New Yorkers struggling through the foreclosure process will experience even more difficulty modifying their loans after Ally Financial’s Residential Capital filed for bankruptcy last Monday, the New York Post reported. Declaring Chapter 11 bankruptcy put an automatic freeze on the government-backed lender’s loan negotiations with consumers. Of ResCap’s 2.4 million consumer mortgages, 120,000 are in New York and those attempting to alter their loans now must do so in court. [more]

New York judges are beginning to take a stricter interpretation of the “good faith effort” banks are required to make under a 2009 state law passed to offer support to distressed homeowners, according to the New York Daily News.

The law states that banks must try to negotiate with distressed homeowners so that they can modify the loans and keep their property. But those homeowners are increasingly complaining that they can’t get modifications. Since November, 2009 judges have found at least seven cases where banks, including Wells Fargo, HSBC, Bank of America and Deutsche Bank, failed to act in good faith, and in one case the judge ordered the mortgage debt wiped out (although that was later reversed by an appeals court). [more]

So-called loan modification “specialists” are coming under fire for taking thousands of dollars from struggling borrowers in exchange for the promise of lower monthly mortgage payments and not following through. According to the Wall Street Journal, a group of pro bono foreclosure attorneys filed a lawsuit yesterday in state Supreme Court in Nassau County that named several loan modification companies operating out of Garden City, which have allegedly scammed homeowners into believing that they had better chances of getting their mortgage payments modified if they paid for the companies’ services. [more]

Borrowers participating in the Obama administration’s Home Affordable Modification Program will soon have a simpler route to mortgage loan modifications. Under new guidelines, borrowers seeking to lower their mortgage payments will be required to provide just three items to servicers: a form requesting the modification, authorization for the servicer to access tax information from the Internal Revenue Service and evidence of income, the Treasury announced yesterday. The HAMP program, launched one year ago, has been widely criticized for its low success rates in turning three-month trial modifications into permanent ones, and borrowers and servicers alike had pointed to complex documentation requirements as one of the major stumbling blocks. Roughly 900,000 borrowers had been given trial modifications by the close of 2009, but only 66,465 of those had been converted to permanent ones. Beginning June 1, servicers will also have to gather the documents prior to granting trial modifications in order to avoid beginning the process with borrowers who ultimately won’t be able to come up with the paperwork. [WSJ]

The Obama administration has no immediate plans to encourage mortgage principal reductions through its foreclosure prevention program, the Treasury Department said yesterday. The announcement comes amid mounting pressure from banking regulators and attorneys general in 14 states, who have said that with so many homeowners now underwater, reducing loan balances may be the only way to curtail the foreclosure crisis. The administration’s program, which was announced last February, aims to reduce borrowers’ loan payments but has met with criticism over still-rising delinquencies and its failure to thus far turn many temporary loan modifications into permanent ones. An administration report released last week said only 7 percent of borrowers in the program had received permanent modifications by the end of 2009, largely due to issues with paperwork. More than 70 percent of loan modifications have actually resulted in an increase in principal because of unpaid interest and fees, according to a report by state attorneys general and banking regulators. “The failure to reduce principal jeopardizes the sustainability of loan modifications,” said Mark Pearce, North Carolina’s deputy banking commissioner. [WSJ]

The latest wave of troubled American homeowners is a surge of people in
financial danger not because of reckless gambling on real estate, but
because of lost income. One homeowner approached mortgage company
Countrywide, now part of Bank of America, for a loan modification, but
the lender instead offered her a refinancing because she did not
present a big enough problem to merit aid. Although the borrower had
just lost her job, she had never missed a mortgage payment, and the
bank said it was focusing on borrowers “already in severe threat of
foreclosure.” A spokesperson for the Department of Treasury said that
these homeowners are eligible for loan modifications under the Making
Home Affordable program, and that mortgage servicers have offered to
modify more than 100,000 loans since the program was introduced. The
spokesperson did not say how many loans have been successfully
modified, noting that the Treasury was working with lenders to
“fine-tune” reporting systems. [more]