The Obama administration is billing today's $25 billion agreement between most states and five banks that engaged in flawed or deceptive practices as a big win for struggling homeowners.

Most of the money in the settlement isn't a penalty, or a fine levied on the banks. Instead, the biggest slice of the settlement will be money banks put toward principal reduction -- reducing the amount owed by struggling or underwater borrowers. (Banks will also put smaller amounts toward refinancing and other ways of helping people get back in control of spiraling debt.)

Getting a break on their mortgages could help the millions of homeowners who owe more on their home than it is worth. But many of them won't qualify -- thanks to government-owned Fannie Mae and Freddie Mac.

The two mortgage companies, who were bailed out by the government in 2008, were described by former Obama economic advisor Jared Bernstein as "the boulder" in the way of principal reduction. Their federal regulator, the Federal Housing Finance Agency, is tasked with maximizing profits from the companies -- and thus minimizing taxpayer losses. The head of the agency, Edward DeMarco, argues that allowing principal reductions would result in a big loss for Fannie and Freddie and ultimately taxpayers.

The two companies aren't directly part of the settlement. They don't service mortgages, or deal directly with borrowers. But Fannie and Freddie do guarantee or own roughly half of the mortgages in the U.S. They also hold more than 3 million of the nation's nearly 11 million underwater mortgages. Since Fannie and Freddie are backing the loans -- and are the ones who will take a loss if the mortgage isn't paid back in full -- they often have a veto on whether homeowners get a break.

Even if Bank of America, for example, services your mortgage, you would not be eligible for principal reduction if Freddie or Fannie back it.

Principal reduction is being pushed heavily by the Obama administration as a way to lower the rate of foreclosures. The administration recently tried to encourage Fannie and Freddie by offering to triple incentives for principal reduction. So far, the companies and their federal overseer, DeMarco, have declined to do so. An FHFA spokesperson said that the agency is "not a party to the agreement. We await a copy of the agreement to determine its implications."

Lowering the amount of money owed on a loan would result in at least short-term losses for Fannie and Freddie, as well as to any other investors in mortgages that are reduced. But many economists and analysts argue that Fannie and Freddie would ultimately benefit since such moves could help restore the health of the housing market as a whole.

The reluctance by Fannie, Freddie and others to take on principal reduction is partly why the administration's mortgage modification programs have been so ineffective.

The settlement does have potential benefits for future borrowers, including new protections and disclosures to prevent what Attorney General Eric Holder called "abusive practices" by the mortgage industry.

A small portion of the overall settlement -- about $5 billion -- will amount to penalties for past abuses by the banks. Some of it will go to state governments that were afflicted by banks' shoddy practices, and some of it will go directly to about 750,000 homeowners who were foreclosed upon. If you lost your home, you could get up to $2,000.

Prevailing wisdom has it that homeowners who owe more on their mortgages than their houses are worth -- known as being "underwater" -- are forced to stay put because the property is too difficult to sell. So people who would otherwise relocate -- say, to find a job -- are "tethered to their homes." It's a theory touted by prominent New York Times columnist Thomas Friedman, Harvard economist Lawrence Katz, and regularly makes appearances in the media.

But according to economist Sam Schulhofer-Wohl at the Federal Reserve Bank of Minneapolis, they've all got it backwards: underwater homeowners are actually more likely to move.

In a forthcoming paper, he argues that the main source of empirical evidence for the established view is flawed, because it ignores a substantial number of movers.

Evidence for the tethered-to-their-homes thesis comes largely out of a paper from the National Bureau of Economics Research (NBER) whose authors hail from the Wharton School of the University of Pennsylvania and the Federal Reserve Bank of New York. The paper analyzed a national sample of homes by U.S. Census Bureau called the American Housing Survey. Since 1985, Census Bureau interviewers have tracked over 60,000 housing units across the country, returning every two years to record who lives there. If the Census records a house as occupied by its owner, then two years later there are four possibilities: the house is occupied by the same owner, a different owner, a renter, or nobody (the house is vacant.)

In the original NBER research paper, all entries recorded as renters or vacancies were dropped from the data, so that only homes with a different owner were counted as a "move." The authors explained that this was done on purpose, because housing mobility has traditionally referred to "permanent" moves where an owner sells a house and never returns. Using this measure, the researchers found that underwater homeowners were almost a third less likely to move.

But if you owed more than your home was worth and were desperate for a job, maybe you'd rent while you left to try greener pastures, or you might even ditch the house altogether, especially if the bank was going to foreclose on you anyway. So Schulhofer-Wohl analyzed exactly the same data, but he included properties that were rented or vacant.

"I thought, let's count as moves all the times where someone moved out and rented their house, or moved out and left it vacant, which could happen if they were foreclosed upon." He found that if you included all the renter or vacancy cases, people with negative equity were actually more mobile than those with positive equity.

Schulhofer-Wohl thinks that only counting moves in which a person leaves and never comes back is unnecessarily strict. Since the Census survey gathers information every two years, "the distinction between temporary and permanent is not just a matter of leaving for a month on vacation," said Schulhofer-Wohl. "These ‘temporary' moves really have some duration to them."

Now, neither counting method resolves a larger question: Is the overall unemployment rate affected by whether underwater homeowners can move to look for work? Pundits assume a connection. The data suggests it's not so simple.

The assumption goes: some towns are currently hiring, others aren't. If job seekers were perfectly mobile, they could leave at the drop of a hat to find a job anywhere in the country. (So laid-off app developers from Silicon Valley could go work for a software venture starting up in Anchorage, Alaska). In a world of perfect mobility, localities with low unemployment could suck workers out of areas with high unemployment, which would lower the nation's overall rate of unemployment.

But according to Schulhofer-Wohl, the vast majority of moves are local -- people moving close by to where they already live -- so most moves don't alter overall unemployment. Most people aren't moving from Silicon Valley to Anchorage, but rather from one side of the valley to the other.

Joseph Gyourko, co-author of the NBER paper and a real estate and finance professor at the Wharton School of the University of Pennsylvania, points out a more depressing reason that mobility might not affect unemployment. There could be so much unemployment that even if an underwater homeowner couldn't move to take a job elsewhere, an unemployed person near the job would snatch it up. "That's all you need for this not to have a big labor market effect," he said in an email.

This is part of our year-end series, looking at where things stand in each of our major investigations.

If last year was the year in which faulty foreclosures and bank errors became a full-blown scandal, this has been the year of waiting for something to be done about it.

First, there's the still-to-come multi-state settlement over alleged fraud on the part of the country's five largest mortgage servicers. That's the settlement being brokered by a coalition of state attorneys general and once touted as homeowners' best bet for redressing banks' flaws in foreclosure and mortgage documentation. Over the past year, one story after another declared such a deal was imminent, but the details -- the total price tag, the deal's framework, and the expected date -- have continually been changing.

Earlier this month, the Des Moines Register reported Iowa Attorney General Tom Miller -- a point man for the attorneys' general probe -- as saying that the final deal should be complete before Christmas and would include a measure to reduce the total debt owed by underwater homeowners. No deal has yet been announced. Miller wouldn't disclose a dollar figure on the size of the settlement -- or whether California, one of the hardest-hit states, would participate.

Over the course of the year, some state attorneys general seemed to lose faith in the coordinated effort, voicing concerns that the eventual settlement would be too easy on the banks.

California Attorney General Kamala Harris signaled her hesitation too, as did the attorneys general of New York, Delaware, Nevada, Massachusetts, Kentucky and Minnesota. These state attorneys general -- many of whom have filed their own suits against major servicers, foreclosure processing firms, and other players -- questioned whether the settlement would limit their ability to take more aggressive action against foreclosure abuses in their states and either expressed doubts about whether they'd sign on to the final settlement or pulled out of the talks altogether.

Banks, meanwhile, have pushed for the settlement to include broader releases from legal liability over mortgage-related abuses. According to a recent Wall Street Journal piece, they've tried to make their participation in the settlement contingent on being shielded from the possibility of lawsuits brought by the new Consumer Financial Protection Bureau.

Also still to be determined? An official to monitor the banks and servicers and ensure they comply with whatever agreement is eventually reached.

Meanwhile, federal banking regulators have also begun to act. In April, the Office of the Comptroller of the Currency, the Office of Thrift Supervision, and the Federal Reserve accused eight mortgage servicers and two third-party mortgage processing firms of “unsafe and unsound" foreclosure practices and ordered them to come up with a plan to prevent the same errors going forward. (Read the orders they received.) But the revamp plans drawn up by the banks are kept confidential. And no financial penalties have been issued, though regulators have said that they're still to come.

Regulators also launched an interagency foreclosure review program [PDF] this year to identify and compensate homeowners who were wronged in the foreclosure process. The plan is to review sample loan files pulled from the files from 14 largest mortgage servicers, as well as files from homeowners who submit a request for a review.

The regulators in charge of the program have so far declined to disclose information on key aspects of the review, such as what kinds of compensation are available to homeowners, how compensation would be calculated, and for what specific offenses. (Homeowners with questions can see our FAQ on the reviews to see whether they're eligible for review and how to apply.)

The reviews themselves are being conducted by outside consulting firms that will be supervised by the regulators but paid by the banks. As we've reported, some lawmakers have raised concerns about the experience of the reviewers and whether they will truly be able to operate independently of the banks.

Finally, it bears mentioning that despite the efforts on both the federal and state level to address the systemic failures of banks and mortgage servicers, errors are continuing -- and they're still causing wrongful foreclosures.

The only subset of homeowners who seem to have gotten a break -- or redress for botched foreclosures -- is military families. Earlier this year, the Justice Department settled lawsuits against subsidiaries of Bank of America and Morgan Stanley over allegations that they wrongfully foreclosed on active duty service members, in violation of a law that specifically offers them greater protection from foreclosure. As part of that settlement, the two companies apologized and paid a combined penalty of $22 million, plus compensation to certain service members who suffered wrongful foreclosures.

