When Art and Joyce Espinosa bought their Paso Robles home in 2005, they planned to live there “for life.” Before the recession hit, homes were selling fast, and the couple didn’t want to miss out on buying the ranch-style house on 7.5 acres just minutes from town.
But Art’s post-retirement business of making custom cabinets suffered as the real estate market fell, and the Espinosas found it increasingly difficult to pay the $3,500 monthly mortgage.
The couple, now in their 70s, depleted their savings and tried to work with their lender for more than a year to get a modification on their interest-only loan before they lost the house to foreclosure. The lender declined to modify the terms of the loan, saying that Art did not have full-time work.
“I don’t understand why they would not just lower the house payment and lower the interest rate,” Joyce said. “If they had done that, we would have been fine.”
The Espinosas are just one of many San Luis Obispo County families who have found the loan modification process cumbersome, confusing and, in some instances, infuriating.
Those who work closely with distressed homeowners report mixed success with banks and mortgage servicers — companies that collect mortgage payments — inundated with people facing financial hardship.
Michael Blank, attorney with California Rural Legal Assistance in San Luis Obispo, called the loan modification system “irrational” and said it requires determination and persistence on the part of the borrower.
“Loan modification is a difficult process,” he said. “Some stick with it and achieve it, but many fall through the cracks.”
Blank added: “The banks should be making it easy for people to stay in their houses and pay their mortgages. Instead, it has become a nightmare.”
When the real estate bubble burst, banks geared up rapidly for the fallout, and in some cases that meant handing loan modifications to inexperienced hires.
That has caused a host of problems, ranging from lost paperwork to improperly followed protocols in filing documents. Finding the right contact for help can take hours or even days, and then when the correct person is reached, it can take several more days or weeks to get a response.
Moreover, documents that are not submitted cleanly or accurately can lead to delays or modifications being denied.
Joyce Espinosa said she was meticulous about filing the appropriate documents and following up with the mortgage company. Her dining room table is covered with paperwork and letters, including those to the California Department of Corporations, first lady Michelle Obama and former Gov. Arnold Schwarzenegger.
Her diligence, however, was not enough. At one point, she had faxed 42 pages of a document only to be told that she forgot to sign the back of one page.
“We tried to get a loan modification, and all they asked for was more paperwork,” she said.
Why modifications fail
There are other reasons a homeowner might be unsuccessful either with a traditional modification, which is funded by the lender, or with the federal government’s Home Affordable Modification Program, which offers homeowners a chance to modify or refinance their mortgages to make monthly payments affordable.
More than 3 million permanent loan modifications have been made in the last two years by mortgage servicers, according to data recently released by the federal government.
Last year, permanent loan modifications totaled 1.76 million, up from 1.24 million in 2009. Last year’s total permanent modifications outpaced foreclosure sales of just over 1 million.
Modifications with reduced principal and interest payments accounted for about 81 percent of all proprietary or non-HAMP modifications.
Many homeowners applying for a loan modification through HAMP do not meet what’s called the net present value test, said Brian Kerrigan, a housing counselor with Peoples’ Self-Help Housing. This test, required for all loans being considered under HAMP, is based on a complex formula and determines whether it will be more valuable to approve the loan modification or foreclose on a house.
A lender may also decide not to approve a modification if it believes borrowers have insufficient income to pay the mortgage — even under more favorable terms — or if they have too much income, Kerrigan said.
Sometimes, the investor on the loan does not allow loan modifications.
Kerrigan said homeowners who start early have the most success. They also work with housing counselors who typically “carry more weight” than the homeowner and are trained to navigate the loan modification system.
Peoples’ Self-Help Housing offers a free HUD-approved program, which has dealt with hundreds of such cases in recent years, despite difficulty in obtaining grants and other funding sources to hire housing counselors. Since 2008, the program has completed 744 loan modifications.
“When I’m dealing with them, there’s a certain way that I do it,” Kerrigan said. “Wells Fargo, for example, wants fresh income documents regularly, and so I make sure I send new pay stubs and statements, on top of phone calls once a week.”
He advises against clients missing payments to increase their chances of getting a loan modification. He said more clients walking in the door are current on their mortgage payments than in the past, which is a positive sign.
Andy Greensfelder, a volunteer paralegal with California Rural Legal Assistance, has noticed an improvement lately in bank operations, adding that it’s almost always in a bank’s best interest to keep the loan being paid and save the foreclosure costs.
“It seems like we are having more success,” he said. “Banks are better organized. Maybe more pressure has come from the government. But it seems like they’re getting a rhythm down.”
New state plan may help
A new plan for California homeowners may also help stop people from losing their homes. The U.S. Treasury Department approved $2 billion in funding for the California Housing Finance Agency’s Keep Your Home California program, which could help low- and moderate-income homeowners to stay in their houses if they are unemployed or experience a change in their lives such as death, illness or disability and are at risk of default.
While programs such as Keep Your Home California may stem the tide of foreclosures and strengthen the housing market, there are still lenders who are unwilling or unmotivated to give homeowners a second chance, said Ginna Green, spokeswoman for the Center for Responsible Lending’s California office.
Some mortgage servicers, she said, pursue loan modifications and the foreclosure process at the same time. That has led to many wrongful foreclosures when a person may have qualified for help. When the clock on a foreclosure has begun, it’s difficult to stop it, Green said.
“One would think that a loan modification would be in someone’s best interest, but it may not be as easy as a foreclosure. There hasn’t been enough carrot and stick to make modifications worthwhile,” she said.
For some county residents, any help is too little, too late.
In a final attempt to avoid foreclosure, the Espinosas said they worked with a real estate agent on a short sale of the property. But that offer was refused, and the lender foreclosed on the house.
Now, Joyce, who has a medical condition, and Art have until March 1 to vacate the property, which boasts a large master bedroom, an outdoor barbecue, and walnut and almond trees.
In hindsight, the Espinosas, who comfortably put $200,000 down when they purchased the home for $700,000 more than five years ago, would not have taken out an interest-only loan.
But Art, a former Marine, is not looking for pity or charity. In fact, he plans to keep a positive attitude and move forward as he and his wife prepare to move into a rental.
He does, however, wonder whether he and other distressed homeowners are getting a fair shake.
“I don’t want to see the government take control of the banks,” he said. “But they should demand that they assist people because they were assisted.”
Where to get help
The federal government’s Homeowner’s HOPE Hotline: 888-995-HOPE
Peoples’ Self-Help Housing, San Luis Obispo: 781-3088
California Rural Legal Assistance: 544-7994