Eye on the Bailout

On the Saturday before Thanksgiving, Lesa Herron of Santa Rosa, Calif., opened a letter from Chase Home Finance (PDF). She’d been denied a permanent modification under the federal government’s loan-mod program, Chase said, because “Your hardship is not of a permanent nature.” No other reason was given.

For Herron, that was hard to understand. She was working two jobs and her mortgage payment still amounted to more than half of her income. She’d fallen two payments behind. If her money troubles were only temporary, it was news to her.

We at ProPublica reported last month that mortgage servicers are often not following the Treasury Department’s rules for the program and provided three examples. One involved another homeowner who, like Herron, had been denied a modification because his hardship was not “permanent.”

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The Treasury unveiled (PDF) new data last Friday showing the progress of its major foreclosure prevention program. Treasury officials touted the new data as evidence that pressure on mortgage servicers to improve performance was working, but the numbers continue to show real problems. And though there is a wide disparity in performance among the participating servicers, the four largest all continue to lag.

First, a look at the overall numbers: 66,465 homeowners had received permanent modifications as of Dec. 31. That’s up from 31,382 reported last month. On a conference call with reporters Friday, Treasury official Phyllis Caldwell called that a “significant acceleration of the rate at which borrowers are being approved.” That may be, but it’s still well below where it should be if the program were working properly.

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Nathan Reynolds is something of an expert on the government’s foreclosure prevention program. A mortgage broker who’s worked in the Chicago area since 1998, he’s seen both his business and his home’s value plummet in the past few years. After receiving his own trial loan modification from JPMorgan Chase, he’s helped others apply for modifications through the program on his own time.

But in November, after Reynolds had made trial loan payments for seven months, Chase told him his mortgage would not be permanently modified. Chase had determined that his personal financial troubles were only temporary — because Reynolds had expressed optimism that the administration’s policies might rescue the housing market, boosting his income.

That’s not a legitimate reason for a loan servicer to deny someone’s modification, according to the Treasury Department’s guidelines for the program. And Reynolds’ experience — along with the cases of two other homeowners examined by ProPublica, shows how servicers have created unnecessary hurdles that, in some instances, violate the loan program’s rules.

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The year ended with three of the biggest bailout recipients – Bank of America, Wells Fargo and Citigroup – together returning more than $90 billion to the Treasury Department. But it also ended with a Christmas Eve announcement from the Treasury that it could spend a virtually unlimited amount of money bailing out Fannie Mae and Freddie Mac. So while the Treasury is winding down its programs to support the nation’s banks, it will continue to spend big to prop up the housing market.

As of the end of December, the bailout total outstanding fell to $337.5 billion, a decrease of $84 billion since our last monthly update. We continue to track the totals on our frequently updated bailout database*, which tracks both the TARP and the bailout of Fannie Mae and Freddie Mac.

Meanwhile, the losses booked from the bailouts did not grow in December, staying around $9 billion. Treasury did, however, release its updated estimate for ultimate losses from the TARP: $61.1 billion. We’ll continue to track the losses as they’re realized.

And revenue continued to grow, reaching $20.6 billion. More about that below.

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Since last spring, when President Barack Obama announced his administration’s plan to prevent foreclosures, there’s been a crush of homeowners seeking help from mortgage servicers. Confusion and delays have plagued the entire program, but the problems have been particularly acute for homeowners seeking a modification before they begin falling behind on their mortgage payments.

Some homeowners, like Regan Sciesinski of Florida, have been waiting as long as nine months with no relief. The Sciesinskis seem to be a prime candidate for a modification through the program. His wife, Stacy, was found to have breast cancer in late 2007, and in the past year, a combination of medical costs and reduced income have made their mortgage payments unaffordable for the couple, who have three children. Their home, in a suburb of Tampa, has also dropped about 25 percent in value since they bought it in 2006. Like millions of other homeowners, they’re underwater, stuck with mortgages worth more than the property.

Sciesinski says he first submitted his information to his servicer, Chase Home Finance, in March. He’s still waiting. Sciesinski says he and his wife have drained their retirement savings and accepted help from other family members to stay current. “We take our obligation seriously,” he says, but now they’re facing default and need the modification “because having to move would completely devastate us.”

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It was another busy Friday for regulators, as they closed seven banks, bringing this year’s total to 140. As always, we’ve updated our complete list of failed banks.

The failures figure to continue in 2010. FDIC Chair Sheila Bair said last month failures will “peak” next year. The FDIC’s recently announced budget for 2010 reflects that: In order the handle bank closings, the agency plans to add 1,600 temporary employees to its staff of about seven thousand. The FDIC said last month that its list of “problem” banks has risen to 552.

All told, Friday’s failures cost the FDIC about $1.8 billion. The agency earlier this year dealt with its deficit by arranging for insured banks to prepay three years of assessments in advance, which is expected to raise $45 billion.

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Three more banks failed on Friday, bringing the year’s total to 133. The FDIC estimates Friday’s failures will cost its insurance fund a combined $252.1 million. While the failures represent another hit to the FDIC’s depleted fund, they are a boon to three companies that acquired the assets and deposits of the closed institutions.

The first to go for the day was Republic Federal Bank of Miami, Florida. The bank had total assets of approximately $433 million and deposits of approximately $352.7 million. 1st United Bank of Boca Raton assumed all the deposits of the failed bank, paying the FDIC a premium of 1.2 percent for them. It also purchased $267.1 million of the failed bank’s assets including loans, cash and marketable investment securities.

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This week, the administration has been trumpeting the news that the $700 billion TARP is likely to ultimately cost much less than early estimates. That’s true, but far from the whole story.

The government’s best estimate, released Wednesday, is that the bailouts of AIG and the auto companies will ultimately cost taxpayers about $61 billion. It also forecast that other parts of the TARP will end up making taxpayers money. Put it all together, and the final estimated loss from the bailout’s first full year (thru September 2009) is about $41.6 billion.

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