Of all the possible reasons why the government's loan modification program has been a dud, at least one has received scant attention: When borrowers are denied a loan mod and call a hotline to have their case reviewed, they are handed off to a nonprofit group created by a large mortgage servicer and largely funded by the industry.
The nonprofit Homeownership Preservation Foundation got its start as an in-house arm of the mortgage lender Residential Capital LLC, a unit of Ally Financial Inc., the former GMAC Inc. The foundation's board is dominated by GMAC and other finance officials; its chairman is the former CEO of GMAC's ResCap unit.
No one involved even bothers to dispute the conflict of interest, one of many that have plagued the Treasury Department's Home Affordable Modification Program, or Hamp.
"Because we're supported by the industry, are we really working for the homeowner?" asked Bruce Paradis, the foundation's chairman, who retired as CEO of ResCap in 2007. "Maintaining this neutral ground is hard to do, but we work very hard to keep our advice neutral."
Ask Treasury officials why they decided to send at-risk borrowers to a group created by a major servicer, and their explanation is more pragmatic. The foundation had already created the 888-995-HELP toll-free hotline, and the Treasury did not want to have to reinvent the wheel.
"We didn't want to confuse borrowers further," said Cindy Gertz, the director of operations in the Treasury's homeownership preservation office (it even cribbed from the foundation's name). "We were leveraging the infrastructure and brand that already existed."
The Treasury awarded a large contract to the foundation in 2007 to connect borrowers with neutral, third-party housing counselors. The group has trained 200 counselors specifically to deal with complaints from borrowers who have been denied modifications. The foundation's 888-number is now listed on every denial notice sent to borrowers turned down for Hamp.
So far, 150,000 borrowers, or nearly 10% of those who have contacted the hotline, have called with questions about denials, said Treasury spokeswoman Andrea Risotto. Of the 1.8 million callers in all, 170,000 have received free counseling, she said. The group does not track the outcome of its calls, so there is no way to know whether borrowers were inappropriately denied a modification or how many disputes with servicers were ultimately resolved in favor of the borrower.
Some industry experts said they had never heard of the foundation. They questioned how its success could be measured if there is no tracking mechanism for borrower outcomes.
"Even if 5% of borrowers denied mods are calling requesting an explanation, that's not a good success rate," said Greg Hebner, the president of MOS Group Inc., a mortgage-loss-mitigation company in Irvine, Calif. "If an automaker has 5% of its cars go bad, that would be a recall. It calls into question whether this group is meeting its objectives and what its success has been."
Hebner said the inherent complexities of the Hamp program make it hard to determine whether nonprofit housing counselors are helping or hurting borrowers. In some instances, borrowers are misinformed, which may lead to bad decisions, he said.
Some industry experts have questioned why a nonprofit affiliated with servicers is receiving government funding to resolve disputes between borrowers and the same servicers who are denying modifications. Several distressed homeowners who contacted American Banker said servicers refuse to give explanations for denied mods. Many were put into trial mods at a reduced payment but were later denied and are now in worse shape because servicers demand that any arrearages be paid in full for the loan to become current.
Steven Gillan, the executive director of the American Alliance of Home Modification Professionals, an Astoria, N.Y., company that helps servicers with the government's loan modification program, said one reason Hamp has been unsuccessful is a lack of oversight.
"How can Hamp succeed if the work being done by the servicer goes unchecked and there is no third-party review?" Gillan asked. "You have to make sure the servicers are doing what they're supposed to be doing."
Last month, the Treasury issued new guidance for resolving borrower inquiries and disputes, known as "escalations." Servicers are required to have at least one employee who can be reached by phone and e-mail to manage such disputes. Servicers also must acknowledge in writing within five business days that they have received a borrower dispute.
Paradis, the foundation's chairman, said he came up with the idea of creating a special group to reach troubled homeowners because the default rates of ResCap's subprime borrowers were going through the roof. But borrowers in financial distress were reluctant to talk directly to their servicer, who typically demanded immediate payment.
So the in-house ResCap group switched to nonprofit status in 2003 and began working with housing agencies, offering servicers what was then a new approach to reaching borrowers in default.
"The whole idea was to set up a system where people could talk to an independent, empathetic person, but it couldn't be a lender, even if it was funded by a lender," Paradis said. "We work closely with the industry because we think that will create the best outcome."
Ken Wade, the CEO of Neighborworks America, a national housing group, said that, despite the foundation's origins, borrowers are more likely to get better modifications by working with a housing counselor. The counselors help write hardship letters, verify borrowers' incomes, prepare budgets and collect documents that are forwarded to servicers.
"What the counselors do for consumers may be at cross-purposes with what a servicer might want," Wade said.