New help for borrowers
To help underwater homeowners, the Obama administration in September rolled out a new initiative to encourage mortgage holders to provide refinanced loans that would forgive at least 10 percent of the original mortgage amount.
Although the government's main mortgage relief program offers loan modification to people who meet certain financial criteria, Ira Rheingold, executive director of the National Association of Consumer Advocates in Washington, calls it "a dismal failure."
"It was not comprehensive enough … and it depended on the good faith and goodwill of the mortgage servicing industry — and that's not something that will win you great success," he says. "People really have not gotten the help they've needed."
The foreclosure system also has pushed people through the process at breakneck speed, with reports of shoddy paperwork, fuzzy details and "robo-signing" of documents by bankers and other officials.
"Servicers have been racing through to foreclosures, and the law be damned," says Rheingold. "Now they have to find the original paperwork and how much people owe, so it may actually be more cost-efficient to modify these loans. The government needs to step in and stop foreclosures until servicers prove they're ... complying with the law."
The goal of the mortgage modification program is to reduce participants' housing debt-to-income ratio to 31 percent, says Celia Chen, senior director at Moody's Analytics in West Chester, Pa.
"But when you factor in all the other debt the homeowner has to pay — credit cards, other bills — the debt-to-income ratio is over 60 percent. People are just giving up."
Indeed, nearly half of the 1.2 million homeowners given temporary loan modifications had fallen out of the program in the last year, government data show.
Sandi Neilson, 58, is trying to persuade her lender to modify her mortgage and avert foreclosure on her upstate New York home. The former nursing supervisor got into trouble when her husband's terminal illness resulted in $125,000 in out-of-pocket medical expenses.
She refinanced to incorporate that debt, but in 2008 the monthly payment rose from $1,400 to $1,950. She missed a few payments, and her lender moved to foreclose.
"I pray about the mortgage every day," says Neilson, who expects to learn her fate in the next few months. "It's been a rough haul, but I feel it'll be okay. I'm hopeful."
Dorothy Lotenero is also optimistic that a settlement will be reached with her lender. Three years ago, her lawyer says she fell victim to a scam by a trusted friend who arranged for her to refinance her home with an interest-only mortgage. She says she didn’t understand that her mortgage payments would continue to rise to more than $2,000 over the life of the loan — more than her monthly fixed income. Default was inevitable.
Lotenero contacted Legal Services of Northern California and has been working with a volunteer attorney to negotiate with her lender. So far, two foreclosure dates set by the lender have been postponed. “I hope and pray that they don’t take it from me,” she says of her home. “I do want to stay here if there is any way possible.”
Carole Fleck is a senior editor at the AARP Bulletin.