Why Making Trial Mortgage Modifications Permanent Is So Difficult

Many people facing foreclosure have successfully made the trial mortgage modification payments required of them, but they've been unable to get their banks to make the modifications permanent. For example, California homeowner Martin Galvan and family made 14 monthly trial payments to JPMorgan Chase (JPM), totaling some $30,000, before receiving notice last week that their house would be sold in foreclosure. The sale is set for Jan. 7.

Back around Thanksgiving, I described Arizona homeowner John H.'s ultimately unsuccessful struggle to convert three successful trial modifications into a permanent modification; CitiMortgage (C) foreclosed on his house.

Two other struggling homeowners, Paul and Michela Meyers of New York and the Bogar family of Vermont, were more fortunate. Judges in their foreclosure cases ordered their banks -- Wells Fargo and Bank of America -- to make their trial modifications permanent. With luck, those sorts of orders, which according to my sources are relatively rare, will become more common.

As of now, BofA (BAC) has not responded to requests for comment. CitiMortgage's comment was included in John's original story. A Wells Fargo (WFC) spokesperson says: "Given that this is still in active litigation while we consider our options, we are unable to discuss the case or the Meyers's situation." And a Chase (JPM) spokesperson says of the Galvans' case: "We have worked with the customer over a number of months to get timely and complete documents, have reexamined their situation multiple times, and communicated investor decisions that were made using government guidelines."

Here's a closer look at these stories, which share key features, and at some of the obstacles -- beyond too few competent staff at the banks -- to getting successful trial modifications converted.

Told to Default to Get Help

The Galvans' and Meyers's paths to foreclosure began like John H.'s: After losing income but still current on their mortgages, they reached out to their banks and asked for modifications. The banks -- JPMorgan Chase for the Galvan family, Wells Fargo for the Meyers family -- told them that they had to default before they could be helped with a modification. According to Martin Galvan, the conversation went something like this:

In October 2008 I told Chase that I needed a modification because my wife was laid off and business at the hair salon I own was down sharply, and we had exhausted our savings. I was current but wouldn't be able to be for much longer. Chase said I have to be behind before they can help me. I said, Are you telling me to stop paying my mortgage? and the Chase representative answered: I can't tell you to do that. But listen to the key word in what I'm saying. You have to be behind for us to help you.

Galvan said two different Chase representatives gave him the same advice. He and his wife were very upset at having to default to get help because in nearly 20 years of being homeowners, they had never missed a payment. (They purchased the house they live in now in 1999. It's second home they've owned, their "move-up house.") But they needed the modification, so they defaulted.

Ultimately they were given a trial modification that was supposed to become permanent three months later. After the three months, Galvan started doing everything he could to get the modification made permanent.

"Don't Know What We're Doing"

Galvan, like John H. and the Meyers, was repeatedly told to resubmit financial paperwork. Because Galvan, like John, was a small-business owner, that meant repeatedly incurring accounting fees to generate the required profit-and-loss statements. Often the paperwork was lost. Galvan was told to go to a Chase branch and have the branch fax the papers for him, since that way the modification department couldn't deny receiving them.

Galvan spoke to numerous Chase representatives who often gave him conflicting information. Frustrated, he went to a counseling session Chase hosted at a hotel near the Los Angeles airport and says the counselor told him that with all the modification programs, "we don't know what we're doing right now."

This past November, in his last round of communications with Chase, Galvan was told that his modification would not be made permanent because he couldn't sufficiently document his income in order to prove he could afford the modified mortgage -- despite over a year of making successful payments.

Galvan sent still more information, and then didn't hear anything until getting the notice of the sheriff's sale last week. Several days after that, Galvan was given the official denial of his modification.

Bad Faith by Wells Fargo

Michela Meyers testified that she needed a modification after her husband, a New York City police officer, lost his second job and was unable to get as much overtime as before (she can't work due to health issues). So, she contacted Wells Fargo for a modification. Several representatives said the bank couldn't help her unless she was three months behind in her mortgage, she testified. So they defaulted.

On Sept. 1, 2009, they were offered and accepted a loan modification. On Sept. 2, Wells Fargo started foreclosure proceedings. The Meyers successfully made their trial payments, but instead of giving them a permanent modification, Wells Fargo changed the payment and required a new trial period.

The Meyers successfully completed this trial, too, but again Wells wouldn't make it permanent. The bank's stated reasons for rejecting the Meyers varied, and the foreclosure process continued.

The Meyers eventually ended up in front of Justice Patrick A. Sweeney of the New York Supreme Court, who oversaw several efforts to get a settlement between the Meyers and Wells Fargo. Ultimately, Justice Sweeney found Wells Fargo had acted in bad faith, and ordered Wells to make the modification permanent.

Fannie to the Rescue?

The Bogars took a very different, and longer path to making their trial modification permanent, according to Grace Pazdan, their Vermont Legal Aid attorney. The Bogars fell behind on the mortgage of their Vermont home and were given a foreclosure notice by Countrywide Home Loans. They repeatedly called Countrywide, hoping to work something out, but got nowhere. The Bogars finally contacted the Vermont bank regulator, BISHCA, and explained the situation.

A few days later, Countrywide offered the Bogars something that it should have at the very beginning: a HomeSaver Advance (HSA) loan. The Bogar's loan was backed by Fannie Mae, and Fannie Mae's Servicing Guidelines require servicers to offer qualified families like the Bogars an HSA loan before starting foreclosure.