Systemic failures at the country's banks and mortgage servicers have exacerbated the most severe foreclosure crisis since the Great Depression, and government efforts to limit the damage have fallen short. ProPublica created an unrivaled database of homeowners who have faced foreclosure, opened a Facebook page to encourage homeowners to share their stories, wrote profiles of some of them, and incorporated their experiences into our reporting. We also provided a comprehensive rundown of the numbers behind the crisis.

In order to ram foreclosures through the courts, many mortgage servicers – companies that handle mortgage payments and that are often subsidiaries of banks – resorted to robo-signing. In thousands of cases, employees falsely swore that they’d personally examined each homeowner’s file. They also routinely submitted false documents in support of their claims to foreclose on homes. ProPublica revealed how employees of one of the nation’s largest servicers, GMAC, effectively posed as employees of a company that was no longer in business, signing documents on behalf of that defunct firm to push borrowers out of their homes. GMAC lacked the legal authority to act on this company’s behalf.

In 2009, the Obama administration created Making Home Affordable, a $75 billion foreclosure prevention program. The centerpiece of that program – HAMP, short for Home Affordable Modification Program – focused on modifying loans to reduce the monthly mortgage payments of struggling homeowners. But, as ProPublica has reported in dozens of stories over the past couple years, extreme delays, errors, lost documents, and frustration have been the norm for homeowners. In many cases, banks simply ignored hard-won loan modifications and kept reporting borrowers as delinquent, damaging their credit, and sometimes even threatening foreclosure.

The program’s architects assumed that in return for modest incentives, servicers would develop the capacity to fairly and efficiently help homeowners modify their mortgages. But servicers don’t own the loans, so they don’t bear the loss from foreclosure. In fact, investing in the necessary staff and systems to effectively handle modification requests hits the servicers’ bottom lines, and modifications have remained relatively rare.

Despite the fact that the big banks and servicers that participate in the program have regularly broken its rules, the government has handed down only a few weak penalties. Instead, the program has been characterized largely by lax enforcement and deference to servicers. Indeed, government audit reports obtained by ProPublica under the Freedom of Information Act showed that the government’s supervision of the program ranged from non-existent to weak. The audits covered GMAC, the fifth largest servicer, and the company itself said it hadn’t reversed a single foreclosure as a result of a government audit.

Recently, federal banking regulators stepped in with a new program to compensate homeowners for “harm” they may have suffered at the hands of banks and mortgage servicers. But the most central question — how compensation will be calculated — has not been determined, regulators said. It’s even unclear what type of compensation borrowers would get, cash or a non-monetary remedy, and many elements of the program have been kept secret, including the specific bank errors or abuses that would merit compensation.

ProPublica will be tracking the foreclosure review process as it progresses. Homeowners going through the process should read our FAQ, fill out our foreclosure questionnaire if they haven’t already, and let us know what’s happening.

This story was updated Nov. 22, 2011 to include new information on the consulting firms that will actually conduct the foreclosure reviews.

Banking regulators this week launched the government’s latest attempt to help troubled homeowners — the Independent Foreclosure Review — heralding it as a thorough and fair way to compensate homeowners victimized by big banks. But early indications are that this program, like earlier efforts, has fundamental flaws.

The most central question — how compensation will be calculated — has not been determined, regulators said, and it’s even unclear what type of compensation borrowers would get: cash or a non-monetary remedy. Many key elements of the program have been kept secret, including the specific bank errors or abuses that would merit compensation. Democratic lawmakers have questioned whether the personnel deciding who deserves compensation are qualified to do so. And the process, which allows no appeals, can require homeowners to put forth their cases in writing, a formidable task that consumer advocates say many borrowers lack the expertise to do.

The government's previous main effort to aid troubled homeowners, the Obama administration’s widely criticized Home Affordable Modification Program, attempts to keep troubled borrowers in their homes by facilitating loan modifications. The new review has a different goal, and it was developed by federal bank regulators, who are independent from the administration. The review is one response by regulators to the widespread revelations last fall that mortgage servicers — companies that collect home-loan payments — were regularly filing false affidavits signed by so-called robo-signers. The new program will evaluate up to 4.5 million home loans to determine whether those borrowers were victimized by bank errors or abuses and, if so, what compensation the banks must pay.

The task of evaluating so many loans — those in foreclosure at any point during 2009 or 2010 — is beyond regulators’ capacity. So the two agencies heading the effort, the Office of the Comptroller of the Currency (OCC) and the Federal Reserve, have overseen the selection of eight “independent consultants” that will do the work. The government has refused to identify these consulting firms, though it now says it will.

Update: On Nov. 22, the OCC revealed the names of the eight consultants. They are listed at the end of this post, and we have also added the information to our FAQ on the foreclosure reviews.

Many details unclear

Regulators said Tuesday they have not yet determined how the consultants and regulators will calculate the financial harm a homeowner suffered, and therefore what compensation the banks would have to pay. Even the form of compensation — cash or something else — remains unclear. An example of non-cash compensation, said OCC spokesman Bryan Hubbard, could be repairing a borrower’s credit report.

Regulators have declined to provide a comprehensive list of the problems the consultants will be looking for — in essence, what constitutes an abuse or error by a mortgage servicer. Regulators have issued guidance on this topic to the independent consultants, but during a conference call Tuesday with reporters, they declined to make those documents available.

Regulators have given some public indications of what they’ll be looking for, which we note on our FAQ about the foreclosure reviews. In April, regulators issued "consent orders" that laid out some of the faults committed by the biggest servicers, which collectively handle almost 70 percent of the country's mortgages. The orders also mandated this new foreclosure review to address past problems and general standards that servicers should follow going forward.

So far, regulators have withheld the identity of the eight consulting firms that will conduct the reviews — a stance that angered some members of Congress. In July, a group of about two-dozen senators and representatives — all Democrats except for Sen. Bernie Sanders, I-Vt. — objected to the lack of transparency and questioned whether the consultants had conflicts of interest such as ongoing business relationships with the banks.

The consultants will be paid by the banks, but regulators must approve each consulting firm and its scope of work. Last week, some House Democrats pushed to subpoena the documents, called engagement letters, that identify the consulting firms and spell out what they would do. On Tuesday, the OCC said it will release those documents later this month.

Update: On Nov. 22, the OCC released the engagement letters for twelve of the banks being reviewed. You can see those documents here or in our FAQ

OCC officials say they’ve worked diligently to ensure that the consultants are truly independent of the banks. The banks sought to hire some consulting firms and law firms that had “inappropriate conflicts,” said Joe Evers, the OCC’s deputy comptroller for large banks, so regulators disqualified those companies. Evers declined to identify the firms or how many had been disqualified.

Lawmakers have also expressed concern about the experience of the personnel who will conduct the reviews. At least three temporary staffing agencies have posted positions for a “Foreclosure File Reviewer.” (One agency said it doesn’t discuss its clients, and the other two didn’t return phone calls requesting comment.) The ads reviewed by ProPublica typically call for some foreclosure or mortgage-servicing experience but little else. Critics have questioned whether the people filling these positions will be qualified to determine whether servicers followed the law.

“Distressingly, the job solicitations for these positions seem to suggest that servicers intend to hire individuals with no more expertise than the so-called ‘robo-signers’ that created many of these problems in the first place,” wrote Rep. Maxine Waters, D-Calif., in a letter to regulators last week.

See the foreclosure review job ads:

The OCC’s Hubbard responded that the consultants “have spent significant time training staff, who will be supported by subject matter experts and whose work will be governed by a rigorous quality assurance process.”

It’s not known how long the reviews will take: On Tuesday, the OCC’s Evers said only that he didn’t think it would last “years.” He said he couldn’t guarantee, however, that the process wouldn’t stretch into 2013. Even before Tuesday’s launch, many consumer advocates and homeowners had viewed the process skeptically because regulators had overlooked servicing abuses for years and because regulators developed much of the new review process behind closed doors. Housing counseling and consumer groups could have given valuable input on the types of problems homeowners have faced in the past few years, said Alys Cohen of the National Consumer Law Center, but they were shut out of the process.

The OCC’s Hubbard said regulators did meet last week with consumer groups to discuss the process, and that Hope Now, a servicer-dominated alliance with counseling organizations and community groups, had been involved earlier. Cohen said consumer groups hadn’t received any “meaningful information” during last week’s meeting.

Burden on borrowers

Not all eligible loans are guaranteed a review. First, the consultants will screen each servicer’s portfolio using a statistical sampling method to select loans with “the highest potential for financial injury,” as OCC head John Walsh put it in a speech in September. Regulators have not released details on that sampling method. The loans flagged by this statistical method will be automatically reviewed.

But if homeowners want to ensure that their loan is reviewed, they must submit a “Request for Review Form.” (Homeowners can see our FAQ on how to submit their complaints.)

The OCC and the Financial Services Roundtable, a trade group representing the biggest banks, refused to provide ProPublica with a sample of this form, even though a version of it will likely be mailed to millions of people. They cited concerns about “copycats, fraud and the negative effects on truly eligible borrowers who would suffer if the system becomes unnecessarily burdened with requests which are out of scope,” as the FSR’s Paul Leonard put it. Nevertheless, we obtained a sample of the five-page form, which you can see here. (Homeowners need to obtain a form specific to their case in order to submit a request. See our FAQ for more information.)

The form includes a list of yes-or-no questions such as “Do you believe that you were denied a modification when you qualified under the applicable program rules?” and an open-ended request to “Describe any other way in which you believe you may have been financially injured as a result of the mortgage foreclosure process.”

