Foreclosures stymie efforts to revive economy

The latest foreclosure bill expands on that effort and provides further help for lenders who offer troubled homeowners more affordable loans. One key provision protects servicers from lawsuits by investors holding bonds backed by loans that are modified. In many cases, lower mortgage payments bring lower returns for those investors; servicers say that has stymied past efforts to modify loans.

Another provision overhauls the Hope for Homeowners program. Introduced last summer, the program was intended to help some 400,000 borrowers. But high fees and tight credit left all but a handful of homeowners with new loans and lower monthly payments.

Foreclosure relief efforts have also been hampered as servicing companies have been overwhelmed by calls from homeowners seeking help. Originally hired to collect payments and forward them to investors, servicers say they aren’t set up to handle the historic wave of defaults created by the housing market collapse. Cash incentives for loan modifications are designed to help defray those costs. But many servicers remain badly understaffed.

“You talk to a machine, talk to someone in a foreign country,” said Taylor. “More often than not you never get the same person. So you’re constantly starting from scratch. I do think there is an industry infrastructure problem.”

Scott’s attempt to modify her loan typifies the process. When she bought her Atlanta-area home two years ago, she applied for an FHA mortgage through a state-sponsored program. Bank of America approved her application for a $65,000 loan — about half the home’s current value — but the payments are consuming nearly 70 percent of her fixed income, she said.

After contacting the bank in March, 2008, she was told there was nothing the bank could do until she was behind in her payments, she said. So she stopped paying. After she recently began working with a HUD-approved credit counselor, she said the bank told her she had to make up two of those missed payments before they would talk to her. Two months ago, the counselor helped Scott apply for a loan modification, but the bank has not yet assigned someone to her case.

“They lost the paper work and asked that it be resubmitted,” she said. “So then we had to start from scratch, resubmitting all the documents.”

A Bank of America representative said the company does not comment on individual customers’ financial details but that it is reviewing Scott’s case.

Like other lenders who are participating in the government foreclosure relief programs, Bank of American also faces a hurdle when it tries to modify loans that aren’t held in its portfolio or were packaged and sold to investors outside of Fannie Mae and Freddie Mac.

Because those mortgages were pooled and sold off to hundreds of investors — each of which have varying financial interests in the loan pool — modifying those mortgages means getting those investors to sign off on the loan. Loan servicers say they’ve been hampered in their efforts to provide more affordable terms because of the threat of lawsuits from investors who might get a lower return on the new loan.

To help break that logjam, the foreclosure relief bill includes a so-called “safe harbor” provision that would shield lenders and servicers from lawsuits if they follow government guidelines when modifying loans.

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