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The Predatory Nature of Home Loan Modifications
Zobari Kina and his wife were trying to live the ‘American Dream,’ namely owning their own home. Like far too many people these days, the economic tsunami caused by Wall Street had reduced their income and as a result forced Kina and his wife into the federally funded ‘loan modification’ program. Lured by promises of a new monthly payment meant to reflect these economic times; Kina and his wife signed the closing papers with the most honest of intentions.
They did not question the fact that the closing documents were incomplete as their bank, JP Morgan Chase in St. Louis, assured them this was only a technicality. Before anyone criticizes their naivete—remember that far too many consumers have done the same thing.
Unfortunately, for Kina and his wife—the loan modification appears to have never been finalized in terms of the reduced payment and they found their mortgage checks sent to an escrow account and NOT credited to their monthly mortgage requirements. Now they are facing foreclosure and immediate eviction, July 27th, for ‘failure to make payments.’
Kina and his wife made numerous calls to Chase which were never returned. Finally, out of desperation they turned to the St. Louis Branch of Legal Aid, and a local activist group, Missourians Organizing for Reform and Empowerment (MORE), in an 11th hour attempt to save their home. The results were mixed. Kina was told by St. Louis Legal Aid, that only one attorney handled ‘foreclosures,’ and that person was on vacation, literally unavailable until after he would become homeless. The local activist group MORE, was ready to help.
Armed with only the best of intentions and an almost naïve belief in our system; activists staged a protest/sit-in at the only Chase location in St. Louis—situated in an office building in affluent, suburban, Chesterfield, Missouri. What happened that morning was a disgrace to the very idea of democracy.
Within 10 minutes of the group entering the small bank area, chanting slogans—both building and bank security called the Chesterfield police department. Self-identified conservative bloggers from the tea party movement were present and have provided video online.
After identifying myself as an online journalist in the office lobby, I began asking questions when building security told me to leave or risk arrest. I asked why I had to leave and I was told that my presence was ‘disruptive’ and that I was ‘disrupting business,’ and ‘frightening customers.’ Chesterfield police began to arrive within some 15 minutes after this exchange.
Now the conservative blogs are all ‘atwitter’, outraged over this type of protest, even though many conservatives face the same economic disaster of losing their homes to predatory lending practices. The sad truth lies in the fact that Mr. Kina and so many others have been refused reasonable accountability from banks regarding this loan modification program.
According to a recent Los Angeles Times article, homeowners in danger of foreclosure, who have entered the loan modification program have reported banks repeatedly requesting documents already in their possession, losing documents and altogether refusing to make the trial modifications permanent. Even after participants have followed all the requirements the law demands—trial loan modifications are frequently declined for permanent status. Usually the homeowner is never given the reason for denial or how the decision was rendered.
To add further insult to injury; a report by ProPublica found that 97,000 homeowners have remained in ‘trial modification’ status beyond the three month timeline mandated by the government’s regulations. Of these 97,000 borrowers, some 60,000 have their mortgages with JPMorgan Chase & Co.
After the Obama administration committed some $75 billion in taxpayer funds to subsidize this program; reports such as the expose done by ProPublica have documented massive refusal by the big banks to provide reasonable accountability and transparency regarding these contracts. ProPublica has further documented that after analyzing data provided by the US Treasury Department, almost 500,000 homeowners have been…”in loan mod limbo,” for over three months, beyond the timetables required by this program. (Source : ProPublica)
The program mandates that once the homeowner in question makes the reduced payments on time, and documents their finances—the trial modifications were to be made permanent. The big banks, such as Chase have argued that borrowers fail to provide necessary documentation, especially regarding proof of income. For borrowers like Kina, documenting proof of income includes the all too real situation of rapidly changing income. Loss of a job, or being reduced to part-time status can result in sudden income changes. Kina had such a reversal. Being a small business owner, he suffered the loss of a larger client which changed their income. Kina reported the change, but never heard from Chase. Ironically, this program was set up to save the homes of people who have suffered such financial reversals, yet stories such as Kina’s are all too common. In many cases, the homeowner is denied the permanent modification when they need it the most.
During this time, the banks collect the checks from homeowners such as Kina and either deposit them in an ill-defined ‘escrow’ account, or simply return the checks months later, with no explanation—to the confused homeowner. In Kina’s case; he was told that the checks were in an escrow account by one bank official, yet when he spoke with a different bank representative, was told that his mortgage was ten months behind. In any case, Kina, like far too many people in this badly policed program was hit for the mortgage payment, while the bank refused to credit his mortgage account. According to reports in ProPublica, the LA Times and the Wall Street Journal; this practice isn’t unusual and the explanation is deceptive.
