Mortgage Mayhem: Banks Doing Too Little Too Late

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Editor's note: This is the last part of a series documenting the struggles of homeowners seeking a mortgage-rate modification. Part 1 reviewed how homeowners have been stranded, and part 2 exposed the opportunists taking advantage of the broken system.

NEW YORK (TheStreet) -- The banking industry has taken a great deal of time to help troubled homeowners and done a poor job by some accounts.

"We've had people who met guidelines through and through," says Charles Favor, a mortgage modification specialist with HLP Center. "They fall right into the category of every criteria that's out there and the banks are just not helping people. They string them along through the loss-mitigation department and the attorneys don't even know they've foreclosed upon the house."

Additionally, the number of people assisted by banks pales in comparison to the number who defaulted or walked away from their homes. While it's difficult to gauge the precise number of homeowners who fall into the category of "troubled," somewhere between 3% and 5% of U.S. households are delinquent on mortgage payments, according to quarterly reports from major banks, Fannie Mae (Stock Quote: FNM) and Freddie Mac (Stock Quote: FRE). That implies 3.4 million to 5.2 million households are now at risk of default or foreclosure, on top of the millions who have already faced the same fate.

Big banks have finally realized that the mortgage malaise won't stop spreading throughout their loan books until barrier walls are erected. They've started providing better workout solutions than those offered by the federal government, because banks have more flexibility to tailor modifications to individual borrowers' needs.

The question now is whether progress has come too late.

Despite initial unpreparedness, the country's four largest mortgage servicers -- Bank of America (Stock Quote: BAC), Wells Fargo (Stock Quote: WFC), JPMorgan Chase (Stock Quote: JPM) and Citigroup (Stock Quote: C) -- have now added nearly 30,000 staffers to push borrowers through the pipeline more quickly. Hope Now, an alliance of financial firms that reaches out to at-risk homeowners, says the industry has completed 8.2 times as many successful workouts using their own solutions as those completed through the Home Affordable Modification Program.

"The latest results continue to support the industry's unprecedented efforts to assist borrowers across the country using myriad foreclosure prevention programs," says Faith Schwartz, senior advisor for the group.

Of course, banks aren't restructuring loans out of the goodness of their hearts. Besides prodding from the Treasury Department, workouts also allow them to improve the credit quality of their loan books, avoid hefty write-downs and stop the crisis from bleeding into more viable loans in surrounding areas.

For instance, Wells Fargo structured a plan to assist its most troubled borrowers, those who were part of Wachovia's "Pick-A-Pay" program. Partly as a result, the bank was able to move $1.8 billion worth of loans in that portfolio back to "performing" status last quarter.

Mike Heid, the co-president of Wells Fargo Home Mortgage who structured the program, says that "having a full range of options to address different customer circumstances is crucial to helping all of the borrowers who truly need assistance."

But the Pick-A-Pay plan also comes with strings attached.

Wells Fargo is letting those underwater borrowers with financial difficulties ignore principal and pay "interest only" for six-to-10 years. At that point, the bank believes the economy will have improved enough to restructure the loans into more profitable ventures. Right now, the plan allows Wells to publish sunnier loan statistics and avoid higher mortgage-related costs.

Wells Fargo, Bank of America and JPMorgan each report greater success outside of the Home Affordable Modification Program than within it. Perhaps unsurprisingly, the most aggressive champion of the program among large, money-center banks has been Citigroup, the only one in which the U.S. government still holds a large ownership stake. Even so, Citi has pushed less than 30% of those eligible through to permanent modifications.

Banks have been making more progress outside of the government-sanctioned box for a few reasons. The federal program wasn't structured to help all troubled borrowers. Banks don't necessarily want to help all of them, either, viewing some financial situations as too precarious. They'd also prefer to tout successes without federal assistance, if they can avoid it.

Through June, fewer than 390,000 eligible borrowers have moved through the Home Affordable Modification Program into permanent modifications and stayed there. Meanwhile, nearly 530,000 of those who received modifications have canceled them. Overwhelmingly, defectors have turned to alternatives offered by banks.

For instance, Bank of America has completed 665,000 mortgage modifications since January 2008 -- just 11% of which have fallen under the Home Affordable Modification Program. In May, Bank of America had difficulty even uploading files to the government's computerized system, leading to apparent inaccuracies in the Treasury Department data.

"When a customer is found to be ineligible for HAMP or falls out of a trial modification, we consider an alternative home retention program, and if no viable solution is available, a dignified exit from homeownership," Rebecca Mairone, an executive in Bank of America's mortgage division, noted when discussing July performance. She added that "HAMP guidelines are quite specific with regard to the debt-to-income ratio, owner-occupancy, trial payment performance and other requirements."

The picture isn't all rosy of course -- it took the industry roughly two years to accept a new philosophy about the mortgage market, in which losses aren't heaped solely upon homeowners. But now they're now reaching out to troubled borrowers across the country with a new pitch: Helping them stay in homes.

The Hope Now alliance has organized workshops across the country to connect homeowners with modification experts. Individual banks have promoted such events as well.

For instance, Wells Fargo CEO John Stumpf says the industry has offered suggestions to make the Home Affordable Modification Program "more friendly, more usable," but in the meantime his firm has been doing community outreach instead. Wells has been promoting what is calls "home preservation workshops" in cities like Atlanta, Baltimore, Chicago and Phoenix in recent weeks.

"We bring our people in," Stumpf says. "They are all hooked up online so people can sit down and have a modification done right at the event."

Those proprietary programs have been repairing the system -- in President Obama's words -- one house and one family at a time. Yet it's hard to tell when the long-troubled housing market will finally show consistent signs of stability.

Andrea Risotto, a Treasury Department spokeswoman, explains that progress has been slow in part because "the face of a person who is struggling has changed."

Problems are no longer isolated to irresponsible, naive or opportunistic subprime borrowers. Doggedly high unemployment and the continued depreciation of home values has been snaring responsible borrowers on an increasing basis -- "many of whom never thought they would be in this position," says Risotto. "They're struggling through no fault of their own."

Meanwhile, second liens have presented another hoop for many borrowers to jump through before resolving their primary home loan. Each time the government starts to gain traction addressing one problem, additional challenges seem to be presented.

As a result, mortgage transactions have occurred in fits and starts since "Making Home Affordable" was first announced. There were desperation-driven booms in the first half of 2009 and spring of 2010 when federal incentives were unveiled or about to expire. Those booms have faded when economic reality sets in.

"I think we're sort of all learning as this shifts, as the economy ebbs and flows," says Risotto, "as servicers learn from their own implementation challenges and their own successes, and we're trying to remain as responsive as we possibly can."

Yet while the enormous amount of taxpayer assistance devoted to the housing crisis has brightened banks' profitability -- delivering mortgage-servicing fees and lowering funding costs -- it hasn't helped homeowners nearly as much.

"The president is coming out with how great this was and how this plan has been successful," says Favor, the mortgage-modification specialist, "and the bottom line is, it's getting worse. The whole plan has kind of backfired."

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