But homeowners often lack the legal or technical expertise to know why their foreclosure was wrong or abusive, Cohen said. “They just know how they were treated.” She drew an analogy to going to court without a lawyer: “This essentially looks like a class-action case where the homeowners have no representation,” she said.

The review process

After a borrower mails the Request for Review Form, the consultant will obtain the borrower’s file from the servicer. The consultants will not interview borrowers but may ask them for additional documentation.

After the consultants have reviewed the loan files, they will write up their findings in a report, which will be turned over to regulators and the servicer of the loan but not to the borrower. Based on that report, the servicer will put together a report of its own on how it will compensate the borrower. Once regulators approve that plan, the servicer will send the borrower the findings of the review, including details on what compensation, if any, the borrower will receive.

OCC officials would not say whether homeowners will be asked to waive their right to sue their servicer in exchange for accepting the compensation. Borrowers will not have an opportunity to appeal the findings or the offer. But, Hubbard said, if homeowners decline their compensation, they retain “the right to pursue satisfaction through the courts or other means that may exist.”

The consultants will attempt to mail every eligible borrower a copy of the Request for Review Form — no small task given that, by definition, many foreclosed homeowners no longer live at the addresses the loan servicers have on file. For such people, the consultants will attempt to find new addresses. Regulators will also oversee an advertising campaign in newspapers, magazines and online, but the campaign may change depending on the response rate, Hubbard said.

The process has already proved confusing for at least one homeowner. Dan Sanders of Marysville, Calif., contacted ProPublica in early October after receiving a letter from the OCC’s Customer Assistance Group that said his case would not be covered by the foreclosure review. The reason, the letter said, was that Sanders had not actually lost his home to foreclosure, and the review was limited to completed foreclosures. That’s not true.

Hubbard said the error was unfortunate but said a review by the OCC’s ombudsman concluded that Sanders was the only homeowner who’d received this misinformation, which was the result of one OCC employee’s error. Sanders can submit a request for review, which would ensure his case gets evaluated.

ProPublica will continue to monitor the foreclosure review process as it progresses. Homeowners going through the process should read our FAQ, fill out our questionnaire if they haven’t already, and let us know what’s happening.

Update: On Nov. 22, the Office of the Comptroller of the Currency (OCC) released a list showing the consultants and which banks they’ll be reviewing. They also released each consultant’s “engagement letter,” which lays out the terms of their agreements. Below is the list of banks and their consultants. We’ve also uploaded the engagement letters, which you can see by clicking on the consultants’ names.

Two servicers, GMAC and SunTrust, are part of the reviews, but not on this list because their regulator, the Federal Reserve, have not yet released the consultant’s names. We will update the list as soon as that information is released.

• Aurora Loan Services: AllonHill, LLC
• Bank of America (includes BAC, Countrywide, Home Loan Services, and Wilshire): Promontory Financial Group, LLC
• Chase (includes EMC and WaMu): Deloitte & Touche, LLP
• CitiBank (includes CitiMortgage and CitiFinancial): PricewaterhouseCoopers, LLC
• EverBank/Everhome Mortgage: Clayton Services, LLC
• HSBC (includes HFC and Beneficial): Ernst & Young, LLP
• IndyMac Mortgage Services (part of OneWest Bank): Navigant Consulting, Inc.
• MetLife Bank: Ernst & Young, LLP
• PNC Mortgage (includes National City): Promontory Financial Group, LLC
• Sovereign Bank: Treliant Risk Advisors, LLC
• U.S. Bank: PricewaterhouseCoopers, LLC
• Wells Fargo Bank (includes America’s Servicing Co. and Wachovia): Promontory Financial Group, LLC

This post was updated Nov. 22, 2011 to include new information on the consulting firms that will actually conduct the foreclosure reviews.

As we reported today, federal banking regulators have launched a foreclosure review process. Certain current or former homeowners who were the victims of abuses or errors by mortgage servicers will be eligible for compensation.

Regulators have provided a bare-bones website and frequently asked questions, which you can see here.

But we thought things could be even clearer, so we’ve provided this information as an extra resource for readers. If you have other questions about this process, let us know, and we will consider adding it to this FAQ.

Also, to help us continue reporting on this issue, homeowners going through the process can fill out our foreclosure questionnaire if they haven’t already, and let us know what’s happening.

Q. Who is eligible for the reviews?

You have to meet all of the following criteria:

1. The home is/was your primary residence. Vacation homes or investment properties will not be eligible.
2. You were in the foreclosure process at any time between Jan. 1, 2009, and Dec. 31, 2010. The review is NOT limited to people who actually lost their homes to foreclosure in that time period. All that matters is that you were in foreclosure at any point during that time frame. You might have eventually avoided foreclosure by getting a modification; you might still be in foreclosure; you might have sold your home. The final outcome doesn’t matter. All that matters is that you were in the foreclosure process at some point in 2009 or 2010.
3. Your mortgage servicer — the company you sent payments to and that handled your request for a modification — in 2009 or 2010 was one of the following companies, listed here in alphabetical order:
   • America’s Servicing Co.
   • Aurora Loan Services
   • BAC Home Loans Servicing (a subsidiary of Bank of America)
   • Bank of America
   • Beneficial
   • Chase
   • Citibank
   • CitiFinancial
   • CitiMortgage
   • Countrywide
   • EMC Mortgage
   • EverBank/Everhome Mortgage
   • GMAC Mortgage
   • HFC (now HFC Beneficial)
   • Home Loan Services (a subsidiary of Bank of America)
   • HSBC
   • IndyMac Mortgage Services (part of OneWest Bank)
   • Litton Loan Servicing*
   • MetLife Bank
   • National City Mortgage
   • PNC Mortgage
   • Sovereign Bank
   • SunTrust Mortgage
   • U.S. Bank
   • Wachovia Mortgage
   • Washington Mutual (WaMu)
   • Wells Fargo Bank
   • Wilshire Credit (a subsidiary of Bank of America)

*Regulators acted on Litton Loan Servicing later than on the others, so the foreclosure review for Litton customers has not yet begun. The Federal Reserve — the regulator for Goldman Sachs, which owned Litton during the relevant time period — could not tell us when the process would begin for Litton. We will update this post when we hear more about this.

Q. Who is conducting these reviews?

Under the supervision of regulators, the banks have hired consultants to conduct the reviews. Regulators say the consultants will be independent and answer to them, not to the banks. Regulators have kept the identities of these consultants secret but say they will divulge them in November. We will update this FAQ when that happens.

Q. How do I submit a complaint so that I’m included in this process?

You have to submit a Request for Review Form postmarked no later than April 30, 2012.

You can get a Request for Review Form two different ways. First, you might receive a letter from your servicer with the form included. Those letters will be mailed out sometime before the end of 2011. If for some reason you don’t receive one, you can also request a form by calling 1-888-952-9105 (Monday through Friday, 8 a.m. to 10 p.m. or Saturday, 8 a.m. to 5 p.m. Eastern time.). The form will have a “control number” specific to your individual case, so you can’t get a copy of it elsewhere, not even online.

You can see a sample version of this form here so you'll know what to expect. It is being mailed to homeowners with something like this notice. But again, you need to obtain a form that’s specific to your request.

Q. What abuses or errors are covered by this review?

The short answer: There is no comprehensive list. But based on what regulators have said, there are some areas of focus. If any of the following things happened to you, you will probably have a better shot at receiving some form of compensation if you clearly describe them on the Request for Review Form and provide any supporting documentation.

Modifications:

• Your servicer didn’t properly consider you for a modification.
• You were in a trial modification, were making payments, but were foreclosed on anyway without having been denied a permanent modification.
• You were doing everything a permanent modification agreement required, but the foreclosure sale still happened.
• You requested assistance/modification, submitted complete documents on time, and were waiting for a decision when the foreclosure sale occurred.

Calculation errors or incorrect charges:

• You were charged bogus fees and/or penalties.
• Mortgage payments were inaccurately calculated, processed or applied. It would be especially noteworthy if the foreclosure process began because your servicer incorrectly processed your payments.
• The mortgage balance amount at the time of the foreclosure action was more than you actually owed.

Legal and documentation issues:

• Your servicer didn’t properly document ownership of the promissory note or mortgage when the foreclosure was initiated.
• Your servicer didn’t follow state or federal laws when it pursued foreclosure. (This would include not sending you the proper notices).

Other:

• The foreclosure action occurred while you were protected by bankruptcy.
• Your servicer violated the Servicemembers Civil Relief Act. For instance, you were in the military and on active duty when your servicer pursued foreclosure. Under the act, the ban on foreclosure runs for nine months following active duty.

Q. What will happen after I submit my complaint?

You should receive an acknowledgment letter within one week. Then you wait. The reviewer may contact you for more information at some point. You will not be interviewed, however. Eventually, you will receive a letter that lays out what compensation you are being offered and “the findings of the review.” Regulators said they haven’t decided precisely what form these letters will take and in what detail they will discuss your complaint.

Q. Will submitting my complaint automatically stop my foreclosure?

No. However, the OCC says that homeowners who submit a request for review “will receive expedited attention” if the servicer is about to sell their home through foreclosure. Essentially, the reviewer will investigate to see whether the servicer committed any abuses or errors. If so, the foreclosure sale “may be postponed or halted.” That is far from a guarantee.

Q. How long will the review take?

Regulators won’t say. We will update this FAQ when they give some indication.

Q. What sort of compensation might I receive?

Regulators have not provided any information about this. You might receive cash, and you might get some sort of nonfinancial compensation like having your credit report repaired. The only clear guiding principle is the focus on “financial injury” to the homeowner. But regulators said they have not yet determined how that will be calculated.

Q. Will I have to waive my right to sue my servicer in exchange for receiving this compensation?

That’s not yet clear.

