In 2006, Colorado banned smoking in bars and restaurants. That was a bad year for Josie Kay.
"If I had nine people on a Friday night — when it was my best night — I was lucky," she says. "Then the recession hit."
Receipts at her bar dropped 50 percent, and last year, she lost the business and declared bankruptcy.
Kay and her husband had built their house and lived there for 13 years. They didn't want to lose that, too. She had heard about home loan modifications, such as the federal Home Affordable Modification Plan, and wondered if something like that might work for her.
So she called her bank. And like an untold number of Americans, Kay was informed that to qualify for HAMP, she would need to be two months behind in her mortgage payments.
She had never missed a payment before, she says. It was a revelation.
"What a thing to tell somebody who's already sinking: 'Don't pay your mortgage for two months,'" she says. "You love it! You go for it!"
In hindsight, she wishes she'd never made that call.
Stephen Swift is not a fan of HAMP.
"What is disguised as a program to help people is really a scam upon the American public," says the Colorado Springs bankruptcy attorney. "They think that they are going to get relief, but in most instances, they don't. In most instances, it is an enticement to go into default on their loan."
Swift represents Kay, and has represented at least 25 others who have been told delinquency was a requirement for modification. He explains that if a modification is successful, the lender might lower the mortgage's interest rate or take the money owed and add it to the back end of the loan. This reduces the monthly payments, but it also extends the life of the loan by years. Not a great help, says Swift, especially since the monthly payments rarely go down by a significant amount.
More perilously, he adds, going two months behind on payments might trigger the foreclosure process. And if the modification's denied, the foreclosure might just proceed.
Which is exactly what happened to Kay.
In October, she applied for a HAMP modification by phone. In December, her bank sent her a letter rejecting her application, stating that she didn't show a financial hardship — despite her bankruptcy and two months' default.
So she began catching up. She paid January's mortgage. In February, she wrote a check for well over $3,000 to cover that month plus the two back months. It didn't matter. On March 24, the U.S. Bankruptcy Court for the District of Colorado ruled that her bank could proceed with foreclosure.
Why urge homeowners into default in hopes of qualifying for HAMP? According to Colorado Springs real estate attorney Paul Murphy, it's nothing nefarious. It's simply a numbers game.
"They have so many zillions of these modification applications," he says, "so why should they worry about the ones that are paying? That's the general attitude."
When HAMP was established in March 2009, the U.S. Treasury estimated that the program would direct $75 billion to assist up to 4 million homeowners. As of December 2010, only 521,000 mortgages were in active permanent modification. Nearly 800,000 borrowers had been approved for the first step in a modification, a trial period, only to fail to meet the terms of the modification. As of February, $1.04 billion had been disbursed.
Right now, Murphy explains, one problem is that there's no requirement that a mortgage holder try a modification. Another is that the federal funds offered to banks to incentivize a modification might only cover application costs.
"It is about the bottom line," says Murphy. "Let's face it — that is what banks and lenders are always about."
HAMP's shortcomings led U.S. House Republicans to vote last month to kill the program, but congressional Democrats, among others, have suggested fixes. President Obama has stated that he would veto any effort to end the program.
Caught in uncertainty
Josie Kay is not her real name. She asked the Independent to protect her identity because of her state of limbo.
After receiving the judge's order, she called the bank's call center and was told not to worry. They don't want her house, she heard.
She called the bank's attorneys for clarification. They punted her back to the bank.
According to Murphy, banks aren't equipped to handle the sheer volume of homeowners seeking assistance. Plus, their call centers are manned by people with little to no expertise, and inter-communication within the banks is nearly absent.
Swift says the bank won't move forward with Kay's foreclosure, but adds, "they are always in the position that they can." She has nothing in writing saying that her house is safe, and fears that any day, the sheriff will arrive with an eviction notice. That the ax will drop. Like it did on her son.
In a perverse coincidence, Kay's son, who had owned his home for five years, applied for a HAMP modification a month before she did. And like Kay, he went two months behind on payments and was rejected, then caught up only to have the bank foreclose.
The weekend before Easter, Kay helped him move his stuff into storage.
"I am not a stupid person, but they took me," Kay says. "You are hoping beyond hope that a bank is going to do something good for you — because Obama made them.
"Now I understand why the old-timers hid their money. They didn't trust the banks."