Beware Our Government's Advice on Loan Modifications!

On the US Treasury's Website that is dedicated to helping homeowners it says:

BEWARE OF FORECLOSURE RESCUE SCAMS - HELP IS FREE!

Beware of any person or organization that asks you to pay a fee in exchange for housing counseling services or modification of a delinquent loan. Do not pay – walk away!

Oh, dear God...

It was a little more than two years ago that I started watching the housing market meltdown.

To be honest, in the very beginning I didn't see it as being that big a deal. In fact, and I absolutely hate admitting this… perhaps I was even a little happy about it.

I don't think I'm that different than anyone else on this. I had spent the last several years watching people buy homes in my neighborhood, tear them down and build McMansion after McMansion. For a while, everyone except me, of course, seemed to be moving up in the world, house-wise anyway. And yes… when the housing bubble popped and prices started to decline, maybe it did make me just a little bit happy that some of those people would soon be taken down a peg or two.

There, I said it. So, what's your point? I'm human, after all.

I enjoyed watching as one of the homes that had been for sale in my neighborhood for many months, and that had been incredibly over-priced, in my opinion, was reduced… first by ten percent… then by another ten… and then by yet another ten… and still the For Sale sign remained in the home's front yard, now with a clipped on piece of plastic proclaiming that it had been "REDUCED!"

Today, it amazes me to think that six months later I was getting even happier about things. Housing prices had dropped by more than ten percent, and many were on the market for twenty or even thirty percent less than they would have been less than a year before. I'm not sure I even saw it as bad news back then. In fact, I was starting to go house hunting occasionally on the weekends.

Of course, that didn't last long. Within the next few months the fissures in our economy began to both lengthen and widen. They would soon become a chasm whose bottom could not be seen. The number of foreclosures was increasing at a faster pace than I'd ever imagined possible in this country, and soon the secondary mortgage market would freeze up like a Minnesota lake in winter. But, it wasn't until politicians and the media started blaming sub-prime borrowers for the problems that I began to worry about what was, at that point, certain to follow.

The reason for my fear was simply this: When you can't identify a problem, you have no chance at finding its solution. And once the problem was characterized as being one of "sub-prime" borrowers, I knew that our politicians had painted themselves into the proverbial corner. As time went by, and it became clear that the situation was not as simple as sub-prime borrowers defaulting on loans, it would prove to be impossible for government intervention to correct the course. The die had been cast, and American political support would align itself against anything perceived as helping those who had caused our country's economic ills.

I always felt that I knew two things with absolute certainty:

1. The economic dominoes weren't just falling, but they were spiraling downward and picking up speed.
2. It was NOT the fault of irresponsible sub-prime borrowers, as our government still seemed to believe.

How did I know that it wasn't simply the borrowers that were causing all the problems? Well, for one thing, banks were writing down assets to the tune of tens of billions on dollars every quarter. It just didn't make sense that the number of sub-prime loans could produce that volume of losses in that period of time. And for another, the default rate for prime mortgages was climbing steadily as well. I soon came to understand that it wasn't a sub-prime problem… it was an adjustable loan problem. And as payments adjusted higher, it was the sub-prime borrowers that went down first.

Then it happened. The bond market, which provides the liquidity for mortgages broke down and locked up. Credit tightened dramatically almost over night and refinancing at a fixed rate became next to impossible for nearly everyone.

New accounting regulations, now known as "mark to market" were also having their impact. The new rules required banks to write down their hard to value assets to their value if sold on a given day, and with no market for mortgage backed securities, these new rules were slashing billions from bank balance sheets faster than you could say… well, just plain fast. Every three months we'd hear about another stream of multi-billion dollar write downs at banks like Citigroup, Merrill Lynch, Lehman Bros. and more.

But, I think most Americans didn't understand what a write down really was, and there was a feeling that if Citi and Merrill had that many billions to begin with, so what if they had to write down a few. People were struggling, why shouldn't the Wall Street crowd struggle too?

The only thing that could happen now was that foreclosures would increase… and then increase again… and then increase again. Within a year prime loans would be defaulting faster than sub-prime. The water level was rising and it would soon be lapping at just about everyone's feet. Unless, of course, the government stepped in to stop the problem from spreading… and they didn't, perhaps because they didn't want to, as far as President Bush was concerned, but also because they couldn't. The political support just wasn't there. After all, who wanted to bailout irresponsible sub-prime borrowers?

