By Robert Lewis
Published: Monday, Jan. 17, 2011 – 12:04 am

For nearly five years, from 2000 to 2005, Vera Jackson drove every workday from her home on a well-manicured Elk Grove street to the hair salon she owned and operated in Sunnyvale.

It was a price she thought worth paying to own her own home, an unattainable goal in the pricey Bay Area. On the commute, she often brought along her father, who suffered from Alzheimer’s and needed looking after. The pair slept at a motel in Sunnyvale when she was too tired to drive.

“I wanted the American dream,” Jackson said.

Now, 10 years after moving to Elk Grove, Jackson is like millions of other Americans buried by the subprime mortgage crisis and ensuing recession: She’s fighting to keep her home.

For months, Jackson has struggled to get her mortgage servicer, Bank of America, to modify the terms of her loan.

Interviews with Jackson and other homeowners illustrate how hard it remains for many people to get their loans permanently modified and avoid foreclosure, despite a variety of federal and state programs set up to help.

Lenders are reluctant to reduce the principal amount owed on loans – often the only thing that would allow people who have lost their jobs to keep their homes. In addition, many trial loan modifications never become permanent. Paperwork gets inexplicably lost.

A federal government-backed loan modification program, which offers the best terms for homeowners, has fallen short of its goals. A large percentage of homeowners receiving modifications from their loan services that aren’t backed by the government are falling back into trouble.

Adding to these impediments, some people who took out ill-advised mortgages now are making desperate financial decisions that only make things worse.

Jackson, for instance, has put her few remaining dollars into the sort of companies state attorneys general have been warning debt-ridden Americans to avoid.

She hired a debt settlement company named in a 2009 New York attorney general’s investigation to help her out from under the crushing weight of credit card debt. More recently, she hired a Southern California lawyer to help get her loan modified. The lawyer charged $500 to review her case and will bill nearly $2,000 more to file loan modification paperwork that nonprofit housing counselors file for free.

In a recent interview at her home – stacks of paperwork on her table – Jackson, 66, said she realizes she might be in trouble. But she’s desperate.

“I can barely make it now. You can’t get blood from a turnip, and I don’t want to hold up a bank.”

5.1 million in default

Loan servicers say they’ve worked hard to help their customers. Hope Now – an alliance of mortgage companies, investors and counselors – touts the fact that in 2010, loan modifications outpaced foreclosures.

Nearly 1.65 million loans were permanently modified nationwide from January through November 2010, compared with nearly 1 million foreclosure sales, according to Hope Now data released earlier this month.

But the scope of the problem remains enormous. About 5.1 million homeowners nationwide were behind at least 60 days on their mortgage payments as of Oct. 31, according to the U.S. Treasury Department.

New figures RealtyTrac released last week show 2010 was a record year for foreclosure activity, and the Irvine-based researcher projects 2011 will be even worse.

Loan modifications “still take a long time. They’re still not happening at the level they probably should,” said Pam Canada, chief executive officer of NeighborWorks Sacramento, a nonprofit group that counsels homeowners facing foreclosure.

The federal government’s main effort to address the situation, the Home Affordable Modification Program, or HAMP, has fallen short of its goal to help 3 million to 4 million homeowners by 2012, lowering their monthly housing payments to 31 percent of their gross monthly income.

Launched in early 2009, the program is on track to prevent 700,000 to 800,000 foreclosures, according to a federal report released last month.

The report laid much of the blame on a complicated multi-party system in which servicers sometimes have financial incentives to foreclose on homes and where other parties – such as secondary lenders or investors – can block modifications.

Rather than using the government-sponsored HAMP program, loan servicers are mostly steering borrowers into private modifications. From January through November 2010, about 70 percent of modifications were granted this way.

Such modifications are generally more expensive for borrowers. And federal figures show that homeowners in such arrangements are twice as likely to default as those in the government program.

Faith Schwartz, executive director of Hope Now, cautioned against reading too much into such statistics. Non-HAMP loan modifications have improved significantly over time, she said.

Borrower, beware

Even when homeowners get a trial modification through the HAMP program, more than likely it won’t be made permanent.

More than half of all trial HAMP modifications have ended without a homeowner receiving a permanent modification, according to Treasury Department data. And in more than three-quarters of cases, it wasn’t because they had missed a trial payment.

Robert Robinson of San Ramon said he never missed a payment in his trial modification from JPMorgan Chase – a deal that cut his payments in half, to $1,600.

Still, after three months, the bank told him he did not qualify for a permanent modification. On top of that, it said he owed thousands of dollars – the difference between the discounted monthly payment and what he would have paid without the trial modification. The lender also informed him that the discounted payments would be counted as delinquent, ruining his credit, he said.

“I was getting calls from my wife in tears saying ‘We’re going to lose our house,’ ” Robinson said. “I said ‘We can’t, we’ve been doing everything they said.’ ”

A Chase spokeswoman said the bank is reviewing Robinson’s case to see what options are available.

Among the reasons servicers deny permanent modifications: Applications are deemed incomplete; borrowers don’t have enough debt to meet the program criteria; they fail the complex “Net Present Value” test. That test is essentially a formula that measures whether it’s cheaper for a mortgage company to foreclose than to modify a loan. If foreclosure makes more financial sense, the servicer can deny a modification.

As of June, federal regulators changed the rules to screen out more ineligible borrowers before they get into a trial modification.

A matter of principal

Some homeowners who have seen their incomes decline can’t afford a loan modification without having the amount they owe reduced, something banks have been reluctant to do.

Richard and Madelyne Moreno had hoped to persuade Bank of America to lower the balance on the $400,000, fixed-rate loan for the Rio Linda house they bought in February 2008. But after nearly a year of trying for a loan modification, they’re pursuing a short sale to avoid a foreclosure.

When they bought the house, the couple made more than $250,000 a year with their construction company. Work has all but dried up, and Richard has health problems. In 2010, Madelyne brought in about $47,000 – not enough to pay the mortgage.

Madelyne said she filled out numerous forms for BofA, mailed in records and was frustrated when low-level bank workers would tell her something was missing.

“I can’t even tell you how many times I sent the same things over and over,” she said.

After months of waiting, the Morenos learned last week that they don’t qualify for a HAMP modification; the bank scheduled a foreclosure sale for early February.

Bank of America did not return calls for comment.

But, as the new year begins, there are glimmers of hope for struggling borrowers.

In March 2010, the state announced it would start a program, supported with $2 billion in federal funds, to reduce loan balances and help unemployed people make their payments. The program’s first phase started last week. It’s unclear how many lenders will participate.

Paul Leonard, California director of the Center for Responsible Lending, said people are paying close attention to the investigation by state attorneys general into the mortgage servicing industry. Leonard said there’s hope the scrutiny will force servicers to beef up their loan modification programs.

Last month, Wells Fargo announced an agreement with the California attorney general’s office that calls for the bank to make billions of dollars worth of modifications statewide.

“It’s not too late,” Leonard said. “There are still a lot of foreclosures ahead of us.”