With the end of the Great Recession, the Loan Mod Wars of 2008-2013 are gradually fading from view. The numbers of complaints to the State Bar of California have returned to pre-recession levels, even as the Client Security Fund still struggles to pay off a large number of “legacy” claims deriving from the bad old days when lawyers were, according to the official story, running amuck ripping off desperate homeowners by the millions. You might think that attorneys would have gotten the message a long time ago but a few are still being hoisted on the twin petards of SB 94 and extra jurisdictional practice, some years after their transgressions.
It is ancient history how, but its worth recalling that SB 94, the 2009 law that kicked the off the Loan Mod Wars was bottomed on the idea that consumers did not need an expensive lawyer to deal with the banks, so that destroying the ability of lawyers to provide those services by banning advanced fees would work no hardship. California Civil Code section 2944.6, enacted as part of SB 94 required attorneys entering into such engagements to tell clients exactly that:
It is not necessary to pay a third party to arrange for a loan modification or other form of forbearance from your mortgage lender or servicer. You may call your lender directly to ask for a change in your loan terms. Nonprofit housing counseling agencies also offer these and other forms of borrower assistance free of charge. A list of nonprofit housing counseling agencies approved by the United States Department of Housing and Urban Development (HUD) is available from your local HUD office or by visiting www.hud.gov.
But the New York Times tells us (“A Slack Lifeline for Drowning Homeowners“) that a recent report from the Office of the Special Inspector General for the Troubled Asset Relief Program (SIGTARP) on the Federal Government’s HAMP program tells a much different story. At the program’s inception, it was estimated that HAMP would “enable as many as 3 to 4 million at-risk homeowners to modify the terms of their mortgage to avoid foreclosure.” We, the taxpayers of the United States, agree to pay the mortgage servicers $29.8 billion as an incentive to modify the loans of homeowners facing foreclosure (SIGTARP report, page 96.) “Although participation in HAMP is voluntary, servicers who agree to participate are required to offer HAMP modifications to all eligible homeowners. The actual execution of HAMP lies in large part with participating mortgage servicers, whose employees are responsible for reviewing homeowner HAMP applications and deciding whether a homeowner gets into HAMP or not.”
The results? “According to Treasury’s official HAMP database, of the 5.7 million homeowners who applied for HAMP between December 2009 and April 2015, servicers turned down 4 million. That means that, according to Treasury’s HAMP database, servicers turned down more than 7 out of every 10 homeowners (72%) who applied for HAMP.” (SIGTARP report, at page 100.) But wait, that’s not all: “The problem may be far worse than that. In a separate survey, participating servicers report that they have denied far more than 4 million homeowners for HAMP. In those surveys, HAMP servicers report denying 5.8 million homeowners for the HAMP program, an additional 1.8 million not captured in the HAMP database during the height of the foreclosure crisis.”
“HAMP’s program guidelines require that servicers report to Treasury the reason the servicer denied each homeowner for HAMP by selecting one of the Treasury-defined denial reasons set out in the HAMP guidelines. The top three reasons servicers report for denying homeowners’ HAMP applications attribute the denial to the fault of the homeowner or to the homeowner falling outside of eligibility standards. These include denials because: the homeowner’s application was “incomplete;” the homeowner withdrew the HAMP application or “failed to accept” an offered HAMP trial; or the homeowner’s income fell outside of HAMP eligibility. While these denials may be appropriate in particular cases, the fact that servicers have reported the same reasons so frequently—in light of known problems at the largest HAMP servicers—raises concerns over whether Treasury is doing enough to ensure that denials of homeowner HAMP applications are accurate and based on the actual conduct and status of the homeowners, rather than on the misconduct of the mortgage servicers.”
As reported by SIGTARP, by the Consumer Finance Protection Bureau, by Treasury in its reviews of the top HAMP servicers, and by homeowners who have filed complaints with Treasury, there are many problems with servicers themselves that can affect each of these three denial reasons. Persistent problems and errors in the application and income calculation process (servicers calculate a homeowner’s income) have historically plagued homeowners seeking HAMP assistance, and continue to do so. As a result, eligible homeowners may have been, and may continue to be, denied a chance to get into HAMP through no fault of their own.
While these denials may be appropriate in particular cases, the fact that servicers have reported the same reasons so frequently—in light of known problems at the largest HAMP servicers—raises concerns over whether Treasury is doing enough to ensure that denials of homeowner HAMP applications are accurate and based on the actual conduct and status of the homeowners, rather than on the misconduct of the mortgage servicers….. Persistent problems and errors in the application and income calculation process (servicers calculate a homeowner’s income) have historically plagued homeowners seeking HAMP assistance, and continue to do so. As a result, eligible homeowners may have been, and may continue to be, denied a chance to get into HAMP through no fault of their own.
This is hardly news to we battle hardened veterans of the Loan Mod Wars, those of us who dealt with thousands of State Bar complaints against attorneys seeking to help distressed homeowners. The Times’s Gretchen Morgenson details a few anecdotes that seem so familiar to us. The loan servicers were happy to take that sweet TARP cash, but not so eager to follow through on relief for troubled homeowners. The reason, as related by Jacob Inwald, director of foreclosure prevention at Legal Services NYC, seems pretty obvious: delaying a modification or even wrongfully denying it, means more interest and fees that can be charged to the borrower, increasing the amount of the mortgage. As quoted in the Times story, Mr. Inwald states that obtaining a modification requires “constant pushback and challenging wrongful denials.” In other words, a lawyer.
Some of the loan modification attorneys were involved in outright scams; some of them were victims of scammers themselves. Others were actually achieving good results for their clients while trying to find a way to stay in business in the face of SB 94’s prohibition on upfront fees. But the indiscriminate scythe of Civil Code section 2944.7, wielded by the State Bar with a special fury after the ascension of our Chief Trial Counsel in 2011, showed no mercy.
The Loan Mod Wars are fading to a close, not with a bang but with a wimper. Some may deserve medals for their participation. Others would really, really like to forget that the whole thing ever happened.