Chase is Failing to Provide New Yorkers Needed Mortgage Modifications

Chase is Failing to Provide
              New Yorkers Needed
             Mortgage Modifications
         An Analysis of Current New York and Federal Data

A report by New York Communities for Change
2-4 Nevins Street
Brooklyn, NY 11217
(347) 410-6919
info@nycommunities.org
www.nycommunities.org

Issued February 2011

Executive Summary
Using recent data collected from a variety of sources, this report shows how Chase is harming families
and communities in New York by refusing to modify the mortgages of struggling homeowners at an
alarming rate. The report examines and analyzes Chase’s performance in this area using the following
data:
       -- results compiled for Chase-serviced loans where modifications have been requested by
       borrowers (through a group of New York City loan counseling organizations).
       -- results as reported by the federal Home Affordable Modification Program (HAMP).

Affordable, permanent, transparent and timely mortgage modifications using principal reduction are
necessary to protect New York families, communities and economy. A variety of experts –from the
Chair of the FDIC to the State Foreclosure Prevention Working Group (made up of state Attorneys
General and state banking regulators) – have made this point during the last several years. As the
country’s third-largest mortgage servicer, Chase has a major responsibility to modify mortgages – a
responsibility at which they are failing.

Chase has failed to provide affordable mortgage modifications for New York City borrowers. As
reported by loan counseling operations in New York to the Center for New York City Neighborhoods,
of the 1,027 homeowners with Chase mortgages who came to get help, only 6% now have a permanent
modification. A full 80% of these homeowners who asked for a modification have not even received an
offer of a modification.

Chase has done a poor job with the HAMP program as compared with other servicers. Chase has only
converted 36% of trial HAMP modification to permanent modifications, and it rejects a
disproportionately high percentage of homeowners for the federal mortgage program. Chase actually
had fewer permanent active modifications at the end of December compared to the end of November.
Additionally, the bank begins foreclosure proceedings on a higher percentage of homeowners who either
do not qualify for HAMP or have their modifications cancelled than the other three big servicers.

Even though Chase has told its investors that it has done proprietary modifications, proprietary
modifications have been shown to perform less well than HAMP modifications. Proprietary
modifications have a higher re-default rate, less of a payment reduction, and more often do not include
the necessary principal reduction. Chase has not released data to let New Yorkers know the terms of
their propriety modifications, even though this data has been requested by researchers.

Chase must come into line with best practices. Chase must put in a place a mortgage modification
process that produces permanent, affordable, transparent, timely modifications whenever these
have a positive net present value. These modifications must include principal write-downs and
interest rate reductions for the life of the loan. Loans must be considered for modification before
foreclosure may be initiated, and any foreclosure proceeding must be frozen (including all steps of
the foreclosure process, not just sales) if there is a request for a loan modification and while loans
are being considered for modification, and during any appeal. Chase should issue a new portfolio
loan at affordable terms for any borrower where agreements with investors preclude the needed
modification. For any junior/second lien that is entirely underwater, the lien must be written off. Costs
and fees charged during the modification or foreclosure process cannot be added to the new loan.

Introduction
!
Using recent data collected from a variety of sources, this report shows how Chase is harming
families and communities in New York by refusing to modify the mortgages of struggling
homeowners at an alarming rate. The report examines and analyzes Chase’s performance in this
area using the following data:
        -- results compiled for Chase-serviced loans where modifications have been requested by
        borrowers (through a group of New York City loan counseling organizations).
        -- results as reported by the federal Home Affordable Modification Program (HAMP).

Affordable, permanent, transparent and timely mortgage modifications are important for
families, the community and the economy. In a speech in January, FDIC chair Sheila Bair urged
banks to quickly provide mortgage modifications as a means to aid the economy.

        “Bair also said lenders need to pursue more loan modifications instead of foreclosures,
        arguing it will help the economy as well as the borrower”.1

        “The fact is, every time servicers have delayed needed changes to minimize their short-
        term costs, they have seen a deepening of the crisis that has cost them–and the rest of us–
        even more,” she said. “It is time for government and industry to reach an agreement that
        will finally bring closure to the crisis.”2

Principal reduction must be a keystone of the modification process. Currently less than 5% of
mortgage modifications include principal reduction, despite the many experts who believe this is
necessary.
    ! A recent industry analysis concludes that principal reduction is “the least costly and only
       permanent solution for defaulted loans”.3
    ! Principal reduction reduces the likelihood of re-default, as shown by a 2009 study of loan
       modifications.4
    ! The State Foreclosure Prevention Working Group, made up of state Attorneys General
       and state banking regulators, said in an August 2010 report that: “The State Working
       Group believes that servicers should strategically increase their use of principal reduction
       modification to maximize prospects for success. … in fact, the vast majority of loan
       modifications actually increase the loan amount by adding servicing charges and late
       payments to the loan balance.”5

1
  http://www.reuters.com/article/idUSN1922390420110119
2
  http://blogs.wsj.com/developments/2011/01/19/fdics-bair-mortgage-industry-should-compensate-consumers/
3
  Laurie Goodman, Roger Ashworth, Brian Landy, Lidan Yand, The Housing Crisis – Seizing the Problem,
Proposing Solution, pp. 13-14 (October 1, 2010).
4
  Roberto G Quercia & Lei Ding, Loan Modifications and Redefault Risk: An Examination of Short-Term Impacts,
Cityscape: A Journal of Policy Development and Research (HUD), Vol. 11, Number 3, 171, 1712-73 (2009).
55
   “Redefault Rates Improve for Recent Loan Modifications,” State Foreclosure Prevention Working Group
Memorandum on Loan Modification Performance (August, 2010), available at
http://www.csbs.org/regulatory/Documents/SFPWG/DataReportAug2010.pdf.

