Although President Barack Obama has recently made changes to a program designed to help Americans refinance their "underwater" homes, people who have been advised by banks to become delinquent on their loans may not qualify for the new benefits.
Full details of the revised Home Affordable Refinance Program won't be released to mortgage lenders and servicers until Nov. 15, but what is known is that homeowners who owe more on their loans than their houses are worth must be current on their mortgage payments.
That requirement will lock out people who say they relied on bank representatives' advice to fall behind on payments to qualify for refinancing or modification of an underwater loan.
Nationwide, an average of 12.54 percent of loans are delinquent.
Since the burst of the subprime housing bubble, many people are going through the same thing as Carole Atkinson of Ventura, Calif., who was told she had to be delinquent to get a loan modification.
It took two years, but Atkinson and her husband secured a home loan modification from Bank of America in 2009 after a bank employee recommended they withhold three payments, she said.
"They said, 'I can't officially tell you this, but they're not looking at people who are paying their loans,' " Atkinson said. "I had never missed a payment, ever. Can you imagine?"
The Atkinsons went against their gut feeling, skipped some payments and were penalized $20,000.
"That was the hardest thing for me," she said.
Bank of America spokesman Rick Simon said that, in general, mortgage investors require that a mortgage be delinquent to demonstrate the borrower's need for a modification and the increased likelihood the loan may reach foreclosure. The bank's representatives may confirm the required investor guidelines on delinquency, he said.
"However, they do not advise customers to skip payments," he said. "That would be the borrower's decision based on the information provided about the investor's guidelines and policies, their own situation and their consideration of consequences such as the potential damage to their credit rating."
Bankruptcy lawyer Louis Esbin has heard repeated stories of banks nudging people to get behind on their payments. He advises his clients to open up an account at a bank other than the one that holds their mortgage and deposit any withheld mortgage payments there to show good faith.
That way, he said, if litigation occurs, borrowers can show they took precautions when urged to withhold payments because they feared breaching their contract.
"Because what the banks have asked them to do basically is breach their contract," he said. "It's tantamount to fraud to tell someone, 'If you breach your contract we'll consider you for a loan modification.' It's absurd."
Due to the pervasiveness of delinquency, the Obama program's no-delinquents qualifier will preclude many people from eligibility, Esbin said.
Obama announced the revisions to the program last month. The 2 1/2-year-old program is designed to help people who have been unable to refinance and obtain lower interest rates because their homes have decreased in value. As of the end of August, 894,000 borrowers had refinanced through the program.
Under the new program eligibility requirements, borrowers must have a mortgage owned or guaranteed by Freddie Mac or Fannie Mae, and the loan must have been sold to one of those agencies before May 31, 2009. The borrower's home also must have a current loan-to-value ratio of more than 80 percent. That means the homeowner would have less than 20 percent equity in the property, making refinancing through traditional means difficult.
Changes to the program also will remove a 125 percent loan-to-value cap, allowing borrowers to refinance regardless of how underwater they are.
People are expected to be able to apply for the program as soon as Dec. 1, depending on the lender's ability to get the expanded program into its systems.