Q. Can I appeal if I disagree with the findings of the review?

No.

Two servicers, GMAC and SunTrust, are part of the reviews, but not on this list because their regulator, the Federal Reserve, have not yet released the consultant’s names. We will update the list as soon as that information is released.

• Aurora Loan Services: AllonHill, LLC
• Bank of America (includes BAC, Countrywide, Home Loan Services, and Wilshire): Promontory Financial Group, LLC
• Chase (includes EMC and WaMu): Deloitte & Touche, LLP
• CitiBank (includes CitiMortgage and CitiFinancial): PricewaterhouseCoopers, LLC
• EverBank/Everhome Mortgage: Clayton Services, LLC
• HSBC (includes HFC and Beneficial): Ernst & Young, LLP
• IndyMac Mortgage Services (part of OneWest Bank): Navigant Consulting, Inc.
• MetLife Bank: Ernst & Young, LLP
• PNC Mortgage (includes National City): Promontory Financial Group, LLC
• Sovereign Bank: Treliant Risk Advisors, LLC
• U.S. Bank: PricewaterhouseCoopers, LLC
• Wells Fargo Bank (includes America’s Servicing Co. and Wachovia): Promontory Financial Group, LLC

Related Story: Flaws Jeopardize New Attempt to Help Homeowners

Last month, we noted that the Obama administration's push to allow more underwater homeowners to refinance faced a major barrier: the regulator for Fannie Mae and Freddie Mac. Federal Housing Finance Agency chief Edward DeMarco had blocked earlier efforts to help underwater homeowners.

But this morning, the administration announced major changes to its refinancing program -- changes beyond what analysts were expecting.

One of the main reasons the program hadn't reached many homeowners is that banks have been reluctant to participate. The revamped program offers the banks a major incentive: If they grant a homeowner a new loan, they will no longer be on the hook to buy back the previous loan, even if it was not properly underwritten. That removes a large potential risk to the banks.

Launched in 2009, the Home Affordable Refinance Program (HARP) was designed to allow homeowners with little or no equity in their homes to take advantage of low interest rates, so long as their loans were backed by Fannie Mae or Freddie Mac, which back more than half of all U.S. residential mortgages. Normally, such homeowners wouldn't qualify for refinancing. Back then, the administration said "up to 4 to 5 million" homeowners would be able to take part.

But the program has fallen far short. As of August, about 894,000 homeowners had refinanced through the program. And only about seven percent of those homeowners were significantly underwater.

This morning, the Federal Housing Finance Agency announced a slew of reforms to improve the program's reach, changes that it estimated could double the number of homeowners helped. The program will now be open to all homeowners with little or no equity, regardless of how underwater they are, provided they got their loan before June 2009. (Previously, the program had been limited to borrowers who were no more than 25 percent underwater on their loan).

Many of the specific reforms seek to make it cheaper for homeowners to refinance by reducing various costs and fees associated with refinancing. Some changes are technical and address problems that homeowners with mortgage insurance or a second mortgage have encountered in getting a refinance.

But on a conference call with reporters this morning, administration officials emphasized one reform in particular that's likely to be key: releasing lenders from so-called buy-back risk.

When Fannie or Freddie buy or guarantee a loan, they do it on the basis of a promise by the lender -- usually a bank -- that the loan meets certain standards. If it doesn't, the companies can force the lender to buy it back, which they've done for billions of dollars' worth of mortgages. So banks had recoiled from granting new loans to underwater homeowners because they feared doing so could trigger a repurchase of the original or new loan if the homeowner defaulted.

But under the new plan, Fannie and Freddie will waive their right to force the lender to buy back the original loan.

Why did FHFA's DeMarco agree to these changes? As we noted last month, DeMarco has often stressed conserving Fannie and Freddie's assets so as to limit the level of taxpayer support. So far, taxpayers have pumped $169 billion into the companies to keep them afloat.

In a statement about the reforms today, the FHFA argued that it waived its right to force repurchase of the loans because nearly all the loans eligible for the new program seem to be good ones: "These are seasoned loans made to borrowers who have demonstrated a capacity and commitment to make good on their mortgage obligation through a period of severe economic stress and house price declines." Defects in underwriting tend to show up in the "first few years of the mortgage," according to the statement.

"We feel pretty confident that if there were defects on the original loan, it's probably shaken itself out at this stage," said Meg Burns, a senior FHFA official.

Burns did say that Fannie or Freddie could force the lender to buy back the new, refinanced loan if there were a defect in its underwriting. HARP has simple, streamlined underwriting standards that involve the bank verifying that the homeowner has regular income.

When asked this morning why DeMarco changed course, administration officials cited a number of factors, such as the fact that the barriers to the program's success have become more and more apparent. But on the conference call this morning National Economic Council director Gene Sperling also cited bipartisan support for these types of reforms and increasing political pressure on the FHFA to adopt them.

Earlier this month, 16 senators (12 Democrats and 4 Republicans) wrote a letter to DeMarco and the administration calling for changes to HARP. Sen. Barbara Boxer, D-Calif., who met with DeMarco this summer, has been pushing a bill to implement these reforms. Sen. Johnny Isakson, R-Ga., is a co-sponsor. In the House, Democrats have also been pressuring DeMarco on the issue and called for a new director of the FHFA earlier this month after a recent meeting.

In this morning's conference call for reporters, HUD Secretary Shaun Donovan said that in exchange for relinquishing the right to force buy backs Fannie and Freddie will charge a "modest fee" for each refinance. News media reported what he said, but later FHFA officials told ProPublica that Donovan was incorrect and there would no such fee. HUD did not immediately reply to a request for comment.

More than 6 million Americans are behind on their mortgage payments or facing foreclosure. Housing prices have continued to drop, and many neighborhoods across the U.S. are filled with foreclosed homes.

What exactly has the administration done in the face of such historic need? We've put together a guide to the administration's major efforts to help homeowners, laying out the promise of each and how they've actually performed.

It's a sobering list. Obama himself has called his approach to the foreclosure crisis one of his biggest mistakes dealing with the recession. Overall, the foreclosure programs have failed to reach more than a fraction of the homeowners they were designed to help.

Here are the depressing details:

Programs That Have Been Enacted

Plan: Help millions of homeowners by encouraging servicers to lower mortgage payments

Obama launched his "homeowner bailout," Making Home Affordable, in the spring of 2009, with the aim of helping at least 3 million to 4 million homeowners avoid foreclosure. The program gives banks and other mortgage servicers modest incentives to adjust the terms of mortgages so that homeowners who can't afford their current monthly payments can stay in their homes.

Reality: Mistakes, lost documents, lax oversight; billions remain unspent

As we've detailed, the program has been marked by deep dysfunction. Mortgage servicers mishandled cases, made errors and lost documents, while government watchdogs looked on and did almost nothing. In one case, a government auditor found that mortgage servicer GMAC had made errors on 80 percent of audited cases — but kept the mistakes secret. GMAC said it didn't reverse a single foreclosure action as a result of the sobering audit results.

Meanwhile, as of August, only about 816,000 homeowners had received loan modifications through the program, or fewer than one in four of those who applied. The government is on track to spend only about $7 billion of the $45.6 billion in bailout funds set aside to help homeowners. As a result, nearly $30 billion meant to address the foreclosure crisis may instead be used to pay down the deficit.

Plan: Allow millions of homeowners to refinance their mortgages at lower interest rates

Launched in 2009, the Home Affordable Refinance Program was designed to allow some homeowners to take advantage of this year's historically low interest rates and refinance their loans. The administration estimated "up to 4 [million] to 5 million" homeowners would be able to take part. In his jobs speech in early September, Obama promised to work with federal agencies to make this option available to more people.

Reality: May not help the hardest-hit, and a government regulator stands in the way of change

As of June 2011, just 838,000 homeowners had refinanced through the program. While Obama promised to increase the number of homeowners in the program, the government regulator who oversees Fannie Mae and Freddie Mac may make this difficult. While refinancing is good for homeowners, it means more risk for taxpayer-owned Fannie and Freddie, which own or guarantee 5 million mortgages that are higher than the value of the home.

Meanwhile, even if Obama succeeds in giving more homeowners access to the program, refinancing may not do much to address the underlying crisis. "Anything that is called a ‘refinancing' program is just a joke," a member of the National Association of Consumer Bankruptcy Attorneys told iWatch News.

Plan: Loan money to jobless homeowners so they can avoid foreclosure

The $1 billion Emergency Homeowners' Loan Program, introduced last year, aimed to reach 30,000 families. It offered interest-free federal loans of up to $50,000 to qualifying homeowners who had lost income because of unemployment or a medical condition.

Reality: Slow start, few people qualified; at least half of money left unused

The program, which got off the ground only in June, had a deadline of Sept. 30 for giving out money to eligible homeowners before the unused funds were to be returned to the Treasury. As CNN Money reported, its success was hampered by delays and a tangle of stringent requirements. A spokesman from the Housing Department, which ran the program, said earlier this week that at best the program would only succeed in loaning out half the allotted money. Only 10,000 to 15,000 of the roughly 100,000 applicants qualified for the loans.

Plan: Give money to states to experiment with programs for homeowners

In February 2010, the government promised $7.6 billion to finance innovative programs to deal with foreclosures in states hit hardest by the crisis.

In Arizona, for instance, where nearly half of homeowners with mortgages owe more than their homes are worth, the state Housing Department launched a loan reduction program that the agency hoped would aid 3,500 to 4,000 homeowners.

Reality: A small fraction of the money has been used

As of July, only $478 million of the government's $7.6 billion had been actually loaned, used or spent, and some states that implemented new programs have struggled with their enrollment levels.

