Bank errors mar mortgage relief

WASHINGTON — Towana Gooch, a single mom who lives with her 10-year-old daughter, was on the verge of losing her town house in suburban Maryland after her mortgage lender kicked her out of a government loan-modification program. The problem, she says she was told, was a 7-cent error.

Later, the lender told her the tiny error wasn't the issue, that her low income disqualified her from the program. She called the bank trying to get to the bottom of it all but got no answers and feared there was nothing to head off foreclosure.

After an inquiry by The Associated Press, the bank, America's Servicing Company, a division of Wells Fargo, finally returned her call to apologize for the 7-cent error and say the foreclosure sale had been put on hold.

Though her story is striking, Gooch is far from alone in her problems with the Obama administration's loan-modification program, which provides federal subsidies to encourage lenders to renegotiate rather than foreclose on certain borrowers.

Seven months in, many qualified applicants are being rejected, often through bank errors, with no avenue of appeal. Until this month, lenders didn't even have to tell them why.

"If the servicer messes up, even by accident, there is no meaningful way to complain, no real appeals process, no viable ombudsman to consider," said Kevin Stein, associate director of the California Reinvestment Coalition in San Francisco. "Most importantly, there are no consequences to the banks for failure to do what they have promised to do."

Meanwhile, foreclosures continue to rise with each month's report of new job layoffs and each new wave of adjustable-rate mortgages resetting to higher payments.

Foreclosure filings are on a pace to hit about 3.5 million this year, up from more than 2.3 million last year, according to a Thursday report by RealtyTrac, which compiles data for most U.S. counties.

Gooch, who lost her job as a recruiter earlier this year, said she had been thrilled last month when the bank notified her that her monthly payment would be cut in half, to $938.

Gooch agreed to the payment and even logged on to the White House Web site to post a public comment personally thanking President Obama.

"I was so confident in this that I didn't make a plan B or C," she said.

But America's Serving Company later notified Gooch that she no longer qualified for the program because her first automatic withdrawal payment should have been $938.07, not simply $938.

Government officials can't say how many people have been turned down because of a typo, lost fax or an oversight by a poorly trained bank employee. But the Treasury Department acknowledges far too many applicants have wrongly been rejected.

In August, it told mortgage buyer Freddie Mac to begin auditing participating banks through a program called "second look."

Meg Reilly, a Treasury spokeswoman, said officials are still trying to determine the scope of lenders' noncompliance with the program. Freddie Mac is reviewing about 1,000 files per week, but there are no reliable figures yet on how many mistakes were caught, she said.

"In every reported case of eligible borrowers being denied modifications, we worked with the servicer to correct the problem," Reilly said.

As of last month, the government had provided some $1 million to banks in investor subsidies and incentive payments through its Home Affordable Modification Program, according to the Government Accountability Office.

Obama initiated the $50 billion effort in March to encourage lenders to renegotiate rather than foreclose on borrowers who meet certain criteria, such as having mortgage payments that exceed 31 percent of their monthly gross income.

The program was slow to take off, but recently Treasury announced that half a million homeowners had enrolled in three-month trial loan modifications — a target that was met a month ahead of schedule.

David Berenbaum, executive vice president of the National Community Reinvestment Coalition, said his organization is seeing an increasing number of bank mistakes as the program gets into full swing. He attributes the problem to a shortage of well-trained loan counselors at banks overwhelmed by applications.

The coalition, which has been working with Gooch to modify her loan, believes her income meets the guidelines under the program.

"We have to fight for the modifications or refinances in more than half the cases that we see," Berenbaum said.

The government has established a general foreclosure crisis hotline number (888-995-4673) that can take complaints, but housing counselors doubt its utility for sorting out complex mistakes. Treasury recently set up a special phone number to appeal urgent cases, but the number is available only to certain government-designated housing counselors.

Lenders have been directed by the government to set up their own appeals process. And by December, banks participating in the program will be required to report why certain homeowners were not offered mortgage relief. Those reports will be made public to encourage lenders to modify more loans. The administration also wants to impose tough new penalties on lenders who wrongly deny applicants, including kicking them out of the program or taking away incentives. Freddie Mac is tasked with deciding when and how banks might be punished.

Banks say they are working to prevent errors but are grappling with large volumes of applications and changing government guidelines.

Wells Fargo hired 5,800 people this year to review modification applications, a 79 percent increase since last year, and initiated its own internal appeals process.

After being contacted by The Associated Press, America's Servicing Company put Gooch's foreclosure sale on hold "to further review the customer circumstance and to determine what is in her best interest," said Kevin Waetke, a Wells Fargo spokesman. The bank also has reimbursed a $938 payment she made, pending the review, he said.

Gooch said she was told she is likely to be reinstated into the three-month trial modification program.

This time, however, she's containing her excitement.

"I still want to see something in writing," she said.