The house (controlled by Republicans) made a basically symbolic vote yesterday to repeal the Obama administration’s Home Affordable Modification Program (HAMP), but a number of Democrats also voted with the Republicans. Why? The loan mod program isn’t working.

Set up to use TARP funds at the height of the housing/financial crisis, the intent was to help 3 – 4,000,000 troubled homeowners modify their loans so they could stay in their homes. But as you read my previous post (“Loan mods and drama in BK court this morning”) loan mods have been virtually impossible to navigate.

With the Dems in control of the Senate and Obama certainly not willing to kill his own program, I don’t see much chance of HAMP being killed off. Rather, what I see is renewed pressure from the fed on the servicers to get their act together. That pressure is literally on today as the fed and the 50 states’ attorneys general meet with representatives of the 5 largest banks to start on negotiations to mitigate loan mods, short sales and foreclosure processes.

I saw first hand the failure of the loan mod “game” and its consequences played out in bankruptcy court this morning.

Two separate cases. Two separate homeowners pleading their story before the judge. One party has lived in her home 37 years. The other party is retired. Notwithstanding the factors or judgment (good or bad) that got them to this point in the first place (used their home as an ATM machine?), both cases revolved around huge frustrations both parties had trying to pursue a loan mod.

In the first case, the lender’s attorney was trying to get a Relief From Stay motion against the retired couple which would allow the lender to foreclosure on their home. Standing at the podium next to her was the couple. The husband was highly frustrated, trying to explain to the judge a litany of issues they’d encountered in dealing with their lender. The judge was patient and understanding, but ultimately said her experience on the court was that the bank’s left hand didn’t know what the right hand was doing.

She then made I thought a great decision. She made the attorney standing there personally responsible for handling this couple’s issues with the bank. The couple was told to send 2 month’s payments by the end of this week to the bank’s attorney, told the attorney to give them her business card, and basically told the couple this attorney was now the official representative of the bank. Great!

The other case was sad. The woman was sobbing at the podium. The judge had the bailiff give her a box of tissues, but ultimately, I believe she will lose her home. But she had the same horrible experience of attempting to get a loan mod. Her frustration was heart wrenching, but there was little the judge could do but explain her time line of how her case would play out in the next couple of months.

These 2 cases underlined for me on a micro scale what’s happening today on the macro scale in Washington as theses issues are being hashed out – first, the meeting between the 5 largest banks (the “servicers”) and the fed plus the 50 states’ attorneys general on the whole foreclosure, loan mod situation; two – the House voting yesterday to repeal the HAMP program because it’s not working; and three – the FDIC ruling that future loans banks sell into the secondary market (without the banks keeping some “skin in the game”) must have 20% or greater down payments.

Not much comfort for the 2 parties I saw this morning in bankruptcy court.

Should principal balances on mortgages be reduced for homeowners who can’t (or won’t) make their payments?

That’s a big question facing the 5 largest servicers (read BofA, Wells Fargo, Chase, Citi and Ally Financial) on Wednesday. As part of the effort to clean up the robo-signing mess in states that have judicial foreclosures, the attorneys general of the 50 states plus the fed issued a 27 page “Settlement Terms” document that is intended to provide more safeguards of procedural rights for the foreclosure process.

But a part of this document (see paragraph VI – Monetary Relief) has a single paragraph that states “a substantial portion of monetary relief shall be dedicated by Servicer to support an enhanced program of sustainable loan modifications including principal reductions.”

This concept is causing a raging philosophical debate. Is it fair or right for a homeowner to have his debt reduced while his underwater neighbor is still making payments on his negative equity? Let’s see what Wednesday brings…

Foreclosure activity for January was showing a downward trend. Check out the continuing declining trend of  foreclosures for February on this 12 month graph.

The quarterly trends will be updated after the end of first quarter ending in March.

The California Association of Realtors published a full page “open letter” in 7 major California newspapers today (including the LA Times) for the purpose of raising awareness of multiple issues facing the foreclosure crisis and efforts to mitigate that crisis – specifically focusing on short sales and their role in today’s foreclosure crisis.

Efforts to do loan modifications under the federal HAMP program have failed to stem the crisis, forcing homeowners to attempt short sales. However, lack of standardized procedures, incredible bureaucracy hurdles within the large banks, loan servicers unable to handle the work loads and a host of other issues have made short sales a nightmare for homeowners, buyers and agents alike. The open letter stated that “only three out of five transactions closed – even when there was an interested and qualified buyer”. Now you know why Realtors hate short sales!

A solution to this mess is the little known HAFA (Home Affordable Foreclosure Alternatives) short sale program instituted last summer by the US Treasury Department. HAFA is a pre-approved short sale process that was designed to eliminate many of the traditional issues of the short sale process plus provide a $3,000 relocation allowance at close of escrow for the homeowner among other things.

In December, the California Association of Realtors sent a letter to the Treasury Department, Fannie Mae, Freddie Mac and the Federal Housing Finance Agency encouraging these agencies to implement changes to the HAFA program to make it a more workable solution for short sales.

Today’s open letter was designed to make these regulators, elected officials and other stakeholders aware that all of us “with a stake in California’s economic future (must) resolve this issue …Our families and our communities can’t wait any longer”.