Did B of A prevent qualified borrowers from obtaining loan modifications?

Banks don’t want to modify borrower’s loans. They would far rather be paid back the money they borrowed with interest at the terms originally negotiated in the promissory note. The only reason banks are even considering loan modifications is because the collateral backing behind the loan no longer covers the original capital amount. If it did, banks would foreclose, boot out the delinquent borrowers, and resell the house to someone who was ready, willing, and able to make payments under the negotiated terms.

It should be obvious that banks don’t want to modify these loans. If this were something they wanted to do, they would make it much easier, wouldn’t they? Have you ever seen someone opening a savings or checking account go through the same hassles as someone trying to obtain a loan modification? If banks want the business, they make it easy. If they don’t want the business, they make it hard.

It reminds me of the Publishers Clearinghouse Sweepstakes. You can enter the contest without buying their magazines, but they will resend you the paperwork with another query to buy a magazine. After about a dozen mail-ins, if you still haven’t bought a magazine, they will begrudgingly enter you in the sweepstakes. They make people fill out endless paperwork over and over again because they don’t want to enter people into the sweepstakes who don’t buy magazines.

The same is true for loan modifications. They make people fill out endless paperwork because banks don’t want to give the loan modification. Why would they? Particularly if they can get borrowers to keep making partial payments, they will mislead them as long as possible. As far as the bank is concerned, these borrowers are the living dead, so squeezing a few extra payments out of debt zombies is gravy to them.

Further, if lenders did start giving out loan modifications, everyone would want one. Who wants to pay back their full mortgage balance under onerous terms when banks are giving borrowers better deals?

Though these incentives are obvious to anyone who cares to examine them, people feign surprise when the banks actually get caught responding to their incentives. B of A stands accused of denying loan modifications to qualified borrowers and steering them into loan modifications more profitable to the bank. These salacious allegations haven’t been proven, but would anyone really be surprised if it were true?

I wouldn’t.

Bank of America Paid Bonuses to Foreclose: Lawsuit

Published: Monday, 17 Jun 2013 | 11:31 AM ET — By: John W. Schoen

Bank of America routinely denied qualified borrowers a chance to modify their loans to more affordable terms and paid cash bonuses to bank staffers for pushing homeowners into foreclosure, according to affidavits filed last week in a Massachusetts lawsuit.

We were told to lie to customers,” said Simone Gordon, who worked in the bank’s loss mitigation department until February 2012. “Site leaders regularly told us that the more we delayed the HAMP [loan] modification process, the more fees Bank of America would collect.

In sworn testimony, six former employees describe what they saw behind the scenes of an often opaque process that has frustrated homeowners, their attorneys and housing counselors.

They describe systematic efforts to undermine the program by routinely denying loan modifications to qualified applicants, withholding reviews of completed applications, steering applicants to costlier “in-house” loans and paying bonuses to employees based on the number of new foreclosures they initiated. …

When I first saw the cartoon below, I thought it was exaggeration and hyperbole. Turns out, it may be more truthful that anyone outside of those processing loan modifications was aware of.

“We continue to demonstrate our commitment to assisting customers who are at risk of foreclosure and, at best, these attorneys are painting a false picture of the bank’s practices and the dedication of our employees,” a spokesman said in a statement. “While we will address the declarations in more depth when we file our opposition to plaintiffs’ motion next month, suffice it is to say that each of the declarations is rife with factual inaccuracies.” …

The company spokesperson has to deny all the allegations, and perhaps they are untrue, but if they are true, B of A could face a rash of lawsuits and costly settlements with millions of disgruntled borrowers. They will fight this lawsuit to the bitter end to avoid the multitude of claims that would surely follow.

In their sworn testimony, the former Bank of America employees detail a series of specific company policies designed to provide as little foreclosure relief as possible.

Based on what I observed, Bank of America was trying to prevent as many homeowners as possible from obtaining permanent HAMP loan modifications while leading the public and the government to believe that it was making efforts to comply with HAMP,” said Theresa Terrelonge, a Bank of America collector until June 2010. “It was well known among managers and many employees that the overriding goal was to extend as few HAMP loan modifications to homeowners as possible.

