An Obama administration plan announced in April to help up to half of all struggling homeowners modify their second mortgages has yet to officially launch, the Treasury Department acknowledged Friday.

The program, a component of the administration's $75 billion Making Home Affordable effort, was supposed to attack second-lien mortgages, which are additional, second mortgages taken out on a home on top of the initial first mortgage. It's like taking out two loans to pay the same debt.

The Second Lien Program is supposed to automatically reduce the payments on a second mortgage when the first mortgage is modified under the administration's loan modification effort, the Home Affordable Modification Program. The administration says that by lowering monthly mortgage payments, HAMP will eventually help up to four million homeowners stay in their homes

Some housing experts say the second-mortgage component of the plan is necessary to effectively tackle the foreclosure mess -- 3 million foreclosure notices were sent out in 2009; another 3 million are estimated to go out this year -- because so many distressed homeowners have second mortgages. When rolling out the program in April, the administration estimated that "up to 50 percent of at-risk mortgages currently have second liens." Addressing only the first lien is insufficient, experts say, if no changes are made to seconds.

Per the administration's fact sheet on the program accompanying its April 28 announcement:

Second liens contribute to the number of American homeowners unable to afford their housing payments. Even where a first mortgage payment may be affordable, the addition of a second mortgage payment can increase monthly payments beyond affordable levels. In addition, second mortgages often complicate or prevent modification or refinancing of a first mortgage.

The Second Lien Program will help create a sustainably affordable mortgage payment for millions of homeowners who qualify for a first mortgage modification, yet still face challenges in affording their monthly payments because of a second mortgage.

Compounding the problem is the fact that millions of homeowners owe more on their mortgage than their house is worth, putting them "underwater." About a quarter of all homeowners with a mortgage have negative equity, according to real estate research firm First American CoreLogic.

"The single largest problem [with the housing market] is negative equity," said Laurie S. Goodman, senior managing director at Amherst Securities and one of country's top mortgage bond analysts according to Institutional Investor magazine, before a Congressional panel last month. "The [government's] current modification program does not address negative equity, and is therefore destined to fail."

Goodman is right -- the administration's Home Affordable Modification Program [HAMP] does not address negative equity. Rather, it reduces monthly payments for struggling borrowers. Housing experts and consumer advocates agree that lowering monthly payments is a good start to reducing foreclosures. For borrowers with negative equity, though, lower monthly payments does not decrease the total debt owed on the house. In fact, under the administration's plan homeowners end up owing more on their mortgage because mortgage servicers have simply cut interest rates and lengthened the life of the loan, putting them further underwater.

Goodman added: "Any principal reduction program requires the [Obama] administration to address the second lien problem head on...It should be noted that second liens have thus far, under HAMP, been treated with kid gloves."

In an e-mail to the Huffington Post, a Treasury Department spokeswoman confirmed that the eight-month-old program has yet to get off the ground as not a single mortgage servicer has signed a contract with the federal government for this particular effort.

"We don't have any official contracts signed yet, but servicers are committing to the program," Meg Reilly wrote. "We have made enormous progress and continue to move forward with innovative technological development and program implementation and expect to finalize servicer contracts soon."

The hang-up was first discovered by Thomas A. Lawler, a former top official at Fannie Mae and an expert on housing and mortgage matters, who runs Lawler Economic & Housing Consulting.

Part of the reason why it's taken so long for the program to start is due to the complex nature of mortgages, the Treasury Department argues. Mortgages are owned not just by the lenders themselves, but also by investors, who could be anyone from hedge funds to Wall Street banks to municipal pension funds.

"Because there has not been a systematic method of notification to second lien holders when a first lien on the same property is modified, ramp up has taken some time," Reilly said.

Some, like influential New York Times columnist Gretchen Morgenson, have pointed their fingers squarely at four specific culprits -- the four biggest banks in the country.

