Mortgage rescue: Still more hurdles

By Tami Luhby

The administration’s loan modification program has helped 55,000 troubled borrowers so far. But the housing crisis is complex and the fixes aren’t so easy

NEW YORK (CNNMoney.com) — Loan servicers are overwhelmed by the flood of applications. Mortgage investors are angry about a congressional bill prohibiting them from suing servicers that modify loans. Foreclosures are rising as unemployment soars.

Nearly three months after President Obama first announced his $75 billion mortgage rescue effort, his administration is still refining the program in hopes of reaching its goal to save 9 million homeowners from foreclosure.

So far, more than 55,000 borrowers have been put into trial modifications, which become permanent if they keep up with payments for three months. Hundreds of thousands more have applied.

However, the initiative must still get over several hurdles before its chances for success can be determined.

Stressed servicers: The program’s guidelines were issued on March 4, but it took many servicers weeks to reprogram their systems and train their staffs. Many did not even start accepting applications until early- to mid-April, frustrating troubled borrowers forced to wait to find out if they qualify for lower rates.

Even now, housing counselors and borrowers report that servicers are still getting up to speed on the program, causing delays and confusion.

Take the case of Roberta Smith of Foster City, Calif. The 65-year-old has a mortgage where her minimum payments don’t cover all the interest that’s due. To stop her principal from ballooning, she has drained her retirement accounts. But she fears she soon may not be able to afford even the minimum payment.

Smith applied in late March for the modification program, but JPMorgan Chase (JPM, Fortune 500) told her nearly three weeks later that her package was not complete. She faxed the required documents and was assured by a telephone representative that the bank had everything it needed.

But this week she received a letter saying her request was being canceled because the application was incomplete.

Chase spokesman Tom Kelly said the letter was sent as a mistake and Smith’s application is still under review. He acknowledged that the bank, which began processing applications in early April, is still ramping up its modification efforts. Meanwhile, the bank is holding off on foreclosing on applicants.

"It’s an enormous task," Kelly said. "We’re moving quickly, although not as quickly as an individual might wish."

Angry investors: One complicating factor in the mortgage meltdown is the fact that the loans are bundled into securities and then sold off in pieces to investors. Some servicers have blamed the slow pace of mortgage modifications on the fact that their contracts with investors limit their ability to adjust the loans’ terms.

To address this concern, Congress is currently finalizing a bill that would give servicers a "safe harbor" in modifying mortgages.

"The goal of ‘safe harbor’ is to allow servicers to use these program to their fullest capacity," said Stephen O’Connor, senior vice president of governmental affairs at the Mortgage Bankers Association, which represents servicers.

Some investors, however, are lobbying hard against the bill, saying that the contracts already give servicers the flexibility to make changes. One group of investors has hired the prominent Washington law firm Patton Boggs, while another is waiting to review the final legislation before considering legal action.

"Investors don’t have to grant consent," said Bill Frey, head of Greenwich Financial Services who last year filed a lawsuit against Countrywide Financial over its $8.4 billion settlement in which it agreed to lower mortgage payments for many borrowers. The contracts "lay out which loans can be modified and which ones can’t."

Other industry experts agree, saying servicers are using investors as a scapegoat.

"If that law passed tomorrow, you won’t see any more modifications than you do today," said Guy Cecala, publisher of Inside Mortgage Finance, an industry newsletter.

Many investors were also steaming that the administration’s original program did not require second-lien holders, which are often banks, to take a hit during an adjustment.

Although the administration has since expanded the modification requirement to cover second liens, some investors still aren’t satisfied. They want the administration to treat second liens in the modification program the same way it does in the Hope for Homeowners program, which requires these liens to be extinguished, said Micah Green, a partner at Patton Boggs.

Escalating unemployment: The rising unemployment rate is threatening to reverse any gains being made in stabilizing the housing market. When homeowners lose their jobs, they often can’t afford to stay in their homes. Modifications often can’t help, experts say.

"Unemployment is becoming a bigger factor than almost anything," said John Taylor, head of the National Community Reinvestment Coalition, which assists troubled homeowners.

The administration Thursday expanded its loan modification initiative to make it easier for people to get out from under a crushing mortgage.

If troubled borrowers don’t qualify for a modification, their servicers must first evaluate whether the homeowners are eligible for a short-sale or deed-in-lieu agreement before filing for foreclosure. These alternatives allow borrowers to either sell the home for less than the debt owed or give it back to the bank.