For instance, as The New York Times reported yesterday, in the first year of the Arizona program, the state approved only three homeowners for the reduction. The problem? Banks have declined to participate, even though the state was willing to pay half the cost — and taxpayer-owned Fannie Mae and Freddie Mac have also been an obstacle.

The Road Not Taken

Undelivered promise: Giving bankruptcy judges the power to lower mortgage payments

During his campaign, Obama promised to change bankruptcy laws to give judges the authority to lower mortgage payments — a tactic called "cramdown." Democrats pushed for the change after Obama's election, but his economic advisers privately dismissed the plan, and Obama's promised support never came. With the administration silent, and banks fighting hard against the change, the measure was voted down.

Popular idea: Reducing the amount people owe on 'underwater' mortgages

With millions of homeowners owing more on their mortgages than their homes are worth, one popular proposal for dealing with the financial crisis is principal reduction, or asking banks to adjust the total amount owed on a mortgage based on the post-bubble value of a home. The idea is controversial, since some economists argue it would create an incentive for borrowers to take out riskier loans in the future.

But it is also seen as a way to address one of key underlying factors of the housing crisis: that American mortgage-holders owe an estimated $700 billion to $800 billion more than their homes are actually worth.

Because the American people ultimately own or guarantee the majority of the country's home loans through taxpayer-owned Fannie Mae or Freddie Mac, a government-approved program of principal reduction could have an enormous impact, even without buy-in from other mortgage servicers.

But the federal regulator who oversees Fannie Mae and Freddie Mac has refused to consider principal reduction because it would be bad for Fannie and Freddie's bottom line. (They are still $141 billion in the red after a taxpayer bailout.) Proponents of principal reduction argue that Fannie Mae and Freddie Mac will have to deal with the decline in home values eventually — and by keeping losses off their books at the moment, they are costing Americans their homes.

Back to the Drawing Board — With Few Options Left

In July, President Obama noted that his administration had not made enough progress on dealing with the foreclosure crisis. "We're going back to the drawing board," he said. But the administration's new proposals for tackling the crisis are modest. Part of the problem is that an estimated $30 billion in unused bailout money from the previous foreclosure programs cannot be used to fund new programs.

Proposed plan: Turning foreclosed homes into rental properties

Over the summer, the administration put out a call for proposals about how to turn foreclosed houses into rental properties, a way of simultaneously dealing with the glut of foreclosed properties and addressing the steeply rising prices of rental units. No version of the plan has been implemented yet, and the idea itself has gotten mixed reviews.

Proposed plan: Dedicating $15 billion to refurbish foreclosed and vacant properties

As part of his jobs bill, President Obama would spend $15 billion to refurbish vacant and foreclosed homes or businesses, a way to help neighborhoods blighted by foreclosure while creating more construction jobs. Obama is pressing Congress to pass the bill quickly, but this seems unlikely to happen.

Why has the administration’s flagship foreclosure prevention program been so ineffective in helping struggling homeowners get loan modifications and stay in their homes? One reason: The government’s supervision of the program has apparently ranged from nonexistent to weak.

Documents obtained by ProPublica—government audit reports of GMAC, the country’s fifth-largest mortgage servicer—provide the first detailed look at the program’s oversight. They show that the company operated with almost no oversight for the program’s first eight months. When auditors did finally conduct a major review more than a year into the program, they found that GMAC had seriously mishandled many loan modifications—miscalculating homeowner income in more than 80 percent of audited cases, for example. Yet, GMAC suffered no penalty. GMAC itself said it hasn’t reversed a single foreclosure as a result of a government audit.

The documents also reveal that government auditors signed off on GMAC loan-modification denials that appear to violate the program’s own rules, calling into question the rigor and competence of the reviews.

Some of the auditors’ mistakes are “appalling,” said Diane Thompson of the National Consumer Law Center, an advocacy group. “It suggests the government isn’t taking the auditing process seriously.”

In a written response to ProPublica's questions, a spokeswoman for the Treasury Department, which runs the program, denied there were serious flaws in its oversight system, calling it “effective and unprecedented in many ways.”

The audits of GMAC, though revealing, give only a limited view into the program, because the Treasury has refused to release the documents for other servicers. For more than a year, through a Freedom of Information Act request, ProPublica has sought the audits of 10 of the largest program participants. The Treasury provided only GMAC’s audits, because the company consented to their release. ProPublica continues to seek all of the reports.

Abuses of the foreclosure process, in which banks and mortgage servicers cut corners or even created false documents to move troubled borrowers out of their homes, have been extensively documented, along with failures by government to regulate the industry. But the lapses revealed in the documents obtained by ProPublica stand out because they occurred within the government’s main effort to prevent foreclosures, the Home Affordable Modification Program.

Oversight shrouded in secrecy

For HAMP’s first two years, the government offered very little public detail about its oversight efforts. It was virtually impossible for the public—or even Congress—to know how well the banks and mortgage servicers were complying with the government’s effort to prevent struggling homeowners from losing their homes. Those years were crucial, because that’s when servicers evaluated the vast majority of homeowners eligible for a modification—about 3 million.

The documents obtained by ProPublica show auditors finding serious problems at a major servicer during that time. Instead of publicly revealing the findings, Treasury chose to privately request that GMAC fix the problems.

“For two years, they’ve known how abysmal servicers were performing, and decided to do nothing,” said Neil Barofsky, the former special inspector general for the Troubled Asset Relief Program, better known as TARP or the bank bailout, which provided the money for HAMP.

“It demonstrates that if you have a set of rules for which compliance is completely voluntary and no meaningful consequences for those who violate them, having all the audits and reviews in the world are not going to make a bit of difference,” he continued. “It’s why the program has been a colossal failure.”

Treasury continued to release few details about its audits until June, when it began publishing quarterly reports based on the audits’ results. The public report showed what Treasury called “substantial” problems at four of the 10 largest servicers—Bank of America, JPMorgan Chase, Wells Fargo and Ocwen—and Treasury for the first time withheld taxpayer subsidies from three of them.

Mortgage servicers that signed up for the program agreed to follow strict guidelines on how to evaluate struggling homeowners seeking reduced mortgage payments. In exchange, the servicers would receive taxpayer subsidies. But as we’ve reported extensively, the largest servicers haven’t abided by the guidelines. Homeowners have often been foreclosed on in the midst of reviews for a modification or denied because of the servicer’s error. For many homeowners, navigating what was supposed to have been a simple, straightforward program has proven a maddening ordeal.

HAMP has fallen dramatically short of the administration’s initial goal to help 3 million to 4 million homeowners. So far, fewer than 800,000 homeowners have received loan modifications through HAMP, or fewer than one in four of those who applied.

As part of the $700 billion bailout program, HAMP was launched in early 2009 with a $50 billion budget to encourage loan modifications by paying subsidies to servicers, investors and homeowners. But only about $1.6 billion has gone out so far.

GMAC said it agreed to release its audits under the program because the company “believes in honoring the spirit of the Freedom of Information Act process” and “elected to be transparent on our work with the [modification] program,” spokeswoman Gina Proia said.

GMAC's parent company has changed its name to Ally Financial, but its mortgage division is still called GMAC. The government owns a majority stake in Ally because it rescued the company with TARP funds, but both the company and the Treasury said that didn’t factor into the company’s decision to allow the documents to be released.

ProPublica contacted all nine servicers that objected to the reports’ release. All either declined to comment on why they wanted the audits kept secret or defended keeping them out of the public domain by saying the reports contained confidential information. Collectively, these companies have so far been paid more than $471 million—dubbed “servicer incentive payments”—through the program. They are eligible for hundreds of millions more. The country’s four largest banks—Bank of America, JPMorgan Chase, Wells Fargo and Citigroup—are also the largest servicers of mortgage loans.

In its written response, Treasury’s spokeswoman said it agreed to withhold the records in part because they could undermine “frank communications between mortgage servicers and compliance examiners” and hurt the program’s effectiveness. The department declined to provide either redacted versions or an index of the documents.

Early reviews “useless” and flawed

Since the program’s beginning, homeowner advocates have wondered where HAMP’s watchdog was and why it was having so little effect. That watchdog is Freddie Mac, tapped by Treasury in February 2009 and working under a contract worth $116 million and rising. The Freddie Mac unit, now staffed with 121 employees and employing about 150 more through contractors, is supposed to regularly audit servicers in the program to make sure they are following the rules. Treasury is ultimately responsible for deciding whether to punish a servicer but relies on auditors’ findings to make that decision.

It took several months for the unit to even get off the ground. In August 2009, Treasury rejected Freddie Mac’s first reviews of servicers as inadequate because they were “inconsistent and incomplete” and its staff was “unqualified,” according to a report by the TARP’s special inspector general. Freddie Mac promised to improve. That process took several more months.

As a result, for the program’s crucial first eight months, there was effectively no watchdog. Nationwide, servicers filed to pursue foreclosure on about 2 million loans during that time.

Treasury disputed the idea that there was no watchdog for those months, saying that auditors had performed “readiness reviews” of servicers as early as May 2009, one month after the program was begun. The documents obtained by ProPublica, however, show that Freddie Mac’s auditing unit, called Making Home Affordable—Compliance (MHA-C), didn’t issue its first report for GMAC until early December 2009.

That audit was a modest effort that involved collecting a sample of 323 loans handled by GMAC and determining whether they’d been properly reviewed for the program. Because of the delays in starting the reviews, the report was based on a sample of loans that was five months old. Such delays continued into 2010. Another Freddie Mac review, completed at the end of March 2010, was based on GMAC loans selected in October of the previous year.

The delays make those reviews “largely useless to homeowners,” said Thompson of the National Consumer Law Center. If a homeowner lost a house to foreclosure in July, it wouldn’t help to have an auditor notice that several months later, she explained.