As of Sept. 30, Bank of America, JPMorgan Chase, Citigroup and Wells Fargo were carrying a combined $452.4 billion worth of second mortgages on their balance sheets, according to the most recent quarterly data filed with the Federal Reserve. That's $92.1 billion in junior-lien mortgages (mostly second liens) and $360.1 billion in home equity lines of credit.

While the Big Four -- which are also the nation's four biggest mortgage servicers -- may be willing to cut borrowers' payments on mortgages owned by investors, doing so for mortgages carried on the Big Four's books would immediately impact their income; after all, less money would be coming in.

But the country's biggest bank may be poised to finally sign onto the program. A Treasury official told the Huffington Post that Bank of America's new CEO, Brian Moynihan, re-committed to Treasury Secretary Timothy Geithner this week the bank's intent to join the administration's second lien effort.

But for now, eight months after the plan's announcement, up to 1.5 million struggling homeowners are waiting for a program that's, thus far, stuck in the mud.

Shahien Nasiripour, HuffPost Reporting

For a free Homeowner’s Guide on the Making Home Affordable Program, click here

Loan Modifications – Banks Not Following The Rules?

Nathan Reynolds is something of an expert on the government’s foreclosure prevention program. A mortgage broker who’s worked in the Chicago area since 1998, he’s seen both his business and his home’s value plummet in the past few years. After receiving his own trial loan modification from JPMorgan Chase, he’s helped others apply for modifications through the program on his own time.

But in November, after Reynolds had made trial loan payments for seven months, Chase told him his mortgage would not be permanently modified. Chase had determined that his personal financial troubles were only temporary — because Reynolds had expressed optimism that the administration’s policies might rescue the housing market, boosting his income.

That’s not a legitimate reason for a loan servicer to deny someone’s modification, according to the Treasury Dept.’s guidelines for the program. And Reynolds’ experience — along with the cases of two other homeowners examined by ProPublica, shows how servicers have created unnecessary hurdles that, in some instances, violate the loan program’s rules.

Housing advocates say they frequently see homeowners rejected or kept in a trial modification for questionable reasons. "There’s a real resistance on the servicers’ part to making permanent modifications," said Diane Thompson of the National Consumer Law Center.

The administration set a goal of helping up to 4 million homeowners through the $75 billion mortgage modification program as a way to blunt the boom in foreclosures. Treasury has produced a growing number of mandatory guidelines for banks and other loan servicers to review applications and perform the modifications. In exchange for tailoring loan payments to 31 percent of the homeowner’s monthly income, both the servicer and owner of the loan receive incentive payments.

Servicers representing 85 percent of the housing market have signed up to participate. Applicants must first go through a trial period before their mortgage payments can be permanently reduced. But servicers have been slow to convert hundreds of thousands of trials into permanent modifications — as of November, only about 31,000 had been made permanent.

That spurred Treasury to publicly criticize the servicers’ performance and to put out new guidelines in recent months to speed up the process.

Treasury said recently (PDF) that the effort has resulted in a "significant increase" in offers of permanent modifications, but numbers demonstrating how significant won’t be available until February.

ProPublica has reported since last June on homeowners’ frustrations in receiving a prompt answer from servicers, particularly the program’s largest servicers — Bank of America, JPMorgan Chase, Wells Fargo, and CitiMortgage. In response to widespread complaints, those servicers have dramatically increased staffing and touted other improvements, such as new document management systems.

But when homeowners do get an answer, the reasons don’t always jibe with how the program is supposed to work. Housing advocates say this is a direct result of a lack of effective oversight of servicers in the program, something ProPublica has focused on before.

‘An Excuse to Deny Someone’

Reynolds was a prime candidate for a loan adjustment and was among the earliest homeowners to receive a trial modification.

