Homeowners Hope for Easier and More Streamlined Modification Rules as Result of Foreclosure Probe

Union County, N.C., homeowner Barry Lancett signed two agreements with a national lender this year to modify the terms of his mortgage but still received a disturbing piece of paperwork: a foreclosure notice. “A deputy comes to your door and delivers it in front of the community,” said Lancett, who later avoided foreclosure but is still dealing with lingering issues. “It was humiliating, to say the least.”
His experience is one of the biggest frustrations for struggling homeowners—getting hit with a foreclosure proceeding at the same time a loan modification is being worked out with a bank.
Recent laws and regulations in North Carolina are supposed to prevent this, but officials say they’re still getting complaints from consumers. Now it’s an issue coming under scrutiny from attorneys general investigating allegations that lenders mishandled foreclosure-related paperwork.
“This is of great concern to me because it’s important homeowners have a fair chance to keep their home,” North Carolina Attorney General Roy Cooper said in an interview. One of his colleagues in the probe, Arizona Attorney General Terry Goddard, recently said he was most angry about “simultaneous modifications and foreclosures.”

One possible outcome of their investigation may be pledges by banks to improve their loan modification efforts. These programs strive to lower payments for struggling borrowers by reducing interest rates or even principal owed.

Cooper, who is in charge of the potential remedies in the probe, said he would like “easier and more streamlined” modifications to be a goal. Potentially, lenders could agree to make changes to their modification processes, add more resources or provide a single point of contact to borrowers trying to work out payment plans, he said.

“One of the most important issues is making sure foreclosures are done properly as we go forward,” Cooper said. “That includes serious attempts at modifications.”

The officials’ concerns come as foreclosures continue to mount.

Nationally, the Center for Responsible Lending has estimated that from 2007 through 2009, about 2.5 million foreclosures were completed. The nonprofit says another 5.7 million borrowers are at imminent risk of foreclosure.

Kathleen Day, a spokeswoman for the Center for Responsible Lending, said it’s difficult to tell how many borrowers who could qualify for a modification are going into foreclosure, especially amid the recent revelations about shoddy paperwork. But the group believes it’s “prevalent.”

Much of the problem appears to stem from lack of communication and confusion between departments inside banks, housing counselors say. But Day said there can also be financial incentives for servicers to foreclose.

A recent Government Accountability Office report also suggests bank errors can contribute to a foreclosure overtaking a modification. It found that half of servicers studied in the federal modification program had at least 20% error rates when figuring whether borrowers’ income qualified them for the program.

Lately, the focus is on the foreclosure process and whether banks are following laws and procedures. In depositions, bank employees, nicknamed “robo-signers” have said they rapidly approved foreclosure documents without reviewing their contents. Banks, in some cases, have stalled foreclosure sales to review procedures, but executives have largely said the problems are just technicalities.

Not everyone agrees. University of Iowa law professor Katherine Porter said last month in Congressional testimony that flawed foreclosures are not “isolated incidents.” She released a study in 2007 of bankruptcy cases that found a majority of mortgage claims were missing one or more of the required documents.

Porter said she believes “the foreclosure process lacks integrity in an unacceptable number of ways” and that the problems undermine loan modification efforts.

In the past two years, N.C. regulators and lawmakers have taken steps designed to prevent foreclosures for homeowners trying to work out modifications.

The N.C. Commissioner of Banks implemented a rule, which took effect in June, that prohibits a mortgage servicer from initiating or proceeding further with a foreclosure during a pending modification request. The regulation does not apply to national banks, which are not monitored by state regulators. N.C. officials, however, say it’s the policy of the state that all lenders follow the spirit of this rule.

North Carolina also passed a law last year that says clerks of court presiding over foreclosure hearings can delay proceedings for up to 60 days to give homeowners and lenders more time to negotiate.
In addition, under the federal modification program known as HAMP, servicers cannot send a loan to foreclosure until the homeowner has been evaluated for a modification.

The banking commissioner and the attorney general’s office said they couldn’t provide specific numbers on modification complaints. But Noelle Talley, a spokeswoman for the attorney general, said the office is conducting a review of complaints related to borrowers going into foreclosure while they are talking to a bank about a loan modification.

Louise Mack, executive director of Kannapolis, N.C.-based housing counselor Prosperity Unlimited, said she had a case in the past year in which her group was working on a modification with a borrower, only to have the bank foreclose on the home. The bank later gave the home back. “We don’t see a whole lot of it,” she said, “but it does happen.”

A major problem is coordination inside the servicing companies, which can have separate departments handling modifications and foreclosures, she said. One potential solution is for servicers to have one point of contact assigned to each borrower. Prosperity Unlimited is working with national lenders to provide such an approach for her counselors, she said.

In North Carolina, Cooper said the focus is on enforcing already strong laws before pushing legislative changes. In the ongoing foreclosure probe, he said attorneys general are continuing to gather information and have begun holding meetings with the banks involved. “We are trying to move as quickly and expeditiously as possible,” he said.

(c) 2010, The Charlotte Observer (Charlotte, N.C.).
Distributed by McClatchy-Tribune Information Services.