Despite the continuing foreclosure crisis, banks have made little progress toward modifying the loans of stressed-out homeowners, drawing fire from advocacy groups who say both financial institutions and the federal government should do more.
In its first report on the Obama administration's efforts to prod lenders to help as many as 4 million homeowners by reducing their mortgage payments, the Treasury Department said just 9% of eligible loans had been changed.
Loans were modified even less often by the two mega-banks that dominate the mortgage market: Wells Fargo & Co. reduced payments for only 6% of its eligible home loans under the government's program, and Bank of America Corp. modified just 4%.
The administration, under tremendous pressure to help homeowners avoid foreclosure, has said that despite the low percentage of loans that had been modified under its plan, the program "has made rapid progress in a few short months" and was on track to help 3 million to 4 million eligible borrowers.
But critics say the effort is way behind.
"Congress and the administration need to end their 'pretty please' approach to the banks and instead finally force lenders to work to keep people in their homes," said Kevin Stein, associate director of the California Reinvestment Coalition.
Some of the major lenders whose efforts were documented in the report released Tuesday had better success, such as GMAC and JPMorgan Chase & Co., which racked up 20% modification rates. Others, including Wells Fargo and BofA, said the report didn't reflect their efforts to modify loans outside Obama's Making Home Affordable program. They also said the workings of the 5-month-old program were not clarified until last month, forcing lenders to wait until just a couple of weeks ago to adopt it.
"We did 240,000 loan modifications in the first seven months of the year, of which just over 20,000 are [Obama plan] mods," said Mike Heid, co-president of Wells Fargo Home Mortgage.
BofA modified 150,000 loans during the first half of the year without going through the Obama program, plus 28,000 using the government's plan, Barbara Desoer, president of Bank of America home loans, said in a statement.
The government has pledged to provide $75 billion in incentive payments to participating borrowers and mortgage companies.
Under the Obama plan, more than 400,000 modification offers have been extended and more than 230,000 trial modifications have begun, the Treasury Department reported.
But the number of homeowners in distress is huge. Nearly 2 million foreclosure filings were made during the first six months of this year, ranging from default notices to completed foreclosure sales, according to foreclosure data firm RealtyTrac. There were 3.2 million such filings in all of 2008 and 2.2 million in 2007.
Dozens of homeowners have contacted The Times in recent months, complaining about lenders' sluggishness or outright refusals to modify loans. Some homeowners were behind in their payments; others were keeping up by going through their savings, but facing a looming bankruptcy.
Domingo Delgadillo of Antioch, Calif., started out well able to afford the pay-option Wachovia bank loan on his 3,000-square-foot home. But when his real estate business collapsed in 2007, he started making only the minimum payments, causing his loan balance to balloon as the value of his house dropped. He's paying 60% of his gross earnings for the house now and has asked for a modification -- to no avail.
"When I called Wachovia in July to request a loan modification, I was told that they still had not implemented their program," he said. "I do not understand how it is possible."
Reached Tuesday afternoon, a spokeswoman for Wells Fargo Home Mortgage, which agreed to buy Wachovia last year as it teetered near collapse, said she couldn't comment on individual customers or access Delgadillo's records so late in the day. She said that in some cases, loans sold to other parties could be modified only if they were in "imminent default." Delgadillo said he had been told his loan was sold to Bank of New York.
The Obama plan is modeled on a program the FDIC developed to modify mortgages at failed IndyMac Federal Bank in Pasadena. Using incentive payments to lenders and borrowers who agree to loan modifications, it reduces mortgage interest rates and extends the duration of the loans to 40 years. The idea is to try to reduce first mortgage payments, taxes and insurance to 31% of a borrower's gross income.
Participants must fully document their earnings and assets, and the first three months of modification is a trial period. If borrowers make three straight payments on time, showing their willingness and ability to pay, the modification becomes permanent.
Critics say the plan needs to be toughened, calling anew for change in federal law to allow bankruptcy judges to order lenders to reduce the principal owed on home mortgages.
These so-called cramdowns had been supported by President Obama and top officials including Lawrence H. Summers, director of the White House's National Economic Council. But the idea has been repeatedly shot down in Congress, in part because the banking industry vehemently opposes it.
Rep. Barney Frank (D-Mass.), chairman of the House Financial Services Committee, has said he would push for cramdowns if lenders did not show they were modifying more mortgages.
But UC Berkeley economist Kenneth Rosen, who supports voluntary but not court-ordered efforts to lower principal amounts for homeowners, said the federal efforts to prevent foreclosure might show improvement down the line.
"These are early days," Rosen said. "The numbers could be quite different six months from now."