Mortgage modifications come up short

WASHINGTON — Jose Palomo was surprised when the knock on the door came in August, informing him that his California home had been foreclosed and he'd need to vacate promptly. After all, he'd recently started payments on an in-house mortgage modification with CitiMortgage Inc.

"I was speechless, didn't know what to say. What's going on? Why? They got our hopes high saying we got approved; everything was going to go through," recalled Palomo, 23, a car salesman fighting to keep his small home in Riverside.

Palomo's plight illustrates why housing remains such a drag against U.S. economic recovery. He's fighting to keep a 738-square-foot home that today is worth less than $85,000. He was given a mortgage modification where he'll owe about twice that amount — illustrating how such modifications often fail to solve the problem they're designed to fix.

Simply put, mortgage modifications aren't cleaning up the housing-finance mess.

And to top it off, even as he began making payments on his still too-high mortgage, Palomo still faced losing his home — underscoring lenders' relentless pursuit of foreclosure proceedings four years after the housing-market bust.

Today there are at least 4.2 million homeowners who, like Palomo, are late on their mortgage payments or somewhere in the delinquency and foreclosure process. The first wave of foreclosures came during the 2008 financial crisis as subprime mortgages given to weak borrowers imploded. Now the subsequent economic downturn and high unemployment keep housing depressed.

Those conditions are even more pronounced in the Northern San Joaquin Valley, which saw housing prices tumble when the bubble burst nearly six years ago. As prices took a nosedive, homeowners found themselves with properties they owed far more on than they were worth — putting them underwater or upside down.

With so many homeowners in that predicament, their only way out was to sell, but the market was flooded with properties and prices were slashed in an effort to move them.

Homeowners with subprime loans, a popular financing tool in the valley, found it tough to keep up with rising payments and couldn't refinance to fixed-rate mortgages because falling prices wiped out any equity they had. The valley quickly became one of the worst region's in the nation based on the number of foreclosures.

Today, the housing prices remain depressed, foreclosures continue and new construction is very limited. The staggering job losses caused by the housing market decline and tough recession, continue to plague the region with about 16 percent unemployment in August — the worst the valley has seen in more than a decade.

'Still woefully inadequate'

The administrations of George W. Bush and Barack Obama both offered incentives for lenders to help homeowners modify their mortgages. Those efforts haven't achieved much.

And four years into the housing crisis, banks and their bill collectors, known as mortgage servicers, are still under fire for their response to troubled borrowers.

"I would say they are somewhat better than they were three years ago, but still woefully inadequate to meet the demand, given the still remarkably high levels of distressed borrowers they are attempting to deal with," said Paul Leonard, director of the California office of the Center for Responsible Lending, a Durham, N.C.-based advocacy group.

From December 2009 through June, more than 1.6 million government-backed mortgage modifications had been started, but only 791,000 became permanent. These numbers remain well below the goal of 4 million modifications that the Obama administration set for itself.