Foreclosure Prevention through Loan Modification Remains an Uphill Battle, Especially for Low-Income Homeowners
Home Affordable Modification Program
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Jen Ngai Lavallee, Staff Attorney

Over the last couple of years, thousands of homeowners facing the threat of foreclosure have been trying to get loan modifications through the federal government’s Home Affordable Modification Program (“HAMP”). Numerous articles have highlighted some of the problems involving bank compliance with program guidelines. But a recent report published by Pro Publica indicates that, in addition to compliance issues at the servicer bank level, the lack of government enforcement and oversight of the program has also significantly limited HAMP’s effectiveness. The Pro Publica report summarizes findings regarding the quality of HAMP enforcement by Treasury and Freddie Mac against major banks, concluding that one of the main reasons the administration’s flagship foreclosure prevention program has been largely ineffective in helping homeowners get loan modifications is that “[t]he government’s supervision of the program has apparently ranged from nonexistent to weak.”

While bank non-compliance and ineffective oversight of the government’s loan modification program affect all struggling homeowners, the impact of these problems is significantly magnified when it comes to low-income homeowners, who often have limited or no access to internet, fax machines, phones, and copiers—many or all of which are necessary resources in the “paper chase” that has come to define the loan modification application process. Low-income homeowners are also among the most likely to become homeless after foreclosure.  On the flip side, when loan modification does work, it can have an enormous positive impact on the stability and livelihood of families living on the edge of poverty.

The experience of Legal Aid client, Ms. L, demonstrates both the hurdles that loan modification applicants face, as well as the enormous difference that a successful modification can have on the lives of those living in or near the brink of poverty. Ms. L came to Legal Aid fearful that she was about to lose her home of 21 years. After her mother had moved out and was unable to continue contributing to the household expenses, Ms. L fell behind on the mortgage and struggled to make ends meet for the four children she cared for on her own, including one child with permanent and severe disabilities.  She had tried to apply for a loan modification, but her bank had provided her with false information regarding her eligibility and blocked the review from moving forward.

Legal Aid reviewed Ms. L’s financial situation, which indicated that she was likely to qualify for a loan modification, and re-submitted a new application for loan modification on her behalf.  The bank again denied the application, however, claiming that Ms. L’s income was insufficient to support her mortgage even with a reduced interest rate. After investigating the matter further, Legal Aid determined that the bank had failed to count approximately $300 in food stamps as part of Ms. L’s income—even though loan modification program guidelines clearly indicated that food stamps were to be counted—and that the exclusion of Ms. L’s food stamp income was the determining factor in the denial of her application. When the bank persisted in refusing to count the food stamps, claiming that investor guidelines prohibited their inclusion, Legal Aid escalated the matter to the Fair Housing Administration, the U.S. Department of Housing and Urban Development, and the HAMP escalations team, highlighting the bank’s failure to comply with applicable program guidelines and arguing that a failure to count public assistance income under these circumstances was a violation of the Equal Credit Opportunity Act.

Despite Ms. L’s apparent eligibility and Legal Aid’s multiple attempts to get the attention of bank supervisors and government regulators with authority to review the situation, it took months of back and forth to obtain and complete a successful trial modification plan. Shortly thereafter, Ms. L finally obtained a permanent loan modification involving a reduction in her interest rate by more than two percent and the transfer of a portion of her loan balance to a no-interest subordinate loan with the Fair Housing Administration. Ms. L is now current on her mortgage and stable in her family home. Legal Aid congratulates Ms. L on obtaining her modification and for her tenacity in continuing with her foreclosure prevention efforts despite the multiple barriers the bank placed in her way.

While Ms. L was ultimately able to obtain a loan modification and stay in her home, thousands of other homeowners—including many low-income homeowners—continue to struggle.  Legal Aid is committed to continuing its advocacy on behalf of low-income DC homeowners facing foreclosure and to increase access to justice for those who need it most.

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