His mortgage brokerage business had followed the market downward, and as a result, he’d fallen three months behind on his interest-only mortgage. Area real estate cratered. His own home, bought in 2001 for just over $400,000, had rocketed up to about $1.2 million in value in 2006, and then down again to about $350,000. With a refinancing in 2005 and a home equity line of credit with Countrywide, his mortgage debt exceeded his home’s value by more than 70 percent.

Soon after the loan program was announced last February, Reynolds applied. He received an application in late April and was accepted, making his first payment of about $2,400 (down from $3,300) in May. He made six more payments. Like many borrowers in the program, he says he was asked over and over to send the same documents and later, updated versions of those documents. Finally, in late November, he received an answer: He was denied a permanent loan modification.

The reason? A Chase employee explained to Reynolds that they’d determined his financial difficulties weren’t permanent. In his application, he’d written that he believed that the government’s rescue efforts would "save the U.S. housing market" and that his business "will once again be profitable." The Chase employee told him that statement indicated his hardship was only temporary.

"That’s just nonsense," said Thompson of the consumer center. "To me, that sounds like an excuse to deny someone."

Chase spokeswoman Christine Holevas told ProPublica that Reynolds had been denied "because the skill and ability is still there to earn the income." Since he’d "stated in his letter that business would be picking up," it was "not considered a permanent hardship," Holevas said.

Such a determination contradicts Treasury’s guidance to servicers for the program. A FAQ (PDF) issued to servicers says the program does not "distinguish between short-term and long-term hardships for eligibility purposes."

When ProPublica asked about this guideline, Holevas did not directly respond. She did offer another reason for denying Reynolds: Chase’s review of financial information showed his income had not decreased.

Reynolds, who has a wife and two small children, says no Chase employee had made such a claim to him and that the documents he provided show that his mortgage business dropped more than 50 percent in 2009. He submitted a new hardship statement in December, in which he tried to make clear that his troubles are real and lasting. Holevas said those documents would be reviewed.

Now, Reynolds says his finances are at the breaking point and bankruptcy appears unavoidable if Chase denies him again. "I did everything that was asked of me, but Chase has me backed into a corner that I cannot get out of."

The Nine-Month Trial

Six months into a trial modification, Gary Fitz of California still doesn’t know whether or when his mortgage will be permanently modified, and he’s been told he’ll have to wait for a few more months.

Under the program’s design, the trial period was supposed to last three months, giving time for the servicers to collect and evaluate the homeowner’s financial information. At the end of the trial, if the homeowner fit the program’s criteria and had made all three modified payments, the servicer was supposed to promptly make the modification permanent.

Instead, trial modifications routinely last more than six months, homeowners and housing advocates say.

There are a number of adverse consequences of a trial period’s dragging on, said the consumer law center’s Thompson. Because a homeowner is not making a full payment, the balance of the mortgage grows during the trial period. The servicer reports the shortfall to credit reporting agencies, so the homeowner’s credit score can drop. And most importantly, says Thompson, the homeowner isn’t saving money in case the modification fails and the home is foreclosed. "Keeping someone in a trial modification really does not do them a favor," she said.
Fitz’s case shows why some homeowners have remained in limbo so long.

He sought a loan modification in the spring of 2009 because his wife’s salary had been cut. Like millions of others, he applied soon after the administration announced the program last February. He was accepted for a trial modification and made his first payment in July.

Fitz was prepared for an uphill struggle. A Wells Fargo customer service representative told him early in the application process that he should make seven copies of his financial information — because Wells Fargo would likely lose it more than once. He says he’s sent the same paperwork in five times.

When the trial stage lasts so long, servicers commonly ask homeowners for updated financial information months into the trial period. Fitz, for example, submitted his paperwork for the first time last spring. But when Wells Fargo requested an updated package in December, it showed that he’d received a pay raise last June of about $80 per month.

Because of that, Wells Fargo started him over on a new trial period – even though his trial payments climbed just $27, from $1,733 to $1,760. His first payment on the new trial period is due Feb. 1, meaning that by the time he completes it, he will have been making trial payments for nine months.