Hank Paulson, during a recent interview, admitted quite candidly that they didn't see the problem that existed beyond the sub-prime borrowers until much later in the game… after Bear Stearns, as a matter of fact, and by then it had turned into a five-alarm fire. President Bush, appearing on a Fox News Special titled, "Two Trillion With a 'T' - How You Bought Wall Street" also spoke candidly about why his administration hadn't acted sooner, basically explaining that his administration was dedicated to preserving free markets. They simply didn't see what these mortgages were connected to and upon whom the dominoes would soon be falling.

So, when the Democrats were screaming for a homeowner relief bill, Bush was threatening to veto the proposed legislation, and by the time the summer of 2008 had arrived, and Bush was agreeing to the bill's purpose, it was too late.

President Bush's first attempt to help homeowners was the ill-conceived "Help Now Alliance" or "Help for Homeowners," program, which was started in 2007 and revamped in 2008. The program was voluntary as far as the banks were concerned, and it required lenders to write down the principal amounts owed by borrowers. Perhaps predictably, it was soon branded "Hopeless for Homeowners". On October 27, 2008, Fox News reported that the program, which had access to $300 billion, was helping all of 79 homeowners.

It was hard for the Bush administration to see what was happening and it's apparently difficult for the Obama administration to do much about it even today. The financial derivatives that had been used to package and resell the mortgage backed securities, known by initials like CDO and CDO-squared, were impossible to understand or take apart. Many Americans had no shot at understanding what was really happening, heck, it was hard enough for the U.S. Treasury Department to make heads or tails of what was going on.

We all know what happened next. Smack dab in the middle of the presidential election, on a day that John McCain will likely never forget, he said "The fundamentals of the economy are strong," to a Florida crowd who had gathered to hear him campaign that day. By that afternoon, he had changed his tune and was telling Americans that the economy was in crisis. And as of that moment, so was his presidential campaign.

Today, President Obama is touting his solution to the foreclosure crisis, which can be seen at the newly unveiled Website put online by the U.S. Treasury: www.makinghomesaffordable.gov. The Obama plan, while a vast improvement over past efforts is going to come up way short, however, by failing to help enough homeowners, and taking too much time to help the ones it will help.

President Obama's speech said it all for me when I heard the familiar lines about how his program wouldn't help the irresponsible homeowners, just the responsible ones. "Here we go," I thought. "Let's see how that might be defined."

Look, I'm not complaining about the Obama plan, really I'm not. I could, but I'm not going to. I'm complaining about what he said later in his speech. "If you have to pay, walk away." He was talking about loan modification companies.

Loan modifications, I've been told, have been around for years, but if that's true, I don't know anyone that's ever heard of them… until recently, that is. When I first came across the term, my first thought was "YES!"

A loan modification isn't a refinance. It's not a bailout. It doesn't cost the taxpayers a dime. It's simply a lender agreeing to modify the terms of a mortgage, to avoid foreclosure… because as we should all know by now… foreclosures benefit no one. And more than that… they hurt us all.

Lately I've heard Ben Bernanke, Sheila Bair, even Hank Paulson make comments that sounded like they wanted to take it all back. That if they could, they'd go back and undo all that "sub-prime borrower" chatter that has made it so difficult for the government to take more meaningful steps to stop the crisis that now has enveloped the entire planet. But it's too late for that, I'm afraid. All that seems to be left are loan modifications.

In point of fact, that's what Obama's plan is… a plan to stimulate loan modifications. Nothing more, really. Oh sure, there's some refinancing available, but few troubled homeowners will qualify for that aspect of the plan. It's the loan modifications that the administration is counting on, but much as President Bush's plan failed to understand the intricacies of the problem, so it is with Obama's program. And it's a real shame, because until something is done to stop the free fall in housing prices, no economic recovery is possible, and more pain is ahead.

One of the major problems with loan modifications has always involved the lack of capacity to handle the volume. Banks aren't set up to handle them. Loan modifications aren't a streamlined process, as is the case with normal mortgage servicing, collections, and foreclosures. Banks have systems for those things, but not for the one-by-one process that is the loan modification. And government agencies have proven themselves to be… well… government agencies, and we all know how well they answer the phone.

In everyone's defense, it's hard to imagine any organization being able to handle the sheer volume… hundreds of thousands, if not millions of phone calls… I don't even think you can find a company who could handle that many calls if all they were doing was selling magazine subscriptions.

Perhaps predictably, a number of companies formed to help distressed homeowners handle loan modifications. And also, perhaps predictably, some of them were unethical opportunists that ended up taking money from homeowners and delivering nothing.

As reported on National Public Radio (NPR) on March 9, 2009:

California seems to be the epicenter for this new industry. Jeff Davi, the director of that state's Department of Real Estate, says officials started getting complaints about loan modifiers last summer, and now they have more than 200 open investigations.

