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Hope, hardship in mortgage battle

Promised relief, many instead deeper in debt

By Jenifer B. McKim
Globe Staff / March 7, 2011

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Davidson O. Calfee thought a temporary mortgage loan modification was the break he needed to keep his home. It allowed the Sandwich insurance agent to start saving $500 a month in 2009, when his income was down because of the recession.

But instead of being better off, Calfee is now on the edge of a financial abyss.

After CitiMortgage Inc. offered to temporarily lower his mortgage payment in July 2009, Calfee, 33, said, he was instructed by the company to send in documents verifying his income and other data so the change could be made permanent.

The process was supposed to take a few months, but it dragged on for a year. Calfee’s application was ultimately rejected on grounds he failed to submit the proper paperwork, which he disputes.

Overnight, Calfee was in serious trouble. The mortgage payment reverted to its original level, and he was on the hook for 12 months of deferred principal, interest, and fees — a sum that today tops $12,000.

In addition, CitiMortgage reported him to major credit bureaus. The company said that by paying less on his loan, Calfee was technically delinquent on his mortgage, something he found particularly infuriating since he always submitted the amount requested, on time.

“I’m facing all sorts of financial doom, including bankruptcy,’’ he said recently. “If we could put things back the way they were, maybe I would have had some options.’’

Nationwide, 740,240 homeowners have been turned away from the $75 billion federal Home Affordable Modification Program, which is facing mounting criticism from housing specialists and even government officials. Many homeowners are actually in worse financial condition simply because they took up an offer to seek mortgage relief. CitiMortgage officials would not comment on Calfee’s case but said the lender has consistently been a “top performer’’ when it comes to federally sponsored loan modifications.

The government launched its loan program in 2009. It said the plan would slow a wave of foreclosures that was threatening to swamp the US economy by offering companies that service mortgages financial incentives to help property owners. The goal was to offer aid to as many as 4 million troubled homeowners, but so far just over 600,000 have received permanent modifications, according to the US Treasury Department, which administers the program.

As the numbers have disappointed, the program has come under fire for failing to help as many people as promised, as well as for glitches that may have caused qualified candidates to be rejected. And Republicans in Congress have filed a bill to eliminate the program altogether.

Critics say the Treasury has failed to push loan servicers to adjust mortgage payments or improve the application system, which relies largely on mailed and faxed documents. Treasury officials admit the program will not meet earlier expectations, but they say that is because of strict eligibility requirements and other issues. The program is voluntary, officials note, so the government can only urge mortgage companies to participate.

Andrea Risotto, a Treasury spokeswoman, said lenders are supposed to notify credit bureaus that a borrower has entered into a temporary loan modification program. But that doesn’t necessarily mean those homeowners won’t have to make up the difference between a temporarily lower payment and their original monthly obligation, she said. “Until your loan is permanently modified, that is money you still owe,’’ Risotto said.

And it is appropriate for homeowners with temporary-approval status to have their credit scores lowered, she added. The fact that they sought relief shows they have financial problems and are thus higher-risk borrowers, Risotto said.

As a result of pressure from federal officials to reduce the applicant backlog, many lenders began routinely rejecting modifications last year, said Chris Wyatt, a Texas mortgage consultant. “There was a lot of denying eligible borrowers in order to clean up their books,’’ Wyatt said.

Angry and frustrated, an increasing number of them — including Calfee — are suing, alleging loan servicers broke promises to make temporary payment plans permanent. Calfee is one of 45 plaintiffs in five separate lawsuits filed by the Boston law firm Roddy Klein & Ryan against CitiMortgage, Bank of America Corp., Wells Fargo Home Mortgage, JPMorgan Chase Bank, and Litton Loan Servicing LP.

The plaintiffs received a boost in January when a US District Court judge in Worcester ruled against a lender’s motion to dismiss, finding that rejected homeowners can proceed with claims that they were the victims of broken contracts.

“Hundreds of thousands of people who had a promise to get a modification are now in limbo,’’ said Gary Klein, the lead attorney in the foreclosure lawsuits. “It’s a huge public policy failure, and it represents an overwhelming failure by lenders to honor their promises.’’

None of the lenders involved in the lawsuits were willing to discuss specifics of the cases. But representatives for several of them said delays were caused by complications in documenting homeowners’ eligibility. Required paperwork includes tax returns, proof of income, and an explanation of need.

A federal special inspector charged with monitoring the loan modification effort said it has been “beset by problems,’’ resulting in “devastating consequences’’ for homeowners. In a January report, the inspector cited a rushed start that required multiple changes and led to confusion and delays.

More than 26 percent of homeowners who were awarded trial modifications have had to wait for more than six months to be told whether their mortgages would be permanently adjusted, the report said.

To improve the system, Treasury officials in June began requiring homeowners to provide documentation before they can enter into a temporary agreement to lower payments. As a result, the government said, the number of temporary modifications that extend beyond six months dropped to 36,200 in January, compared with 94,000 in August.

For Calfee and thousands of others, however, tweaks to the process came too late.

Eighteen months ago, he received a letter from CitiMortgage saying he qualified for a temporary modification. “Act now to get the help you need!’’ it said. Calfee was not behind on payments, but his income was off by $15,000 and the $1,445 monthly bill was becoming a burden, so he eagerly accepted the offer.

Within two months, though, he began receiving harassing calls and visits from CitiMortgage employees saying he was in arrears even though he was making the modified payments on time. He said he was told the confusion would be resolved when the modification became permanent. Over the next 10 months, Calfee said, he had to submit additional data, including multiple copies of his taxes and updated pay stubs.

It wasn’t until July 2010 that CitiMortgage denied the permanent loan modification, saying he had not submitted all the required paperwork. That same month, the lender said he owed about $6,000 to make up for the year of partial payments.

“I would call them all the time,’’ he said. “Is there anything I need to do? How do we hurry this up? It’s like their fax machine was hooked up to a trash bucket.’’

Robert Gatti of South Boston, 31, also believes he was unfairly denied a modification by CitiMortgage. Gatti said he waited more than a year for the company to reach a determination on his loan after starting him on a trial modification program in March 2009. While making monthly payments, Gatti said, he received letters and calls warning that he had defaulted. His credit score plummeted.

CitiMortgage — which would not discuss Gatti’s case — ended up denying his application on the grounds that he did not submit the right paperwork, Gatti said. It also demanded more than $15,000 in back payments, he said.

“I followed every step. I sent in all my paperwork,’’ said Gatti, who is also a plaintiff in the CitiMortgage suit. “The real problem is I should have been denied or accepted in three months. I feel like I got scammed by a government program.’’

Jenifer B. McKim can be reached at jmckim@globe.com.