The December 2009 audit noted that GMAC might have already foreclosed on loans that auditors had flagged as potentially mishandled, but didn’t order remedial steps. It only requested that GMAC not take “further action.”

GMAC said it had never reversed a foreclosure action as a result of a HAMP audit. ProPublica put the same question to the other nine servicers that objected to the audits’ release. American Home Mortgage Servicing, the only other servicer that answered the question, said it also had never reversed a foreclosure action due to a HAMP audit.

American Home handles about 384,000 loans, putting it among the 10 largest servicers in the program.

A Treasury spokeswoman said that auditors have reviewed more than 50,000 loan files, but did not directly answer whether a servicer had ever reversed a foreclosure action because of a HAMP audit. Where auditors have found problems, she wrote, the department has “required servicers to take steps to tighten controls” and “re-evaluate any borrowers who may have been potentially impacted.”

In early 2010, around the same time that the auditing unit was issuing its first reports, auditors complained that servicers’ lack of responsiveness to their requests was hampering their efforts. Getting the right documents from servicers was "a cumbersome process," the head of Freddie Mac’s audit team, Paul Heran, said in February 2010 at a mortgage industry conference. It seemed, he added, that servicers often relegated responding to the auditors to low-level staff who didn’t understand the requests. Another manager in the unit, Vic O’Laughlen, said servicers tended to respond with “at best 50 percent of what we’re expecting to see.”

However uncooperative the banks and mortgage services may have been, Freddie Mac’s auditing reports contain errors that call into question their reliability.

Every few months, the auditors examine a sample of the servicer’s loans that have been denied a HAMP modification to check whether the denials were legitimate. In each GMAC report reviewed by ProPublica, auditors found that the servicer had, with very few exceptions, given the homeowner fair and appropriate consideration. But among the justifications listed in the audits are some that violate the program’s rules or simply don’t make sense.

For instance, the December 2009 review said that 35 of the 247 loans that auditors reviewed were denied because the homeowner was “less than 60 days delinquent.” In the report, auditors said that was the right decision in all but one case. But being less than 60 days delinquent is never on its own a legitimate reason for a servicer to deny a modification, according to the program rules. Homeowners are eligible for a modification even if they’re current on their loans, as long as they can show they’re in imminent danger of defaulting.

Another example: Auditors agreed that GMAC had correctly denied a homeowner because of a failure to sign a trial modification offer by Dec. 31, 2012, HAMP’s end date. That makes no sense, because the review took place in 2009. Treasury’s spokeswoman said this was a typo and that the homeowner was denied for a completely different reason.

There are several other examples in later reports of auditors signing off on denial reasons that have no apparent basis in the program’s rules. For instance, auditors cited “grandfathered foreclosure” as a legitimate reason for some denials. The spokeswoman said such loans had been in the foreclosure process before GMAC signed up for the program, but the program rules explicitly stated at the time that such loans were eligible.

When ProPublica asked GMAC if it had denied homeowners loan modifications for these reasons, the company said it couldn’t comment because auditors, not GMAC, had generated those descriptions of why homeowners had been denied. In some cases, Proia said, the descriptions were simply wrong: GMAC had never denied homeowners simply because they weren’t 60 days delinquent.

But Treasury defended the questionable denials, and in so doing raised even more questions. For instance, the spokeswoman said HAMP “does not specifically require servicers to evaluate loans that are less than 60 days delinquent.” But Treasury’s official guidance to servicers said such borrowers “must be screened.”

“It makes you wonder if the Treasury even knows the rules for their own program,” said the National Consumer Law Center’s Thompson.

A congressionally appointed panel, among others, has pointed to a fundamental flaw in the way the oversight was carried out: Auditors have had no direct contact with homeowners. The program has been dogged by servicers’ inadequate document systems. Borrowers have long reported faxing and mailing the same documents over and over, because servicers kept losing them. Servicers have denied about a quarter of all modification applications due to an alleged lack of documentation. Because HAMP’s auditors do not contact borrowers, the auditors have no way of determining whether a denial for inadequate documentation was correct.

In response to this criticism from the Congressional Oversight Panel for the TARP in December 2010, Treasury said auditors did not contact homeowners to avoid giving them added stress. The panel rejected that reason, saying that contacting borrowers was “critical to assessing the accuracy of a servicer’s determination.”

Instead of talking with borrowers, auditors conduct on-site reviews of mortgage servicing companies, Treasury’s spokeswoman said in her written response to ProPublica. Treasury believes that focusing “on servicer processes and internal controls is the most effective deployment of our compliance efforts,” she wrote.

Detailed audit shows serious problems

It wasn’t until July 2010—16 months after HAMP was launched—that the unit performed its first major audit of GMAC. The review included a visit to GMAC’s offices and a detailed review of a sample of loans.

The report enumerated various rules violations, including in GMAC's evaluation of homeowners for modifications. GMAC’s practice was to begin the foreclosure process too quickly: The program required the servicer to give the homeowner 30 days to respond to a trial modification offer, but GMAC’s procedure was to wait only 20.

GMAC’s Proia said no homeowners were “negatively impacted by this issue.”

Auditors also found that GMAC was regularly miscalculating homeowners' income. In a review of 25 loan files of homeowners who had received modifications, the auditors said 21 involved a miscalculation of income. Since income is a key factor in whether a homeowner qualifies for a modification, the high error rate raises obvious questions about whether GMAC was accurately evaluating homeowners’ applications.

Asked about the frequent income miscalculations, GMAC’s Proia said the “issue was identified in the early stages of the program,” that calculating the borrower’s income is a “complicated process” and that GMAC has improved since the mid-2010 review—an assertion backed up by recent audit results published by the Treasury.

The July 2010 review also found that GMAC had been aware of certain problems such as “incorrect income and expense calculations” but had not fixed them. Proia said the company does its best to fix problems when it becomes aware of them.

Penalties: late and weak

Typical of the Treasury’s oversight of the program, GMAC was never penalized for any of the rules violations. For the first two years of the program, Treasury officials publicly threatened servicers with possible penalties but instead followed a cooperative approach. When auditors found problems, servicers were asked to fix them.

The documents illustrate as much. In response to the auditors’ findings, GMAC was required to develop an “action plan.” GMAC refused to provide the action plan to ProPublica and recommended seeking it and similar documents by filing a Freedom of Information Act request with the Treasury.

Treasury has sent mixed messages about its ability to penalize banks over the course of the program, threatening “monetary penalties and sanctions” in late 2009 and then saying it lacked the power to enforce such penalties. Treasury finally departed from its cooperative approach in June, when it withheld incentive payments from three of the top 10 servicers. (GMAC was not among them.) The companies would not receive the public subsidies for completing modifications until they made certain changes. The companies were cited for some of the same problems for which auditors had criticized GMAC, such as regularly miscalculating borrowers' income. JPMorgan Chase, for instance, had erred in estimating income in about a third of the homeowner loan files reviewed.

The punishment hasn’t had much sting. Incentive payments were restored for one of the three companies when Treasury’s most recent report declared it’d improved. Chase and Bank of America, the country’s largest servicer, would continue to have their incentives withheld, Treasury said.

But while those incentives have slowed, they have not stopped, according to Treasury’s monthly TARP reports. Since June, when Treasury first announced it would withhold incentives, Bank of America has received $2.5 million in taxpayer incentives. While that’s a steep reduction from the roughly $7.5 million it had been receiving monthly, the bank is supposed to get nothing. Chase received $404,000 during that same time.

Treasury responded that it has programs to encourage modifications on both first and second mortgages, and that the payments Bank of America and Chase received were related to second mortgages. “Current system limitations” meant the Treasury couldn’t withhold these payments, according to the Treasury spokeswoman. Treasury is working to fix the problem, she said.

Correction (10/5): An earlier version of this story mistakenly stated that the Treasury has restored HAMP incentive payments for two of the three companies that had previously had their payments withheld. In fact, only one company had its payments restored. We regret the error.

If you weren't listening closely to President Obama's speech last night, you might have missed his new plan to help millions of homeowners. 

Here it is, in its entirety: “We're going to work with federal housing agencies to help more people refinance their mortgages at interest rates that are now near 4 percent. ... That's a step that can put more than $2,000 a year in a family's pocket, and give a lift to an economy still burdened by the drop in housing prices.”

Why so brief and vague? Perhaps because there are obstacles making it doubtful such a plan will ever get off the ground, let alone make a major impact.

To understand why, you have to look at why the administration's big refinancing plan, started two years ago, has helped only a small fraction of the homeowners it was designed to help. This is the plan Obama is proposing to fix, but it depends on getting a green light from a key regulator, which may not happen.

Launched in 2009, the Home Affordable Refinance Program (HARP) was designed to allow homeowners with little or no equity in their homes to take advantage of low interest rates, so long as their loans were backed by Fannie Mae or Freddie Mac. Normally, such homeowners wouldn't qualify for refinancing. The administration said "up to 4 to 5 million" homeowners would be able to take part.

But like the administration's other flagship housing program, its loan modification program, which promised help for 3 to 4 million homeowners, things haven't turned out that way.

As of June, just 838,000 homeowners had refinanced through the HARP program. And strikingly, only 62,000 of those were significantly "underwater" homeowners—owing 5 to 25 percent more than their homes were worth. That's just a small fraction of the roughly 5 million underwater mortgages that Fannie and Freddie own or guarantee.

Some of the reasons the old program has fallen short are complicated and unlikely to be easily fixed. Loans with mortgage insurance, for instance, are often denied because the insurer must agree to transfer the policy to the new loan. Loans with a second mortgage present their own difficulties.

But two key players—the banks and the federal regulator that oversees Fannie Mae and Freddie Mac—also have been obstacles to the program's success. Both seem likely to continue their skeptical stances, because both view helping underwater homeowners as risky.