Wells Fargo spokesman Kevin Waetke said the company does not comment on individual borrower’s cases. He did say, however, that "the federal guidelines require a final review of updated financial documents before moving any Home Affordable Modification from trial status to complete."

That’s not true. In a Treasury guidance (PDF) to servicers issued in October, meant to streamline the review process, it says there is "no requirement" to "refresh" the homeowner’s documentation as long as it was up-to-date when it was originally received.

Wells Fargo also appears to have begun Fitz’s second trial period contrary to Treasury guidelines. A Treasury guidance (PDF) last April said that a servicer should not begin a new trial period if a homeowner has only a minor income change (defined as exceeding the "initial income information by 25 percent or less"). Guidelines issued later (PDF) are even more restrictive about starting a new trial period. The reason is clear: The purpose of the trial period for the homeowner is to demonstrate the ability to pay, and such a small change in income is unlikely to affect that.

Asked to respond, Waetke said that "given the complexity of the program, the volume of calls we receive and the number of modifications currently in process, there is the potential for a mistake to be made." He added that Wells Fargo would continue to review the case.

Buying Time

Sometimes there seems to be no reason at all for a trial period to drag on.
Cynthia Mason of Texas, another homeowner with a Wells Fargo mortgage, also recently restarted her trial period after several months.

Last spring, she sought a loan modification because medical and other expenses had made it impossible for her to afford her mortgage payment on a fixed alimony income. She’d planned to supplement that income with a job, but has been unable to find anything. Like Fitz, she began the program in July.

In October, good news came with a phone call: She’d been accepted for a permanent modification. She waited for the final paperwork to arrive, but it never did. Instead, while speaking to a Wells Fargo employee about an unrelated issue six weeks later, she found out that she’d in fact been denied. When Mason inquired why, she says she was told some documentation was missing, but the employee could not tell her what it was. She also learned she owed late fees because she’d paid the modified payment, not the original, full payment, in November and December.

When she complained about the late fees (which were eventually canceled), she was passed to a different employee who told her she was being put back into a trial period. She didn’t understand why. Another representative finally told her that she’d been denied because of a negative "Net Present Value" test. The test is the calculation at the center of the Treasury Department’s program: It determines whether the loan’s owner (sometimes the lender, sometimes a mortgage-backed security’s investors) is likely to make more money modifying the loan or not. A negative result means the servicer has no obligation under the program to modify the loan and is a common reason for denial.

But in Mason’s case, a Wells Fargo employee told her she’d nevertheless been put back into the trial period in order to "buy time."

Wells Fargo spokesman Waetke declined to speak about Mason’s case but did say that the bank sometimes extends the trial period "to allow customers time to get the documents so we can complete the review." Mason says she doesn’t know of any documents that might be missing, and she’s not optimistic about receiving a permanent modification. By extending the trial, Mason told ProPublica, Wells Fargo is "just prolonging the inevitable" – denial.

by Paul Kiel, ProPublica

What Can Happen To Credit Cards After Foreclosure

Like so many of you, I too have had my share of financial problems the past couple years. During the good times, I got a little overzealous and purchased a 2^nd home and a seasonal vacation rental. Basically this meant that I had 3 mortgage payments and the rental income I received only covered the expenses on the seasonal vacation rental during the summer months. Once winter came around, those came out of my pocket too, so I decided the best thing to do was sell the vacation rental, so on the market it went.

There my listing sat, and sat, and sat, collecting dust with no offers. It got to the point where I could no longer afford to make the payments on the 1^st and 2^nd, so with much hesitation, knowing I was going to ruin my perfect credit rating of the past 20 years, I stopped making the payments on December 1^st, 2008. I had no choice.