The reason was fairly simple, … After stonewalling qualified borrowers seeking an affordable HAMP loan, Bank of America representatives could upsell them to a more costly “in-house” loan modification, with rates 3 points higher than the 2 percent rate available under HAMP guidelines, Wilson testified.

“The unfortunate truth is that many and possibly most of these people were entitled to a HAMP loan modification, but had little choice but to accept a more expensive and less favorable in-house modification,” he said.

That is really damaging testimony because it demonstrates a strong and realistic motivation for B of A to behave so badly.

Courtney Scott was among the Bank of America customers who experienced repeated delays and denials for a government-sponsored modification of the mortgage on her suburban Atlanta home. The retired nurse and grandmother grew increasingly frustrated after bank representatives repeatedly requested she fill out paperwork covering the same information.

So she was surprised when the bank approved her six months later for an “in-house” modification.

“I got the [HAMP] denial in January, 2010 and then in June they came back with an in-house offer saying ‘Congratulations, you’ve been approved for a modification,'” said Scott. “But it only lowered my payments by about $7 and some cents.” …

On one hand, if this woman made plenty of money to afford her payments, why should she be given a better deal? On the other hand, if she couldn’t afford her payments, and if she did qualify for the HAMP program, if B of A steered her toward a loan that reduced her payments by $7, then they deserve the bad press they are getting from this.

In his affidavit, Wilson said most of the information the bank repeatedly requested from homeowners was already available in multiple document review systems.

The repeated requests for information always seemed odd to me. Banks and the credit bureaus have more information on us that anyone. They know your credit scores, total debt, debt history, income (they see your deposits), everything they could possibly want to know about you financially, yet they endlessly requested more paperwork and documentation on what they already knew. Obviously, something more was at work.

Some completed applications were denied one at a time, while other borrowers were rejected en masse in a process known as “the blitz,” Wilson said.”Approximately twice a month, Bank of America would order that case managers and underwriters ‘clean out’ the backlog of HAMP applications by denying any file in which the financial documents were more than 60 days old,” he said. “These included files in which the homeowner had provided all required financial documents.” …

Sit on the documents until they age, then throw them out because they’re too old. Real nice, not.

Beyond the policy of denying affordable loan applications, Bank of America also encouraged its employees to move loans to foreclosure—even when the process could have been prevented, according to said Erika Brown, a former bank customer service representative. …

The motivation for mortgage servicing companies like Bank of America to move loans to foreclosure is driven by the often perverse economics of the modern mortgage servicing business, according to consumer advocates and attorneys defending against foreclosures.

When the tens of millions of loans written during the housing boom of the mid-2000s were sold off to investors, lenders like Bank of America took over the job of collecting checks, making property tax and insurance payments, assessing late fees and other clerical work.

When a borrower defaults on a loan and the bank forecloses, investors who own the loan typically bear the loss on the unpaid principal balance. But the foreclosure process generates a lucrative stream of fees for mortgage servicers—for everything from property inspections to legal work required to seize a home.

Those added fees provide mortgage servicers like Bank of America with a financial incentive to foreclose—and a disincentive to provide a more affordable loan, according to consumer advocates. The company shared those incentives—and disincentives—with its workers, based on foreclosure quotas spelled out in monthly meetings with managers, according to Gordon.

“A collector who placed 10 or more accounts into foreclosure in a given month received a $500 bonus,” she said. “Bank of America also gave employees gift cards to retail stores like Target or Bed Bath & Beyond as rewards for placing accounts into foreclosure. Bank of America collectors and other employees who did not meet their quotas by not placing a sufficient number of accounts into foreclosure each month were subject to termination. Several of my colleagues were terminated on that basis.” …

If they can back that up with internal company emails and memos, B of A is in big trouble. If that evidence doesn’t exist, it will be dismissed as sour grapes from former employees.