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Chase has failed to provide affordable modifications
for New York City borrowers
The current data on New York homeowners who are trying to get mortgage modifications from
Chase comes from the Center for New York City Neighborhoods, Inc. (CNYCN)6. CNYCN is
playing a coordinating role for loan counseling organizations working to help prevent
foreclosures in the city. Counseling organizations report on their work with homeowners
looking to prevent foreclosures on a regular basis to CNYCN. Based on this data, for intakes
between July 1, 2008 and December 31, 2010:

Only 6% of Chase serviced borrowers who came in for help now have a
permanent loan modification (61 of 1,027 homeowners).

80% of homeowners who asked for a modification have not received even an
offer of a modification.

The particulars are as follows:

" 620 homeowners with Chase as a servicer submitted applications for a mortgage
  modification. Of these:
  # 498 households have not received a modification offer (80%). Of these (numbers total
     more than 498 due to families being counted in every category that pertains to their
     situation):
     $ 338 households whose initial request for a modification is still pending (67% of those
         who asked for a modification)
     $ 55 who were asked for additional information (11%)
     $ 73 who were told they did not qualify for a modification (15%)
     $ 32 had to resubmit their application (6%)
     $ 54 trial modifications have been offered and accepted (10%) (5 of these are reported
         to have failed)
     $ 61 permanent modifications have been offered and accepted (12%)
     $ 7 permanent modifications were rejected by the client (1.4%)

6
  CNYCN seeks to support distressed homeowners retain their equity, and preserve New York City neighborhoods
by limiting the negative impacts of foreclosure, property flipping, and abandonment. CNYCN grew out of efforts by
local leaders to create a systemic response to rapidly rising mortgage defaults and foreclosure filings, particularly in
communities hardest hit by subprime and other unconventional loan products. See www.cnycn.org

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Chase’s performance as reported by HAMP is terrible
Chase is one of the worst performers under the federal Home Affordable Modification Program
(HAMP) program as reported in the December 2010 Servicer Performance Report.7 Chase
shows poor performance in the report in the following ways:

Chase is not converting people from trial modifications to permanent modifications.

    !    Chase required families to wait the longest time in a trial modification before getting a
         permanent modification of any major servicer. Families had to wait an average of 7.8
         months.

    !    Chase has the third-highest number of active trial modifications that were initiated at
         least six months ago (3,323).

    !    Chase has only converted 36% of its eligible trial modifications to permanent
         modifications.

    !    Chase reported fewer cumulative permanent and active modifications in December
         2010 than in November 2010 (66,441 as of December 31, 2010 compared to 67,722 as of
         November 30, 2010).

Chase is pushing more people into foreclosure than the other three large servicers.8

When homeowners’ HAMP modifications are cancelled, Chase has pushed people into
foreclosure faster than other servicers. In looking at this pool of borrowers:

    !    Of the eight biggest servicers, Chase had the highest percentage of foreclosures started
         (19.3%). Chase has started more than 22,000 such foreclosures.

    !    Of the four biggest servicers, Chase had the second-highest percentage of foreclosures
         completed (6.7%). Chase has completed more than 7,600 foreclosures for families
         whose HAMP modifications were cancelled.

    !    Of the four biggest servicers, Chase completed the second-highest percentage of the
         foreclosures they started (34.5%).

Chase has also started foreclosure proceedings on homeowners when they were not accepted into
HAMP.

7
  The full report can be found at http://www.treasury.gov/initiatives/financial-stability/results/MHA-
Reports/Documents/Dec%202010%20MHA%20Report%20Final.pdf
8
  The other three large services are Bank of American, CitiBank and Wells Fargo.

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!   For families not accepted into HAMP, Chase started foreclosures on 10.7% of
            households and so far has completed 25.2% of those foreclosures.

Chase rejects the largest number of families for the HAMP program.

Of the eight major servicers where homeowners were not accepted for a HAMP trial
modification:

        !   Chase rejected the highest number of families for HAMP (334,462) even though
            Chase is not the largest servicer.

        !   Of those not accepted, Chase has the highest number of families where the servicer
            has taken no action (58,015). These families constitute 35% of all families in this
            category.

Chase’s servicing has generated high levels of complaints and required reviews.

    !   Of the eight major servicers studied in Treasury's second look program, Treasury
        determined that Chase had the second-highest rate of disagreements on whether the
        homeowner got the appropriate outcome.