Is it just me… or does that sound like an incredibly small number of investigations? The California Department of Real Estate started getting complaints last summer and nine months later there are only 200 investigations going on? And that seems terribly high in a state with 36 million people, and literally millions of distressed homeowners?

Look, I'm not defending that number as being just peachy, either. Understand, all I'm saying is that when you take into account the chaos that has given birth to this industry, it doesn't seem outrageous by any means. If it were 2,000, maybe, but 200, not so much.

For politicians, however, even 200 investigations become a veritable onslaught if there are cameras in the picture, and considering from whence we came, I suppose it only makes sense that our elected representatives and regulatory agencies would decide to go after the only people that have actually managed to help address the plight of homeowners. What's next? I know, let's send the fire department out to burn down people's homes.

The point that politicians seem to be making, along with state regulatory agencies is that if you need a loan modification, you don't have to pay for it… you can handle it yourself, or you can call a government program and they'll help guide you in the right direction. Even President Obama has jumped on this bandwagon, telling an entire nation of troubled homeowners that if you have to pay, you should walk away.

I have to say that the whole idea that just because a company charges a fee for its work… it should not be trusted, offends me. If there are unscrupulous operators victimizing consumers then put them out of business, regulate them, jail them if need be, but don't tell people that simply because a company charges for its services, that in itself makes it bad.

I understand that I can handle my own loan modification. I also know that I can complete my own tax return, or sell my own home, or change my own oil for that matter. There are lots of things I can do on my own instead of paying someone. It doesn't mean that I want to, or even that I should.

Not all homeowners are comfortable negotiating their own loan modification with their lender or mortgage servicer. They're intimated, unsure of themselves, they procrastinate, get emotional, they panic. And all too often, at the end of the day, they agree to terms they should not agree to. In something like fifty percent of cases in which loan modifications were handled by a homeowner and bank, the homeowners end up back in default less than a year. This was supported by data published by Credit Suisse and UBS earlier this year.

Effective loan modification companies, on the other hand, report much higher sustainability rates on loan modifications. Green Credit Law Center, in Irvine California, for example, reports that over 80% of the loans they modified one year ago are still paying as agreed.

Curt Melone, Green Credit's Chief Operating Officer, was gracious enough to provide me with his company's daily production reports over a month's period of time. Here's an overview of some of the key statistics:

Out of 2,900 inquires from troubled homeowners, Green Credit accepted 2,200 as clients. The firm says that they screen each homeowner to make sure that each is a good candidate for a loan modification before proceeding further.

With 2,200 candidates in the process, Green Credit modifies roughly 300 mortgages each month, and that number is growing each month, as banks become increasingly willing to make concessions in order to avoid foreclosures.

Curt says that what makes Green Credit's operation so effective is the firm's approach. "We don't just focus on the mortgage payment," he explains. "We look at everything. We help people understand what they have to do to get back on top. Sometimes it means helping them get rid of their debt, sometimes it means helping them manage their debt differently. The mortgage payment is only one part of their story."

I told Curt that I wanted to meet with several of their customers and he readily agreed. I was given the contact information for a half dozen homeowners that had worked with Green Credit and had their loans modified. I spoke with all of them, and several other homeowners that were not clients of Green Credit, but the one I'd like to tell you about most is Cheryl.

I drove out to Cheryl's home just a few days ago in the evening. I had asked her if I could film her interview and she said okay. (I'm editing it into a short documentary style program and will be posting it here in a week or so.) Cheryl's home is what's known as a fixer upper. Nothing fancy, just an average home in need of work in a neighborhood that has clearly seen better days. Many of her neighbors are gone now, having lost their homes to foreclosure.

Cheryl and I sat down to talk about what she had gone through and I was instantly impressed by this woman's obvious candor. It's not easy for most people to relax with giant light boxes, cameras on huge tripods, and a boom microphone in your face, but Cheryl didn't seem to notice any of it. She explained that she works for the County of Riverside in the property tax department, and as she put it, talks to thousands of people on the phone each month.

When we began talking, Cheryl readily admitted that she knew it had been her own fault that she'd gotten in financial trouble on her mortgage. It was hard for me to imagine that Cheryl could do anything wrong. She was obviously one of the good people in the world, in her forties, but going to school at night to better herself, and very proud and happy about life, even in the face of such tragic circumstances. I asked her what had been her fault and she explained that she had gone to the bank because she needed to put on a new roof and wanted to do some landscaping. The banker had told her that, since she had owned her home for ten years, it had tripled in price, so it would be no problem to get her the money she needed to make her improvements.

