A foreclosed home on Pine Island in Lee County, Florida. (Chris O'Meara/AP )
Mortgage lenders call it "dual tracking," but for homeowners struggling to avoid foreclosure, it might go by another name: the double-cross.
Dual tracking refers to a common bank tactic. When a borrower in default seeks a loan modification, the institution often continues to pursue foreclosure at the same time.
Lenders contend that dual tracking simply protects their investment if the homeowner is unable to qualify for new loan terms. Mortgage servicers can lose money if they don't foreclose in a timely manner, and repossessions often are complicated and lengthy.
But regulators and consumer advocates say the practice lulls some homeowners into thinking they are no longer at risk of having their homes taken away. Regulators are now aiming to curtail the practice as part of an overhaul of the foreclosure system.
"We don't think that a homeowner who is making a good-faith effort to work through their troubled mortgage should have the roof ripped out from over them while they are negotiating, or trying to negotiate," said Geoff Greenwood, a spokesman for Iowa Atty. Gen. Tom Miller.
On Wednesday, federal banking regulators issued settlements with major banks and home-loan servicers that would, among the many provisions, stop foreclosure once a homeowner is approved for a temporary mortgage modification. In ordering the changes, the regulators said they found "critical weaknesses" in the way the lenders handled foreclosures.
The settlements drew immediate fire from activists who said they did not go far enough, particularly in addressing the two-track foreclosure process. A separate coalition of state attorneys general and federal agencies including the departments of Justice, Treasury and Housing and the Federal Trade Commission is still negotiating details of a foreclosure-system overhaul that could include a near-ban of the practice.
"The dual-tracking issue is of major concern," said Greenwood, whose boss is leading the negotiations for the attorneys general of all 50 states and federal agencies.
The state attorneys general have issued their demands in a detailed, 27-page term sheet. Banks have responded with their own proposals. Negotiations between the two groups continue.
The demands by the attorneys general would prohibit lenders from starting the foreclosure process on a home if a borrower has submitted an application for a loan modification. That is a significant step beyond what the federal regulators have ordered, according to consumer advocates, because often borrowers struggle even to get their loan modification packages reviewed.
"The settlement policy on dual tracking completely misses the point," said Alys Cohen, attorney for the National Consumer Law Center, referring to the deal cut Wednesday by banking regulators. "You have to obtain the loan modification before they stop the foreclosure."
Shirley Robertson of Oxnard has firsthand experience with dual tracking.
Robertson learned last summer that her home was scheduled to be sold at a foreclosure auction, so she contacted her lender, JPMorgan Chase & Co. Robertson said she had fallen behind on mortgage payments for her home and a rental house because the economic downturn put her catering business in a tailspin.
Chase postponed the sale so that Robertson could file for a modification of the loan she could no longer afford. She filed the paperwork to the bank and twice was asked to file new packages because the bank said information was missing, according to a lawsuit Robertson filed against the bank and copies of letters she shared with The Times.
She said she faxed her third paperwork package to Chase on Aug. 23, the day before the deadline set by Chase. But that same day, the home was sold at a foreclosure auction. Robertson said she still had equity in the home, meaning the amount owed to the bank was less than the price the house could have brought.
"They have stolen that equity from me," said Robertson, 64. "If I had known they were going to do this, I would have sold the damn house myself, and not be penniless."
Chase declined to comment on the details of Robertson's situation.
Robertson now lives in the house that was once a rental. Chase granted her a loan modification on that home, she said, but she is struggling to make thosepayments because work is hard to find.
The proposed terms from the attorneys general regarding dual tracking require that mortgage servicers provide homeowners a written list of any missing documentation from their modification package within 10 days of submission. Mortgage servicers would also be required to immediately notify a homeowner in writing of any new sale date if the foreclosure clock has already begun when a borrower reaches out for a modification.