Stop Making Payments to Win Loan Modification?
Did you hear the one about the bank that refused to help the financially struggling homeowner unless he was delinquent in his mortgage payments?
So the homeowner gets behind on purpose and, sure enough, the bank reduces his payments — temporarily, while it decides whether he qualifies for more permanent help.
Later the bank abruptly decides not to make the lower payments permanent, and moves to foreclose on the struggling homeowner because he's behind on his mortgage payments.
This is what Martin Galvan says happened to him when he tried to save the five-bedroom Hacienda Heights home he has shared with his wife and two children since 1999.
The bank, JPMorgan Chase, "told me they couldn't help me unless I was behind in my payments," Galvan recalls. "I said, 'Are you telling me I need to stop making payments?' They said, 'We can't tell you that, but listen very carefully. We can't help you unless you are behind.' "
Welcome to the murky, troubling and often inhumane world of mortgage loan modifications, where the federal government offers small incentive payments to encourage banks to work out more affordable mortgage payments so homeowners can keep their homes.
The Obama administration's efforts to help homeowners have been widely criticized as too little, too late for too many. "The loan servicers make more money foreclosing than they do in modifying someone's mortgage," says Martin Andelman, a Southern California–based, self-styled homeowner advocate who blogs at Mandelman Matters. "Last year we shoveled $12 trillion to the banks. We spent less than one one-thousandth of that dealing with foreclosures."
Earlier this month, the congressionally appointed oversight panel for the Troubled Asset Relief Program (TARP), aka the bailout, labeled the administration's foreclosure relief program ineffective, reporting that it would achieve less than one-third of its own original goal of how many people it would help.
When the administration created the Home Affordable Mortgage Program (HAMP) in 2008, officials said it would help 3 million to 4 million homeowners. In fact, the oversight panel says the program will prevent only 700,000 to 800,000 of the more than 8 million to 13 million foreclosures expected by 2012.
Galvan, a barber for 30 years who owns his own hair salon, never imagined he would be one of those foreclosures when he moved his family from Montebello to Hacienda Heights. "My wife and I thought we were pursuing the classic American dream, buying a home and moving our kids to a nicer neighborhood."
Ten years ago, Galvan, 49, opened his MG Hair Studio on Beverly Boulevard in Montebello's business district.
As a small businessman, Galvan says he was extra careful about taking on debt.
In 1999, he paid $284,000 for the house with a Countrywide mortgage. Then in 2005, at the height of Southern California's overheated housing bubble, he refinanced his suddenly far more valuable home in order to remodel, taking a $532,000 mortgage with Washington Mutual.
The huge new loan reflected the skyrocketing value of his property, along with the rest of Southern California real estate, but it also jacked up his mortgage payments.
Galvan insists he was always careful about his credit, although he acknowledges he wasn't a sophisticated businessman. "They [the loan broker] said sign here and sign here. I trusted them. Unfortunately, that's my background. I'm a trusting person."
When the economy collapsed, Galvan says, his business was hit hard. "My clients are attorneys and real estate people," he says. "If they came in every two weeks before, they stretched it out. Some said they couldn't afford the $20. So I lowered the price. It's more important to keep them as a client."
His wife was laid off from her accounts-receivable job for a construction company in October 2007. Eventually she was able to find a lower-paying job at a mortuary.
Meanwhile, JPMorgan Chase acquired Washington Mutual from the federal government after WaMu collapsed in 2008, in the largest bank bankruptcy in U.S. history. So Galvan approached JPMorgan Chase for a modification.
After he was unsuccessful on his own, he sought advice from a Diamond Bar attorney, Walter Hackett, a former banker who switched sides to represent homeowners. In the spring of 2009, with Hackett's assistance, Galvan applied for a mortgage modification.
Galvan says he followed JPMorgan Chase's guidance reluctantly, stopping his mortgage payments for three or four months in an effort to get the bank to reduce his payments from about $2,700 a month. "When I stopped paying my mortgage, I was crying," he says.
