President Obama's mortgage modification program has reached out to distressed homeowners, but it's left many of them with nothing but broken promises.

The Home Affordable Modification Program (HAMP) debuted in 2009 in response to a historic real estate and foreclosure crisis in the U.S. As a result, mortgage servicers were essentially required to consider mortgage loan modifications for certain qualified borrowers. Because the number of modification requests has been overwhelming, servicers typically grant a temporary modification first, and then review the homeowner's application second. A temporary modification becomes permanent once the servicer evaluates the homeowner's situation and approves the request.

Class action lawsuits pending

The ugly truth of HAMP, however, is that a large percentage of these temporary modifications have failed to receive "permanent" status. Sometimes, modifications are cancelled because homeowners can't make the payments. Sometimes, homeowners remain in compliance with the modified terms, but the permanent modification is denied anyway. In either case, the homeowners are liable for past-due amounts and late fees-as if they'd never been offered a temporary adjustment at all.

Even uglier, homeowners are accusing servicers of denying modifications intentionally, because a denial favors the servicer by putting the homeowner deeper into default. As a result of these accusations, attorneys are organizing homeowners into class-action lawsuits against several national mortgage servicers, including Bank of America, JPMorgan Chase, and Wells Fargo.

Unfortunately, the HAMP lawsuits aren't going to help much if you're already in trouble. Attorneys on both sides have to sort out and argue the nature of the servicer's responsibilities under the program. That process takes time, and you don't have time to waste. If you fear your temporary mortgage modification will be cancelled, evaluate your situation now.

Dire consequences

You'll likely face immediate consequences if a servicer cancels your modification. First, the servicer will begin to enforce past-due amounts, late fees, and other charges. Next, your credit score will take a hit when the loan status is reported to the credit bureaus. Lastly, the servicer may begin foreclosure.

Proactive planning

As a first step, set aside your emotions and objectively evaluate the affordability of your mortgage. If it's too costly, even under a modified scenario, accept that an ownership change is in order. Consider selling, finding an equity investor, negotiating a short sale, or accepting a deed-in-lieu of foreclosure. If you're underwater on the mortgage, consider borrowing money from family so you can sell the home and pay off the loan.

If you choose to stay in the home, you'll face an uphill battle. Develop plans to supplement your income and bolster your savings by getting a second job, starting a weekend business, or renting out a room. Set aside any cash windfalls, such as bonuses, to pay down the mortgage.

Should you receive a denial, call your servicer immediately. Inquire about other programs available, such as repayment plans and temporary payment reductions.

You'll need to make some tough decisions. But broken promises don't necessarily mean broken dreams. Wherever you land is as good a place as any to start over.

Published on September 27, 2010