As has been widely reported, banks have been wary of offering new mortgages to borrowers who owe more on their houses than they're worth. Although each loan is backed by Fannie or Freddie, the bank could still be on the hook if the homeowner defaults and Fannie or Freddie finds that the bank didn't properly underwrite the new loan. The bank could be forced to buy the loan back. Because underwater homeowners are seen as being at a greater risk of defaulting, banks have been wary of taking on those loans. (You might have noticed that since the housing bubble burst, banks have become much more cautious.)

Fannie and Freddie's federal regulator, the Federal Housing Finance Agency, could choose to remove that risk for banks. Doing so, however, would shift that risk from the banks to Fannie and Freddie, and FHFA hasn't been eager to do that. As a former White House aide put it to the Wall Street Journal, FHFA head Edward DeMarco's "first instinct is to say no."

FHFA is an independent federal agency, so even though taxpayers have kept Fannie and Freddie afloat, the two companies are not under the administration's direct control.

FHFA's independence has lately been a big obstacle for the White House. In December, we reported on the FHFA's opposition to cutting mortgages for underwater homeowners facing foreclosure. Reducing the principal amount would make homeowners much less likely to re-default but would lead to short-term losses for Fannie and Freddie. A public White House push on the idea has so far gotten nowhere.

FHFA has watched over Fannie and Freddie ever since the government took them over in 2008. Because of the continuing bailouts, taxpayers are $141 billion in the red. A big part of FHFA's job is to conserve the companies' assets and minimize further bailouts. That's why FHFA has been putting the brakes on White House ideas that would help homeowners but shift risk to Fannie and Freddie.

Other program fixes recommended by experts also would require FHFA approval. Currently, Fannie and Freddie charge underwater homeowners higher fees to refinance because they are seen as riskier, possibly deterring some people from pursuing it. A reduction of those fees by FHFA would mean more risk for Fannie and Freddie.

The administration is already declaring victory in its bid to convince FHFA to go along. Treasury Secretary Tim Geithner said this morning that FHFA will support reforms to the refinancing program.

But in a statement released this afternoon, FHFA chief DeMarco wasn't quite so clear. FHFA is reviewing the refinancing program, he said, and trying to identify “frictions” that have made it less successful. The phrasing is telling: “If there are frictions associated with the origination of HARP loans that can be eased while still achieving the program's intent of assisting borrowers and reducing credit risk for [Fannie and Freddie], we will seek to do so.” [Emphasis added.] DeMarco added that the “final outcome of this review remains uncertain."

This post has been updated to reflect Bank of America's response.

The state of Nevada dramatically expanded its lawsuit against Bank of America today, turning the narrow case it filed late last year into a broadside that targets virtually all aspects of the bank's mortgage operations. Bank of America has previously denied wrongdoing.

The sweeping new suit could have repercussions far beyond Nevada's borders. It further jeopardizes a possible nationwide settlement with the five largest U.S. banks over their foreclosure practices, especially given concerns voiced by other attorneys general, New York's foremost among them. (You can read the suit here.)

In a statement, Bank of America spokeswoman Jumana Bauwens said reaching a settlement would bring a better outcome for homeowners than litigation. "We believe that the best way to get the housing market going again in every state is a global settlement that addresses these issues fairly, comprehensively and with finality."

The suit also weakens a separate, 2008 multistate settlement in which Countrywide promised to evaluate troubled homeowners for loan modifications.

Most broadly, Nevada's action signals that the banks' problems with home mortgages—the main cause of the financial crisis—continue to burden them and rattle investors. Bank of America, the nation's largest bank and company that services mortgages, has seen its stock plunge about 40 percent since March, in part because of its mortgage liabilities. Nevada's action won't help.

Nevada's attorney general charges that Bank of America and the now-defunct mortgage giant Countrywide acquired by the bank in 2008, deceived borrowers and investors at almost every stage of the process.

According to the suit, borrowers were duped into unaffordable loans and then victimized again through a misleading mortgage modification program that homeowners tried to use to avoid foreclosure. Finally, the suit alleges, the bank filed fraudulent documents to move forward with the foreclosures.

"Taken together and separately, [Bank of America's] deceptive practices have resulted in an explosion of delinquencies and unauthorized and unnecessary foreclosures in the state of Nevada," the suit alleges.

The state's suit had previously been confined to the modification issue. At that time, Bank of America also said homeowners would be best served not through litigation but through reaching a multistate settlement that would "broaden programs for homeowners who need assistance."

By expanding the suit, Nevada's Catherine Cortez Masto joins New York Attorney General Eric Schneiderman in stepping up investigations of the bank. In addition to initiating a broad investigation of banks' securitization practices, he recently filed a suit charging that Bank of America had fraudulently foreclosed on homeowners.

A coalition of all 50 state attorneys general has been seeking a settlement with the five largest banks to address their foreclosure practices, such as the filing of thousands of false sworn statements with state courts. Some critics have said the states were speeding to an agreement without thoroughly investigating the banks' abuses.

Last week, fissures in the coalition became public when Iowa Attorney General Tom Miller, who leads the 50-state coalition, removed New York's Schneiderman from the group's executive committee because, he said, Schneiderman had "actively worked to undermine" its efforts by opposing any quick settlement. As part of any settlement (reportedly in the range of $20 billion to $25 billion), the banks have been seeking a wide-ranging release from future legal claims, not just those related to foreclosure practices. Schneiderman has publicly rejected that idea and pushed ahead with his investigation.

Masto's suit signals that Nevada may also reject any settlement in the near future on the foreclosure issues. Two other attorneys general, notably those from Massachusetts and Delaware, have also voiced concerns recently about any broad waiver of claims.

Geoff Greenwood, the spokesman for Iowa's attorney general, declined to comment on Nevada's suit.

Nevada's newly expanded suit also undermines a previous settlement between Countrywide and numerous attorneys general. In 2008, as part of that settlement, Bank of America agreed to implement a mortgage modification program to address charges that Countrywide's marketing and lending practices had defrauded borrowers. That promised wave of modifications never came, however, so Nevada alleges Bank of America has breached the agreement. The expanded suit revives those allegations.

In its new claims, Nevada also charges that Countrywide bungled the process of bundling loans into securities by not properly documenting the transfer of assets. Despite the lack of documentation, Bank of America has fraudulently pursued foreclosure on these homes anyway, the suit charges.

New York's Schneiderman made similar charges earlier this month when he sued Bank of New York Mellon, which, as trustee for several pools of Countrywide loans, was supposed to oversee the securities for investors. Countrywide's failure to transfer complete mortgage loan documentation "impair[ed] the value of the notes secured by those mortgages" and "triggered widespread fraud, including Bank of America's fabrication of missing documentation," the suit charges.

GMAC, one of the nation's largest mortgage servicers, faced a quandary last summer. It wanted to foreclose on a New York City homeowner but lacked the crucial paperwork needed to seize the property.

GMAC has a standard solution to such problems, which arise frequently in the post-bubble economy. Its employees secure permission to create and sign documents in the name of companies that made the original loans. But this case was trickier because the lender, a notorious subprime company named Ameriquest, had gone out of business in 2007.

And so GMAC, which was bailed out by taxpayers in 2008, began looking for a way to craft a document that would pass legal muster, internal records obtained by ProPublica show.

"The problem is we do not have signing authority—are there any other options?" Jeffrey Stephan, the head of GMAC's "Document Execution" team, wrote to another employee and the law firm pursuing the foreclosure action. No solutions were offered.

Three months later, GMAC had an answer. It filed a document with New York City authorities that said the delinquent Ameriquest loan had been assigned to it "effective of" August 2005. The document was dated July 7, 2010, three years after Ameriquest had ceased to exist and was signed by Stephan, who was identified as a "Limited Signing Officer" for Ameriquest Mortgage Company. Soon after, GMAC filed for foreclosure.

An examination by ProPublica suggests this transaction was not unique. A review of court records in New York identified hundreds of similar assignment documents filed in the name of Ameriquest after 2008 by GMAC and other mortgage servicers.

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The issue has attracted growing scrutiny in recent months as bloggers, consumer attorneys and media outlets have identified what appears to be part of a pattern of questionable assignments filed across the country.

GMAC, whose parent company renamed itself last year as Ally Financial, was at the center of what became known as the robo-signing scandal. The uproar began last fall after revelations that mortgage servicing employees had produced flawed documents to speed foreclosures. GMAC and other banks have acknowledged filing false affidavits in which bank officials claimed "personal knowledge" of the facts underlying thousands of mortgages. But GMAC and other servicers say they've since tightened their procedures. They insist that their records were largely accurate and the affidavits amounted to errors of form, not substance.

The issues surrounding the Ameriquest loan and others like it appear to be more serious.

"This assignment of mortgage has all of the markings of GMAC finding that it lacked a needed mortgage assignment in order to foreclose and just making it up," said Thomas Cox, a Maine foreclosure defense attorney.

In New York, it's a felony to file a public record with "intent to deceive."

"It's fraud," said Linda Tirelli, a consumer bankruptcy attorney. "I want to know who's going to do a perp walk for recording this."

No criminal charges have been filed in the robo-signing cases.

Asked by ProPublica about the document, GMAC acknowledged Stephan did not have authority to sign on behalf of Ameriquest. The bank said it is still planning to push ahead with foreclosure on the homeowner, who remains in the property.

Company spokeswoman Gina Proia said an internal review last fall into "suspected documentation execution issues" had flagged the loan as problematic and that GMAC is "determining what needs to be done in order to receive the necessary authorization." 

"We will determine and complete the necessary steps to remediate and proceed with foreclosure," Proia said. 

GMAC also declined a request from ProPublica to interview Stephan.