In August 2009, Chase offered Galvan a temporary modification, reducing his payments by about $400 a month, to about $2,300.
Galvan and his family were incredibly relieved. He made the reduced payments for more than a year. Then in October 2010, the bank said he did not qualify for a permanent modification because he didn't have sufficient income. "But they told me to keep making the lower payments and they would work with me," he recalls.
In early December, Chase sent him a letter notifying him they would sell his home in foreclosure on Jan. 7.
Galvan estimates he paid Chase $30,000 in 14 months as part of the temporary modification.
Through a spokesman, Chase refused to discuss any aspect of Galvan's case.
In an e-mail, the spokesman, Gary Kishner, wrote: "We have worked with the customer over a number of months to get timely and complete documents, have re-examined their situation multiple times, and communicated investor decisions that were made using government guidelines."
Kishner also defends the bank's record in helping borrowers avoid foreclosure, contending that the bank has completed 250,000 permanent modifications through a variety of programs, including HAMP. The bottom line, according to Kishner, is that JPMorgan Chase has "successfully prevented two foreclosures for every one we completed."
But Galvan is far from the only one disgusted by JPMorgan Chase's loan mod efforts.
The Oakland-based nonprofit Housing and Economic Rights Advocates filed a class action suit against the bank based on conduct "very similar if not identical" related to several borrowers, says the group's executive director, Maeve Elise Brown.
She acknowledges that the rules governing federal loan modification are complex.
"But borrowers shouldn't have to go into default in order to get help from the loan modification program," Brown says of the extremely risky and clearly failing approach.
Under the complex scheme banks devised during the housing boom, loans were packaged and sold to investor groups, which then would hire banks to service the loans — collect mortgage payments and, when needed, handle foreclosures.
"What's particularly irksome in this case [Galvan's] is it appears that they [the bank] are stringing him along," Brown says.
According to her organization's lawsuit, filed in U.S. District Court in May, JPMorgan Chase has "extended, delayed and otherwise hindered" the mortgage modification process in thousands of cases across California. The bank profits from the payments borrowers make in temporary modification and then forecloses on them anyway, the lawsuit charges.
Chase spokesman Kishner says he can't comment on the housing advocates' lawsuit. In response to questions, he wrote: "JPMorgan Chase is committed to ensuring that all borrowers are treated fairly; that all appropriate measures short of foreclosure are considered; and that, if foreclosure is necessary, the foreclosure process complies with all applicable laws and regulations."
Hackett suggests a dark motive for why JPMorgan Chase wants the Galvans' house: As in many SoCal neighborhoods, property values in Hacienda Heights, where Galvan's home is, have stayed the same or fallen only slightly. The relatively high value of the home may be motivating the bank to pursue foreclosure rather than work out a modification.
JPMorgan Chase could afford to reduce Galvan's mortgage and still make money because "they paid pennies on the dollar for those [WaMu] loans and this was a true windfall for them," Hackett contends.
Galvan now is represented by Hackett's former office mate, Thomas Bayard, because Hackett has moved to a new job.
For a typical family losing their home to hire a lawyer to fight Chase or another bank would cost thousands of dollars. Many Los Angeles County residents simply cannot afford to fight, even if the bank is wrongly snatching their home.
In addition, after widespread complaints about loan modification scams, the California State Bar launched a high-profile crackdown on lawyers working on loan modification cases, with the consequence that many legitimate attorneys are reluctant to tackle them.
Hackett says, "There are thousands of cases like this [Galvan's] in California, with good facts and good law, but homeowners can't afford to pay lawyers even moderate amounts to pursue them."
The foreclosure sale of Galvan's home has been postponed to Feb. 22 while his lawyer prepares a legal challenge.
Homeowners advocate Andelman is less pessimistic about the prospects for loan modifications — if borrowers are persistent and get good lawyers. "The banks make it incredibly difficult, and many people just back off," he says. "The reason many people need a lawyer is that they're intimidated by banks, or they're ashamed because they think they did something wrong. But I tell them, 'It's not your fault that Wall Street bankrupted the economy.'"
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