The HSA loan brought the Bogars current, and they stayed current by making two monthly mortgage payments, plus a bit on top to start repaying the HSA loan. After they made their second payment, Bank of America, which by now had taken over Countrywide, sent the Bogars a second set of HSA paperwork. When they contacted BofA, the Bogars say that BofA told them not to sign the new papers.

Countdown to Eviction

But then a couple of weeks later, BofA refused to take the Bogar's third monthly payment, citing their failure to sign the second set of papers. And worse, BofA completed the foreclosure, which started a six-month clock ticking for the Bogars: If they could bring the loan current or otherwise work it out with the lender, they would keep their house. If not, at the end of the six months, the house would be sold.

The Bogars kept trying to make a deal with BofA to save their home. The bank told them they would be considered for a loan modification, and had the Bogars submit and resubmit (and resubmit and resubmit) information. Eventually, BofA told the Bogars they didn't qualify for a HAMP modification, but didn't say why. Shortly after that, the Bogars spoke to a bank representative who said they did qualify, but to wait while the paperwork was processed. The next time the Bogars called, they were told their account was labeled "legal" and customer service could no longer talk with them.

At this point, with the six months almost over, the Bogars contacted Vermont Legal Aid. Pazdan asked the court to undo the foreclosure, on the grounds that the Bogars were current after the HSA loan and BofA was wrong to reject their payment and continue with the foreclosure.

While Pazdan's motion was pending, BofA suddenly offered the Bogars a trial HAMP modification. Although the offer was made in February, the trial period was for April, May and June, so the first payment wasn't due until April 1. Nonetheless the Bogars sent it in immediately. In mid-April, the judge vacated the foreclosure judgment, and, since a modification plan was in place, asked the parties to come back in August and report on the status.

Bank of America's Alternative Reality

The Bogars made the May and June payments on time, but BofA didn't make the modification permanent. Although July was beyond the trial period, on Pazdan's advice, they made the July payment on time, too. Pazdan asked BofA's attorneys why the modification wasn't becoming permanent, and their answer was revealing: An email that claimed to represent the Bogar family's performance during the trial period.

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The email was incorrect in every respect. It claimed that the payment due dates were Feb. 24, March 24, April 24 and May 24; that the Bogars had made only three payments; and that each time their payment was late. As noted, the trial modification agreement covered April, May and June, and the Bogars paid July as well. As to the timeliness of the payments, the Bogar's canceled checks show BofA cashed the April payment on March 3, the May payment on April 29, the June payment on June 2, and the July payment on July 1. When Pazdan gave BofA's attorneys this information, they responded that they would look into it.

August was drawing near, and the modification still wasn't made permanent, so the Bogars made the August payment, which BofA cashed on Aug. 3. As the August date for the status conference the judge had set approached, Pazdan told BofA's attorneys that she was going to ask the judge to order BofA to make the modification permanent, and she did. On Sept. 29, the judge granted Pazdan's motion from the bench. In his written order a few days later, the judge gave BofA 30 days to make the modification permanent.

The judge's order was no magic wand, however. Before BofA was willing to send the Bogars the appropriate papers, BofA required them to resubmit information and go through credit counseling. Only then, nine days after the 30 days had run out, did the Bogars receive the permanent loan modification. At least it was in time for Thanksgiving.

A Key Problem: Communication

Much has been written about the odd relationship between the foreclosing banks and their attorneys, but not much has focused on the nitty-gritty practical consequences of it, and how it undermines modification efforts.

Foreclosing banks generally communicate with their attorneys through software provided by third parties like Lender Processing Services, and mostly say things like: I need document x; document y has been filed; I need more time to get z done. So little substantive communication occurs between the banks and their foreclosure attorneys that one frustrated judge ordered HSBC to tell its attorneys to call it as needed.

As a result, Pazdan explains,

"Defending foreclosures is very different than any other civil case because in a normal negotiation you present the strengths of your case and the weaknesses of the other side's, and they respond in kind, so the ultimate settlement reflects the merits of each side's case. But when negotiating a foreclosure -- usually aiming at sustainable modification -- the banks' attorneys seem to be unable to present the legal merits or weaknesses of their case to their bank clients and have that information shape the settlement decisions.

As a result, the banks' settlement decisions seem wholly unrelated to the actual merits of their cases. That also makes it difficult for us as homeowner advocates to advise our clients because we can't predict what the other side will do, given the merits of the case. The merits just don't matter."

"What's Really Frustrating"

And that inability of the foreclosure counsel to get their bank clients to listen to what is happening in each case is at least in part what leads to outcomes like John H.'s, the Meyers's, the Galvans', and the Bogars'. "What's really frustrating," Pazdan points out, "is that if the Bogars hadn't made their way to Legal Aid, their home would have been foreclosed on by now, and yet there's no question they can make the modified payments."

The same could be said for the Galvans, the Meyers, and sadly, because he was foreclosed on, John H. Let's hope Chase makes the Galvan family's modification permanent voluntarily, or that the family's attorney finds a way to persuade a judge to order Chase to do it. Unfortunately, a new California statute makes it virtually impossible for homeowners to get attorneys to help them with modifications, reports The New York Times.

Nor is the problem limited to these families. Arizona and Nevada recently sued Bank of America over failed loan modifications.

How many people who can pay modified mortgages are going to lose their homes?

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