What bothers me most about the debate over a foreclosure moratorium is that many of the folks who are opposed are painting troubled homeowners with such a broad brush. I've seen many variations on the following idea; "I don't have any sympathy for someone who lied about their income and bought just to keep up with the Jones." "Why should people be allowed to stay in a home they can't afford?" "These people haven't made a payment in close to a year".
Perhaps it is because I am in stodgy New Hampshire, but as an agent who works extensively with distressed homeowners I have run into VERY FEW folks who were living beyond their means when they bought their house and I have not run in to one single person who had a "liar loan".
The folks I have come in contact with are far from being irresponsible, lying deadbeats. Instead they are people who have fallen on difficult times because of job loss, pay cuts, illness, death or divorce.
Many of them made the mistake of trying to modify their loan first and were yanked around by their servicer in a "trial mod" for many months before being ultimately declined and presented with the information that the difference between what they should have been paying and what they were paying under the many months of trial modification was now immediately due and payable or....foreclosure.
Here's a classic example:
Lydia and George are a hard working couple that have owned their home for 10 years. They are having financial difficulties because Lydia had a string of health problems that kept her out of work for the better part of 18 months and George has had his hours cut at work. They are not behind in their mortgage yet but things are very tight. They could certainly use some help until they can get back on their feet. They hear about the Home Affordable Modification Program and decide to look into it.
They go to the Making Home Affordable website to see if they might qualify.
Is your home your primary residence? YES. Did you get your current loan prior to 1/1/09? YES. Do you owe $729,750 or less? (Are they kidding???) YES. Is your first mortgage payment greater than 31% of your gross monthly income? (It is now!) YES. Are you having trouble making your mortgage payments? YES! YES! YES!
They can answer yes to all the questions so they contact their Servicer who confirms; YES they meet the eligibility guidelines. They fax in a bunch of information (a bunch of times) and after a month or two they get the word...
"Congratulations, you've been approved for a trial modification. (It's always easy to get approved for the Trial Mod. If you want to know why, read my blog entitled The Elephant In The Room). Your trial modification payment will be $1700 (their regular payment is $2400). You'll be receiving a package in the mail soon". AWESOME!!! This is really going to help. Right?
It is almost the end of October when they get the word so Lydia asks, "Is that the amount I should send in for November?" The answer is "No, don't send in a payment until you get the package". Sounds reasonable right? After all, the terms of their loan have been temporarily changed.
The package does not arrive until almost the end of November but the letter says their first modified payment is not due until December 1st. So that's okay. Right?
Wrong. They did not make their November payment so...guess what...they are now in default by 30 days.
They make all of their modified payments on time starting in December though, so how bad could it be.
Well, I'll tell you. Although they made the agreed upon payment in December it is not the full ($2400) payment so it does not get applied. Instead it gets held in a separate account until part of the next modified payment can be added to it in January.
Now they're 60 days in default. And on and on it goes until they receive the news 8 or more months later that after review it's been determined that, although they meet the basic eligibility criteria, they cannot be offered a Permanent Modification. (If you want to know why they were declined read my blog entitled On NPV And Schrodinger's Cat.)
So, now they are seriously in arrears, they owe a big chunk of change when you add up the payment they missed, the difference between what they should have been paying and what they were paying for all those months and all the penalties and interest that have been piling up and the foreclosure train is bearing down on them because although HAMP prevents the foreclosure from being completed while people are being evaluated, it does not put the process on hold. A process that, in this case, wasn't even started until they got involved with HAMP.
Yes, they've been getting letters but they are being told not to worry because "the system automatically generates them" and since they are in the HAMP program they are safe. Never are they told, "but if we drop kick you out all bets are off". Furthermore, the limitations of this program are not adequately explained so most folks believe they are accepted in to the program if they are offered a Trial Modification and make their payments on time.
I wonder how many people like Lydia and George are added in to the mix when numbers get tossed off about all the people who "haven't made a payment in a year". Is it really 12 months of no payments or is it 12 months in default?
Possibly, two very different things.