The late payment letters and collection phone calls started coming fast and furious by February. I really needed to learn another language or two, because how many times can you tell a collection agent “I don’t have the money” after 3 phone calls from the same lender in ONE WEEK? Maybe if I could say it in Spanish or Greek, they’d understand and stop calling. But no…..persistent buggers they are….and the saga continued until I just stopped answering the phone.

So April came and I got a letter from Bank of America who holds both my Visa and my American Express accounts for the past 15 years. These two accounts didn’t start out with BofA, but being the huge credit sucking siphon that they are, they ended up there much to my dismay. So anyway, I got this letter saying that my $45,000 credit line (that I paid perfectly up to that point I might add) was being cut to $13,000. Guess how they came up with that amount? It wasn’t rocket science or anything. My balance on the card at that point was $12,800, so I guess $13K looked like a nice round number. Ditto for my American Express account. BofA is nothing if not efficient! Nothing like killing two birds with one stone!

Being the so called “credit expert” that I am, I knew this was the start of the ramifications of my not making my mortgage payments on my seasonal vacation rental, but boy, did that hurt the ego or what? I’d had that account for 15 years with a $45,000 credit limit; had never missed a payment or ever been late, and now it was down to $13,000. If that wasn’t bad enough, do you know what happens when your balance is basically as high as your credit limit? It totally dumps your credit scores……as if the late payments on the mortgage weren’t bad enough. I went from a 768 score down to a 569. Thanks for the help BofA! Deep down I knew and understood their reasoning. I was now considered a credit risk and they had to limit their possible loss. I sure didn’t like it, but I understood it.

Okay, so I had to adjust my spending…..move auto payments around to another card that hadn’t cut us yet and generally fight on-going depression for the next few months while I adjusted to my new crappy credit standing. I knew that once the foreclosure was actually done and over with, my credit would start to repair itself, (after about 2 years) and I wanted to get that clock started, but the lender hadn’t foreclosed yet. By September of 2009, I was getting really frustrated, so I wrote a nice letter to my first mortgage holder saying “Please take my house!” and I enclosed the house key. Thought I’d make it easy for them and give them the incentive to just go to sale and get this thing done. I guess it worked because on October 19^th, I lost my house to my first mortgage holder.

I sat back and said “Ahhh….” That chapter is over and I can move on, but noooooooooooo……. I had a 2^nd mortgage with Wonderful Wells Fargo and they wouldn’t go away. In all fairness, I got this 2^nd in 2007 when I saw the writing on the wall with the economy and real estate values. I took as much out of this home as I could…..to the tune of $135,000. I put some of the money into upgrades on the house that got foreclosed on, and I used the rest to live on for 2008. Wells really had every right to want their loan repaid and since they didn’t initiate foreclosure proceedings themselves, I was now being hounded by Wells continuously. “Either pay or we’ll seek legal action.”

Again, being the “credit expert” that I am, I knew if they decided to seek legal action, that would result in a judgment against me which would be another big ding on my credit and it also would start to accrue interest on a much higher scale. Wells told me that if I made payments NOW, directly to them, the interest would stop accruing on the account and any payments I made would be credited directly to the principal. Since I didn’t see any other way around the situation, short of filing for bankruptcy, I started to pay them $200 a month. They really wanted $65,000 and they’d call it settled, except for 1099’ing me for the difference. Isn’t that nice? Yeah, like if I had $65,000, I wouldn’t be in this mess.

So far, so good with the $200 a month until last month, when they tried to talk me into the “10 year plan” for $1,200 a month. Naaaa…..that’s a bit much…….how about $300? They seemed to be okay with that, but now I’m getting a “Wells” call a couple times a week again. That’s okay. I know the number now and unfortunately I’ve been too busy to answer the phone when they call. I know this arrangement is not going to last forever, but for now, I’m dealing with it.

To top this whole sucky last year off, after taking care of my elderly dad for the past two years, he passed away this last October. I’ve spent so much time with him in the past two years, that now I’m a little lost, but he’s in a better place. It was his time. He was 87 and his quality of life was deteriorating quickly in the past 6 months before he passed, so I think it was a good thing that he went before he got any worse. It brings me comfort too, knowing he is now with my mom, who passed almost 11 years ago now.