    !   Chase had the second-highest rate of complaints on the Hope Hotline.

    !   Chase had an above-average rate of callers abandoning their calls to the Hope Hotline.

    !   Chase took the second-longest amount time to resolve third-party escalations (about
        45 days).

Chase’s propriety modifications are likely not helping
homeowners.
In Chase’s report to investors on their financial results for the fourth quarter of 20109, the bank
says that it has completed 285,000 mortgage modifications. Since only 66,441 of these were
reported to the federal HAMP program, more than 218,000 of these modifications are so-called
proprietary modifications. Public data about proprietary mortgage modification comes from an
aggregate report of the eight largest national banks (which includes Chase) and the largest thrift
(published quarterly by the joint efforts of the Office of the Comptroller of Currency and the
Office of Thrift Supervision).10

9
  The presentation can be found at http://files.shareholder.com/downloads/ONE/1105224763x0x435207/37df9ee9-
950d-43cf-a1d3-a0011a6911e8/4Q10_Earnings_Presentation_Final.pdf
10
   There is no public data source the separates out Chase’s proprietary mortgage modifications.

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The most recent OCC and OTS Mortgage Metrics Report covered the third quarter of 201011.
The report shows the poor performance of proprietary loan modifications:

     !   HAMP modifications reduced homeowners’ payments by a greater amount than
         proprietary modifications. “HAMP modifications made during the quarter reduced
         payments by an average of $585, compared with other modifications that reduced
         average monthly payments by $332.” 12

     !   “HAMP modifications performed better than other modifications implemented
         during the same periods at the end of the third quarter of 2010. At 6 months after
         modification, the re-default rate for HAMP modifications, measured as 60 or more days
         delinquent at 6 months after the modification, was about half that of other modifications
         for loans modified during the fourth quarter 2009 and first quarter 2010 (see table 32).
         These lower post-modification delinquency rates reflect HAMP’s emphasis on the
         affordability of monthly payments relative to borrower income, verification of income,
         and completion of a successful trial payment period.”13

     !   HAMP modification used principal reduction more than twice as often as in
         modifications as a whole. The report states that “…principal reduction was used in 4.5
         percent of modifications made in the quarter…”14 The report then goes on to state that
         “the use of principal reduction increased to 10.2 percent of all HAMP modifications
         implemented during the quarter…”15 Therefore fewer than 4.5% of proprietary
         modification included principal reduction.

     !   Only 83 mortgages in New York State have included principal reduction.

     !   In mortgages where a combination of strategies are used in the modification (such as
         interest rate reduction plus capitalization of arrearages), in New York only 0.8% of
         mortgage modifications included principal reduction, compared to 4.3% of mortgage
         modifications nationally.16

NYCC believes that, given its large market share, Chase’s reliance on proprietary modifications
is hurting New York homeowners. In addition, principal reduction is a tool that is not being used
in New York to help families keep their homes, and this must change.

11
   The full report can be found at http://www.ots.treas.gov/_files/490058.pdf.
12
   OCC and OTS Mortgage Metrics Report, 3rd quarter 2010, page 5.
13
   Ibid, page 7.
14
   Ibid, page 24.
15
   Ibid, page 25.
16
   Ibid, page 57.

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Recommendations
In order to protect the residents, communities and governments of New York, Chase
should:
1) Stop all filed and unfiled foreclosure actions until a mutually acceptable, timely, and
   transparent mortgage modification process is in place and an independent appeals process is
   in place as defined below.
2) Put in a place a mortgage modification process which produces permanent, affordable,
   transparent, timely modifications whenever these have a positive net present value.
   These modifications must include principal write-downs and interest rate reductions for
   the life of the loan. Loans must be considered for modification before foreclosure may
   be initiated, and any foreclosure proceeding must be frozen (including all steps of the
   foreclosure process, not just sales) if there is a request for a loan modification and while
   loans are being considered for modification, and during any appeal. Chase should issue
   a new portfolio loan at affordable terms for any borrower where agreements with investors
   preclude the needed modification. For any junior/second lien that is entirely underwater, the
   lien must be written off. Costs and fees charged during the modification or foreclosure
   process cannot be added to the new loan.
3) Pay for an independent reviewer and pay for borrower representation for an independent
   appeal process for all mortgage modification requests that are denied by the bank, for those
   modification proposals where the borrower believes the new terms to be unaffordable, and
   for completed foreclosures where the property has not yet been sold by the bank.
4) Pay restitution to homeowners who lost their properties unfairly – that is when a
   modification under the above terms would have been possible. If Chase is still in
   possession of the home, Chase must return the home to the homeowner if a mortgage
   modification is possible under the terms above.
5) Release data about Chase’s proprietary and HAMP mortgage modifications to the City
   Comptroller and the State Banking Commissioner. The data to be provided must include the
   amount and percentage change in interest rate and principal, the length of the interest rate
   reduction, the front and back end loan to value ratios, the standard variables used in the net
   present value tests, reasons why people were rejected from getting HAMP and/or propriety
   modifications, and re-default rates with this information coded by race and zip code.

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