Since the homeowner isn’t paying the full amount each month, but a negotiated ‘trial’ lesser amount, the mortgage balance continues to grow during this ‘trial’ period. There isn’t any freeze on missed payments, which is what banks consider any payment less than the full amount. In essence, the clock is still ticking on the foreclosure process, but the homeowner isn’t informed of this little detail. As a result of this procedural ‘miscommunication’, homeowners can find themselves in worse financial shape if the modification doesn’t become final. They can still face immediate foreclosure after making the trial payments and following the rules to the letter—since there appears to be little to no mandated accountability demanded of the banks. If the bank ‘loses’ required paperwork, or stalls by demanding additional copies—there is no mechanism to protect the consumer.
An investigative piece published in Salon entitled ‘Predatory lending with a smiley face,’ explains how this ill defined program lacking any consumer protection or transparency could be considered a thinly disguised alternate form of ‘predatory lending.’ In the early stages of the loan modification, the monthly payment is reduced substantially, but the full amount of the debt still remains in effect. Nothing has been reduced in terms of money owed; the only thing that changes is the timeline for payment. Furthermore the homeowner faces years of added interest. which must be paid. In essence, the interest rate is reduced on paper temporarily, but the added interest over the fully life of the loan has been drastically increased, sometimes exponentially. It may not be the type of predatory lending associated with payday loans, but the effect is the same.
The problem with the present loan modification program lies in the fact that these modifications do NOT decrease the actual principal owed for hyper-inflated properties which were never worth these prices. Congress has considered forcing the alteration of bankruptcy rulings as a remedy, by using a tool known as ‘cramdowns.’ ‘Cramdowns’ give a bankruptcy judge the power to force a reduction of overall principal mortgage debt, in much the same manner they do for car or student loans. Without such help; these modifications won’t work and will only serve as another tool of predatory lenders. The financial industry has been fighting this issue, predictably ‘screaming foul.’
The ‘cramdown’ amendment was offered in Senate Bill 61, sponsored by Senator Dick Durbin. After a successful vote in the US House of Representatives early March of 2009, the legislation was defeated in the US Senate, and done so with the help of eleven Democratic senators. Among the democrats charging in league with Republican Senator Jon Kyl, were Sens. Jon Tester (Mont.), Mary Landrieu (La.), Ben Nelson (Neb.), Blanche Lincoln (Ark.), Arlen Specter (Pa.), Michael Bennett (Colo.), Tim Johnson (S.D.), and Max Baucus (Mont.). Even now deceased Sen. Robert Byrd (W. Va.), arranged to be wheeled into the senate chamber, so he could point his thumb in the air as if voting ‘yes,’ then done with the mean teaser—signaled a dramatic ‘thumbs down.’ Missouri’s own Claire McCaskill finally voted for the cramdown legislation after monitoring the vote tally the entire time, much as an alcoholic heads to the nearest watering hole—anticipating that first drink. So much for the integrity of Senate democrats. Sadly, if the cramdown legislation had passed, some 1.69 million foreclosures could have been prevented according to latest estimates.
The ‘Net Present Value’ Secret Formula aka the surprise ‘joker’
Another problem with this program again speaks to the inadequate regulation needed to hold banks accountable. The loan mod process revolves around a single mathematical formula dubbed the “net present value (NPV) calculation. This formula was created by the Treasury Department and, according to ProPublica—various unidentified “other government agencies.” The formula used is kept secret and is required by the modification program.
The NPV formula was designed to determine whether the modification of a troubled home loan will be more profitable than a foreclosure. According to Alys Cohen at the National Consumer Law Center, a large number of homeowners seeking permanent modifications are wrongly denied…”because of the lack of transparency in the program.”
Just to make this process murkier, servicers in the financial industry frequently run the formula incorrectly. According to ProPublica once again,…”Fifteen of the largest 20 servicers in the program have not followed ‘various aspects’ of its rules concerning the formula, according to the Government Accountability Office.”
Where does this leave people like Mr. Kina? How can the government expect the average citizen to navigate this maze of exotic secret formulas? There is no way to deal effectively with this program until the program has full accountability and transparency, no secret formulas allowed. Furthermore, the modification is nothing but predatory unless the principal is reduced and not merely delayed, accompanied by multiple fees and exploding interest rates down the financial road.
Ultimately, citizens like Zobari Kina will not find relief until there is a federal moratorium on all housing foreclosures. This is the ‘bailout’ of Main Street that the taxpayers demand and deserve. This erstwhile program is nothing more than a full employment plan for predatory brokers on the taxpayer’s dole. It isn’t merely outrageous—it is the ultimate financial injustice to homeowners.
As for Zobari Kina—the future is bleak. While a bank representative DID meet with him—he was denied the right to have an advocate present—by Chase Bank. The only reason he was granted the meeting was because of the protest and the promise of media exposure. So much for accountability.
JEANINE MOLLOFF can be reached at firstname.lastname@example.org