My sweet, sweet dad, who was my financial advisor forever, looked out for himself well over the years, and I was left with a little bit of money from him. It wasn’t a ton, but I was very thankful for it and it allowed me to pay off my BofA Visa and my BofA American Express last week. I thought, okay, at least I have two credit cards now with $11,000 to $13,000 limits on them, and that should help my credit scores come back up now, because my balance-to-limit ratio is not going to be high anymore. This was going to be the beginning of starting to get my credit rating back.

WRONG!

This past Friday, I logged into my BofA account on-line and noticed that my Visa credit limit had been cut to $500!!!!! I WAS LIVID!!!! Now I felt justified in calling BofA to give them a piece of my mind and find out why they cut my limit again! Luckily my BofA American Express was still at $11,900, but I just figured they hadn’t gotten around to that account yet….

So I called BofA and was transferred over to the credit department. I explained to the girl that I had just paid off this account, so WHY would you cut my limit from $13,000 to $500? She said “Let me check your credit”. Being ever-so-helpful myself, I had to explain that there was foreclosure on my credit, but those two accounts were the only two accounts affected and I have no other dings or late-pays on anything else, not to mention, I’ve never, ever been late on either BofA account. I thought that once she knew that, she’d straighten everything out.

WRONG!

At that point she said to me, “Oh, you have a foreclosure? Well then, I have to close your account.” WHAT? YOU’VE GOT TO BE KIDDING ME? “No, it’s our policy that if you have a foreclosure on your credit, that we can no longer offer you any kind of credit. I see you have another account with us as also. That account will have to be closed as well.” REALLY? You’ve got to be kidding me! I’ve had these accounts for 15 years and never been late! How can you do that? Know what her response was? “Didn’t anyone tell you that a foreclosure affects your credit?” DUH! I guess I’m just not being punished enough.

ME AND MY BIG MOUTH!!!!

Being the so called “credit expert” that I am, I know for the most part, the people in the credit department have limited access to your credit. I’m not sure exactly what they see, but I don’t think it’s a breakdown of each account. I believe they only have access to your score and that determines what they’re going to cut your credit limit to. Why my brain didn’t kick in before I decided to tell her I had a foreclosure showing on my credit is still giving me indigestion.

So now, my longest and best credit accounts have been closed. My scores are going to drop even further into the abyss then they are now because they will no longer report and I lose all that history. I’m still sick to my stomach and I HATE BANK of AMERICA!!!!! So much for my credit score improving for the time being.

Here are a couple tips for you if you find yourself in this situation. I have another credit card with a $20,000 credit limit that I religiously PAY OFF every single month. This credit limit has never been cut and I believe it’s because I pay it off every single month, so no attention is being drawn to me for them to look into my account, or check my credit.

As for the BofA accounts, I used to pay both of them off as well every month, but because I was having financial difficulties, I started keeping a balance on them. I believe that is why I became a “red flag” for them to inquire into my credit status. Once they did that, my credit limits got cut.

I have no choice now but to move forward, continuing to make my payments on time and trying to re-build my once perfect credit rating. I know this is going to take a minimum of 2 years before the foreclosure is not going to have as much of an impact as it does now.

As for my 2^nd with Wells, what impact that has, still remains to be seen. I don’t believe they are continuing to update that account, as it’s been placed in “charge-off” status with the lender. I’m keeping track of every payment I make to them now, because it’s “not their policy” to send me statements anymore.

Maybe one day I’ll win the lottery and give them the $65,000 they want to settle this account. If not, it’ll only take me about 39 years to pay them off at $300 a month.

I can tell you one thing; I will NEVER, EVER do business with Bank of America again.

If you need help with your credit, visit: www.RepairCreditTrauma.com