But, according to the former employees, while the bank was lying to borrowers, it was also falsifying its performance when reporting to the government the number of loans that had been modified.

“Often this involved double counting loans that were in different stages of the modification process,” according to Steven Cupples, who supervised a team of Bank of America underwriters until June 2012. “It was well known among Bank of America employees that the numbers Bank of America was reporting to the government and to the public were simply not true.”

That’s one lie the government was happy to be complicit in telling. The various failed loan modification programs like to boast about the total number of people they’ve helped. Bogus exaggerations from the banks help their public relations, and it helped the banks too.

Scandal of the year?

If there is hard evidence backing up any of the claims made by these former employees, this has potential to grow into a major banking scandal. Banks are already reviled by many people. They are too politically powerful, and too big to fail. They were complicit in if not responsible for the inflation of the housing bubble. They were bailed out by taxpayers while families suffered. It’s a recipe of a lot of anger and hatred. If these allegations are true, it’s the kind of lawsuit that lends itself to major jury awards or costly settlements.

Wheeler Dealer

During the housing bubble everyone was using some kind of creative financing to make a deal. Many patted themselves on the backs for being sophisticated financial managers who knew the intricacies of real estate finance. In reality, most were fools who found a trough of free money they didn’t realize was poisoned by lenders.

The former owner of today’s featured property took what should have been a $500,000 gain and turned it into a foreclosure. Brilliant, wouldn’t you say?

  • The property was purchased on 9/15/1997 for $345,000. He used a $276,000 first mortgage, a $34,000 second mortgage, and a $40,000 down payment.
  • On 1/29/2000 he obtained a $100,000 HELOC.
  • On 4/30/2001 he refinanced with a $314,000 first mortgage.
  • On 6/13/2001 he obtained a $98,000 HELOC.
  • On 10/17/2002 he refinanced with a $462,000 first mortgage.
  • On 9/9/2004 he opened a $100,000 HELOC.
  • On 7/31/2006 he refinanced with a $715,000 first mortgage and a $93,000 stand-alone second.
  • Total property debt was $808,000.
  • Total mortgage equity withdrawal was $498,000.

[raw_html_snippet id=”newsletter”]

[idx-listing mlsnumber=”OC13115503″ showpricehistory=”true”]

33891 CALLE CONEJO San Juan Capistrano, CA 92675

$769,900    ……..    Asking Price
$345,000    ……….    Purchase Price
9/15/1997    ……….    Purchase Date

$424,900    ……….    Gross Gain (Loss)
($61,592)    …………    Commissions and Costs at 8%
$363,308    ……….    Net Gain (Loss)
123.2%    ……….    Gross Percent Change
105.3%    ……….    Net Percent Change
5.1%    …………    Annual Appreciation

Cost of Home Ownership
$769,900    ……..    Asking Price
$153,980    …………    20% Down Conventional
4.02%    ………….    Mortgage Interest Rate
30    ………………    Number of Years
$615,920    ……..    Mortgage
$146,139    ……….    Income Requirement

$2,948    …………    Monthly Mortgage Payment
$667    …………    Property Tax at 1.04%
$0    …………    Mello Roos & Special Taxes
$160    …………    Homeowners Insurance at 0.25%
$0    …………    Private Mortgage Insurance
$0    …………    Homeowners Association Fees
$3,775    ……….    Monthly Cash Outlays

($674)    ……….    Tax Savings
($884)    ……….    Principal Amortization
$216    …………..    Opportunity Cost of Down Payment
$212    …………..    Maintenance and Replacement Reserves
$2,645    ……….    Monthly Cost of Ownership

Cash Acquisition Demands
$9,199    …………    Furnishing and Move-In Costs at 1% + $1,500
$9,199    …………    Closing Costs at 1% + $1,500
$6,159    …………    Interest Points at 1%
$153,980    …………    Down Payment
$178,537    ……….    Total Cash Costs
$40,500    ……….    Emergency Cash Reserves
$219,037    ……….    Total Savings Needed
[raw_html_snippet id=”property”]