up to make a fortune out of taking people's homes, and that homes won't regain their values for another 20 years, one has to ask if it's really worth fighting for a house.

In light of the news from the meeting at Treasury and to quote Eschatonblog's Artios, "Conning homeowners by announcing a government program designed to help them when in fact it was designed to help the banksters is, in my world, 'cruel'."

The only real strategy a homeowner has is to apply for a loan modification using the same strategy the banks, servicers, and apparently the Administration, and Treasury have used against them. Extend by applying for a modification and then pretend that they're going to pay and want to stay in the house. Use the money saved by not paying the mortgage to look into alternative strategies.

After accepting the simple and painful fact that holding on to their home is the least likely scenario, there are a few avenues worth exploring. Have a comprehensive compliance and fraud investigation done on the loan by a reputable investigator; have an NPV test or equivalent report like the REST Report generated that shows the investor that the servicer is in fact not working on their behalf or best interest; look into a short sale leaseback program; and hire a reputable attorney that knows how to interpret the numbers and information from these reports and who specializes in foreclosure prevention.

The other alternative is to stay in the house for as long as you can, saving as much money as possible and leave when the Sheriff tells you it's time to go.

What is most disturbing about the meeting with Treasury and the things that were said, or more accurately admitted, is that an argument could easily be made that this was an overt act by the administration to mislead and trick the American homeowner. That our government has been complicit in the bank's ravaging of the bank accounts, retirement, and investments of nearly five million people.

You can read real stories from homeowner and post your own at www.shamethebanks.org.

Richard Zombeck also blogs on www.shamethebanks.org and www.zombeck.com