Cheryl had always had a fixed rate loan, but that banker… that lovely gentleman… ended up putting Cheryl into a springy adjustable rate loan that caused her payment to go from $1,800 to $2,800 in a year. At one point her mortgage payment was taking up all of her monthly income. The wonderful loan Cheryl was offered also came along with a pre-payment penalty for one year, so even if she wanted to refinance, were that an available option, she couldn't do it for at least a year. And by that time it was impossible.

I suggested to Cheryl that perhaps it wasn't really her fault. That maybe the banker should share in the responsibility for what had happened. I don't think she accepted that idea while I was there. I know she'll be reading this article and I hope she comes to forgive herself and buy a Voodoo doll that looks like her banker, because someone should string him up by his prepayment penalty, if you get my metaphor there, which I'm sure you do.

I asked Cheryl what she went through and the story she told me both confirmed what others had said, and made me sick over what our politicians are saying today. Since you'll see the video soon enough, I'll be as brief as possible.

Cheryl began by calling HUD for help. She called and called. She's very comfortable on the phone, you see, and knows how to follow up, as she put it. She called, she followed the instructions… she left messages. FOR FIVE MONTHS. And nothing. Thanks Uncle Sam! Nicely botched. My tax dollars at work. Our government can make a missile that can be launched from s ship 100 miles at sea and clog up a toilet in someone's hotel bathroom, but answer the phone and get something done… well, never in my lifetime, how's that.

She then thought to try her bank… that fabulously managed institution, Chase. For three months she alternated between calling Chase and waiting for things promised to be in the mail, but that never arrived. At one point, a woman at Chase told her to stop making her payments, that her loan modification was imminent. It wasn't, though.

I asked her what it was like dealing with her bank and she replied: "Well, you know… the bank's the bank. They're going to get their money one way or the other."

"No truer words have ever been spoken," I thought to myself at the time.

As August turned to September, Cheryl was afraid she would lose her home by the holidays and she very much wanted to keep it. She had made her payments for more than ten years, but now they were about to hit the $3,000 mark, which is more than she could have paid. A mortgage broker that she knew suggested that she call Green Credit Law Center.

She did and everything changed, Cheryl explained. "I never had to call and bug them. They were so nice and seemed so on top of everything. They got my mortgage payment back down to where it was originally, before any adjustments, and they made sure I got a fixed rate. Now I would never do any refinancing again."

Cheryl's story isn't unique, although Cheryl is very much so. She was wonderful to talk to, and I'm sure everyone that she works with loves to be around her every day. I hope I get to see her again.

I've interviewed a few dozen homeowners that have received loan modifications and none of them had any desire to attempt negotiations with their banks directly. They had heard that they could try themselves, but none wanted to. Almost all had tried HUD and found no one at home. All had paid a reputable loan modification firm and all were more than happy to be living in their homes.

On the way home I cried a little over the whole thing. It wasn't fair what had happened to Cheryl. She wasn't the least bit irresponsible. To the contrary, our country needs a lot more like Cheryl. And then I got mad, which is how I've been ever since.

Then last night on 20/20, I saw the people living in tent cities in Arizona, California… families with young children, older people… all because they lost their homes to foreclosure. A little girl, maybe five years old, explained to the show's host how she used to have a room and lived with her Mommy and Daddy in a house, but now they live here in this tent. And I couldn't take it anymore.

God damn it people. I'm 47 years old. I served my country in the USAF. I pay my taxes. I own my own home. I employ people. I'm raising a child. I've seen my wife fight breast cancer and win. I lived through the horrors of 9/11. And I can't bear to watch this much longer, if at all.

I certainly cannot stand listening to one more politician or regulator say "If you have to pay, walk away." Find the bastards that would take advantage of people in trouble and lock them up for life, for all care. But don't shut down the only thing that's working… the only thing that's helping… the only thing that's not costing the taxpayers more than they've already had to pay… for God's sake… loan modification companies are an answer that helps these people... don't tell them they shouldn't seek that answer.

And President Obama, as related to our economy, our government has failed us in every single respect for going on three years. Don't you dare blame the people of this country… it's not the American people… it's the people we elected… the ones wearing natty suits, flying around in private planes, and attending fancy dinners… it's the people we sent to Washington D.C. that are the problem.

You claimed to know that when you ran for president. But every single day that you or any of us allow this to continue there are children forced to leave the safety of their rooms for the uncertainty of a tent. And what will be the long-term affects of that?

I don't want to see Stevie Wonder entertaining at the White House again… I don't want to hear how shocked you were to find AIG paying $160,000,000 in bonuses… I don't want to know how you plan to fix health care… until something's changed…. Until you've fixed this.

Because if this is allowed to continue as is much longer… then whatever you say… I'll turn away.

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