More Mortgage Madness

Research support for this article was provided by the Investigative Fund at The Nation Institute.

Veronica Gallon went and got her gun. This was just the kind of thing she and her husband, George, had left the north Jacksonville ghettos to avoid: some guy banging and rattling the door in the middle of the night, like a crazed killer or God knows what. Veronica wasn't having it. So she grabbed her gun and plopped down on the front room rug.

"I was in my PJs, looking at TV and getting ready to go to bed for work," she recalls. She doesn't answer her door at night, so at first she just ignored the knock. "Then the knock becomes a banging," she continues, her voice rising. "I peep out the blinds, and I see this white guy," she explains. "I could see him, but he couldn't see me." She noticed his car was idling, with the driver-side door standing open. "Whatever he came to do, he was gonna do it and jump!"

Veronica knew the house was in foreclosure, of course; not a day goes by without a reminder. "First time the phone rings in the morning, it's them," George says with a sigh. "Last time the phone rings at night, it's them." But she long ago checked out of the process in frustration. She couldn't keep up with the bizarre twists and turns, the seemingly random letters from companies she'd never heard of making demands she couldn't believe. But she never imagined that the man banging on her door worked for a company that worked for a company that services her loan on behalf of some Borg-sounding entity called ABFC 2006-HE1 Trust.

Veronica is an ebullient woman. At 45, she radiates giddy teenage youth, doubling over in belly laughs at her own jokes. But she insists her quick smile morphs just as effortlessly into a snarl, and it was only after Veronica called George, at his job as a night security guard, that she calmed down. They both swear it's just dumb luck that American Home Mortgage Servicing didn't lose a contractor that night.

We hear a lot about the big picture of the mortgage crisis: at the end of last year, a little more than 11 percent of homeowners were delinquent or in foreclosure. But the Gallons reveal what it looks like in the micro. All over the country, confused, struggling borrowers and an opaque army of industry contractors are fumbling toward each other in the dark, with guns drawn.

Every effort to date to order that chaos has failed utterly. The mortgage industry got things started in July 2007 with its cruelly named HOPE NOW program. George W. Bush offered a narrowly tailored Federal Housing Authority (FHA) refinancing program, dubbed FHASecure. And last summer, Congressional Democrats finally came in big with HOPE for Homeowners, which put up $300 billion for FHA-administered refinances. All these plans have two things in common: they relied on the industry's voluntary participation, and they didn't work.

HOPE for Homeowners has generated the most laughable data. The program launched in October. As of late March, it has prevented exactly one foreclosure. "Needless to say, the program isn't working terribly well," an FHA spokesman deadpanned to CNNMoney.com.

HOPE NOW's press shop has been less modest. The program claims to have helped millions avoid foreclosure through loan modifications. But despair lies just below the surface of the industry's assertions. In early April, the Office of Thrift Supervision (OTS) released a fourth-quarter report that found more than half of all loan workouts last year failed to reduce monthly payments, and nearly one-third actually increased the payments.

No surprise, then, that 60 percent of loans modified in the first three quarters of 2008 were at least thirty days delinquent at year's end, according to OTS. Valparaiso University consumer law scholar Alan White describes it as "converting risky subprime loans into risky modified loans."

There are myriad reasons for the dismal performance of all these efforts to arrest foreclosures. Everybody from the Mortgage Bankers Association to grassroots housing activists now largely agree on the technical aspects of the problem--servicers are scared to modify loans they don't actually own; the industry's fee structure blinds it to the long-term costs of foreclosure; and many borrowers are far too deep in debt to be helped.

President Obama unveiled his own proposal in late February, the fourth major initiative in less than two years. Key elements of it--like a plan that would let bankruptcy judges reduce the principal owed by mortgage borrowers--require Congressional approval. His plan dutifully pushes and pulls the market's jammed levers, offering servicers significant payments for altered loans and giving them legal cover for doing so, among other things.

But what Obama's plan doesn't do--so far--is address the larger question: can any solution work if it doesn't strengthen the negotiating hand of overwhelmed borrowers? Like all previous initiatives, industry participation in the president's plan is largely voluntary, if heavily subsidized. He's proposed allowing homeowners to modify mortgages through bankruptcy courts, which could reduce their principal, but the industry, led by firms like JPMorgan Chase, Wells Fargo and Bank of America, has fought hard to kill the legislation, blocking it in the Senate since March. And the plan does nothing else to give borrowers more leverage, such as freezing foreclosures--as candidate Obama pledged he'd do back in October. Instead, it pumps $75 billion into a servicing industry that Veronica and George Gallon and millions like them would just as soon see killed off.

"It sounds more positive than anything we've seen before," says California Reinvestment Coalition's Kevin Stein, who has studied mortgage modifications in his state. "But those things looked positive when we first saw them, too."

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