Another GMAC document obtained by ProPublica shows that in at least one recent incident, GMAC employees were still discussing the possibility of fabricating evidence needed to facilitate a foreclosure.

The company once again lacked a document that would show it had been assigned the mortgage. Since the lender was defunct and no assignment had ever been made, GMAC again seemed to be stuck. But the employee proposed in June of this year that GMAC file a sworn statement that the assignment had once existed but had been lost. It's unclear if such an affidavit was ultimately provided to a court.

Records also show that GMAC has continued to rely on documents signed by the very employee at the center of the robo-signing scandal—Jeffrey Stephan, the same employee who also signed the Ameriquest document in 2010. Stephan acknowledged in sworn testimony last year that he had been signing 400 documents each day, a revelation that helped kick off the scandal. According to a former employee and a consumer attorney, Stephan still works at GMAC, though he has been transferred to a different unit.

GMAC, which is still majority owned by the government, said it is still pursuing foreclosures based on assignments signed by Stephan.  

"There is no reason or requirement to 'withdraw' valid assignments of mortgage that happened to have been signed by Mr. Stephan," said GMAC spokeswoman Proia, because there's "no requirement that [the assignment] be signed by a person with knowledge of any particular facts." All that mattered, she said, was that the signer had received the proper authority.

Banks have little reason to worry about their documents being challenged, since homeowners rarely contest foreclosure actions. In a filing with the New Jersey Supreme Court, GMAC said that of the more than 4,000 foreclosures it has handled in the state only about 4 percent of homeowners had contested the action.

When homeowners do challenge banks' documentation for foreclosures, they can have success. Late last week, the Vermont Supreme Court threw out a foreclosure case handled by GMAC due, in part, to a flawed assignment document signed by Stephan.

"It is neither irrational nor wasteful to expect the foreclosing party be actually in possession of its claimed interest," the court said, "and have the proper supporting documentation in hand when filing suit."

Since last fall, GMAC has added staff, increased training and added new procedures, said Proia. But some of those new hires have come from firms themselves accused of filing false foreclosure documents.

One manager at GMAC, Kevin Crecco, moved there from a position at the Law Offices of David Stern in Florida after the firm drew scrutiny from the state's attorney general for allegedly filing forged documents. Stern's office, once among Florida's biggest foreclosure law firms and labeled a "foreclosure mill" by critics, ceased operations earlier this year.

An internal organization chart from this spring for GMAC's foreclosure department lists Crecco as a manager overseeing roughly two dozen employees. GMAC declined to make Crecco available for an interview. He hasn't been accused of any wrongdoing.

Mortgage servicers like GMAC continue to be set up like assembly lines, with members of its "Document Execution" team responsible for signing documents. The organizational chart shows two "Document Execution" teams of 13 employees each.

The employees are tasked with, among other things, signing affidavits attesting to the accuracy of the basic facts of the loan, such as the mortgage amount, outstanding fees, etc. Affidavits are a necessary step to foreclosure in many states where banks have to go to court to seize a home.

During the robo-signing scandal, GMAC admitted that employees signing affidavits didn't verify the underlying facts. The bank says it has fixed the problems.

But consumer attorneys said that while GMAC's processes have improved, they haven't corrected basic flaws with their process.

Cox, the attorney who questioned Stephan last year as part of a foreclosure case, said employees on the "Document Execution" team still aren't truly checking the accuracy of the underlying information. Rather than digging for the original documents, employees on the team look at the numbers given by a GMAC database and double-check the math.

If the employee "just looks at a computer screen, that's not sufficient in my view," said Cox. He said he would soon be challenging affidavits GMAC recently filed in court.

Consumer attorneys also said the systems that servicers rely on are consistently plagued with inaccuracies, making a more thorough verification of the information necessary. "These days, homeowners are being forced to save every receipt, every letter, every statement, so that one day they can prove that their payment history is accurate and the bank is wrong," said Jim Kowalski, a consumer attorney in Florida.

GMAC's Proia said the company's procedures—which amount to a review of information in the company's computerized databases—were sufficient to file affidavits.

Four years into the foreclosure crisis, banks say they've made major improvements in how they handle struggling homeowners. They've promised, for example, not to foreclose on homeowners who are being considered for mortgage modifications. But that's still happening.

Consider the cases of Laurie Pinkerton and Lisa Peterson. The two women, both Californians and Bank of America customers, had been assured by the bank that they wouldn't lose their homes before they'd been evaluated for a possible modification. Both had their homes sold last month.

Such cases are particularly senseless, because simply modifying the mortgage by reducing the monthly payment might be in the interest not only of the homeowner, but also of the investor who owns the mortgage. Both Pinkerton and Peterson said their homes were sold after foreclosure for far less than they're worth.

Regulators have done little to stop the practice, and the "problem appears to be getting worse," said Kevin Stein, associate director of the nonprofit California Reinvestment Coalition.

Last month, the coalition surveyed 55 foreclosure-avoidance counselors throughout the state. Collectively they serve thousands of borrowers every month. Almost all of the counselors, 94 percent, reported having worked with clients who'd lost their homes while under review for a modification. About half of the counselors reported this happened "often." This year's totals, which are due to be publicly released next week, are higher than those in the group's survey last year.

Regulators have acknowledged the problem but have so far stopped short of solving it, say borrower advocates. More than a year ago, ProPublica reported extensively on how the banks' inadequate systems were causing wrongful foreclosures.

This past April, the federal banking regulators released "consent orders" with 14 of the largest banks requiring various improvements in their handling of mortgages and foreclosures. Prior to the orders, the regulators had not had clear rules on how the banks should handle modification applications. Among the new requirements, banks will now be forbidden from actually selling a home before a final decision is made on a modification. Also, if a homeowner is approved for a modification, the foreclosure process is supposed to stop. The new requirements will go into effect later this summer.

While those are necessary requirements, regulators took a "huge step backward" by not explicitly forbidding banks from pursuing foreclosure at all until a final decision has been made on a mortgage modification application, said Alys Cohen of the National Consumer Law Center.

The administration's mortgage modification program, which offers incentives to encourage modifications, has that requirement. But that program is voluntary for the banks and has been hobbled by lax oversight. What's more, over two-thirds of modifications occur outside of the program.

Federal regulators have the power to require all banks to make a decision on a modification application before moving to foreclose, but they've simply chosen not to.

Allowing the banks to pursue foreclosure while the modification process plays out hurts homeowners in multiple ways. First and foremost, there's the hazard of actually losing the home to foreclosure because of bank error. The two homeowners featured in this story show that this continues to be a real danger, especially in states like California where the bank doesn't need to go to court to foreclose. It's also just confusing and unnecessarily stressful for homeowners. Finally, in a foreclosure homeowners actually get billed for bank costs, such as paying for a bank's lawyers.

Instead of outright forbidding banks from pursuing foreclosure while they're considering homeowners for a modification, regulators have asked the banks to explore whether it's a problem. The orders ask the banks to "conduct a review to determine whether processes involving past due mortgage loans or foreclosures overlap in such a way that they may impair or impede a borrower's efforts to effectively pursue a loan modification."

The primary regulator for the biggest banks is the Office of the Comptroller of the Currency, which has been much criticized for failing to crack down on banks' foreclosure failures. Bryan Hubbard, a spokesman for the OCC, said that the orders addressed the "situations that were most confusing to the borrower" and that the issue would be revisited at a later time when regulators draft new, comprehensive standards for the industry. When asked whether regulators were deferring to the banks on the issue, he said they were not deferring, because regulators would have to approve whatever conclusion the banks came to.

Two homeowners' tales

Although Pinkerton and Peterson live about 450 miles apart, they've had strikingly similar experiences with Bank of America.

Both contacted the bank before even missing a payment to see what steps to take, because they'd taken a hit to their income. Both say Bank of America employees told them they'd have to fall at least three months behind to be considered for a modification (advice that is both inaccurate and frequently given). Reluctantly, both did so.

As a result of missing payments, both soon found themselves facing foreclosure. But at least the modification process had begun, too.

Of course, it went slowly. Like millions of other homeowners, they waited months and months for an answer on their modification applications and sent in the same documents over and over again. Despite sending in those documents, both were told at one point that they'd been denied because they hadn't sent in the required documents (another extremely common problem).

Finally, last month, both had their homes sold at a foreclosure auction, despite the assurances of Bank of America employees that that wouldn't happen until they'd received a final answer on their application for a modification.

"The next thing I know, a guy is knocking on my door saying his boss is at the courthouse buying our house," said Peterson.

What makes foreclosure particularly unnecessary in both cases is that Pinkerton and Peterson had made a point of telling the bank they had the means to bring the loan current even if they didn't get a modification. And unlike many Californians, both had the option of selling the home to pay off the mortgage because their homes are worth more than they owe on their mortgage.

"I never received any letter saying you're denied," said Pinkerton. "If that would have been the case, I would have borrowed the money and went and paid it current." Her family had offered to help, she said.

Both errors are particularly hard to undo because Bank of America can't simply give the houses back: The bank sold both homes to others. In order to get the homes back, the bank would have to essentially convince the new owner to sell the home back. In a case we reported on last year, JPMorgan Chase paid about $20,000 above the purchase price to the buyer of a property the bank had mistakenly sold.

At this point in the two stories, the homeowners' paths diverge.

After complaining to everyone she could think of, Pinkerton was contacted by a Bank of America employee who said he worked in the bank's office of the president. He told her he'd work to get the sale reversed. Regardless, Pinkerton was evicted from her home last week.

"I've spent thousands of dollars moving that I didn't have," she said.

As recently as Wednesday, the Bank of America employee told her he's still working on her case.

Bank of America spokesman Rick Simon said the bank was researching whether a mistake had been made. "To the extent it is determined that mistakes in the process contributed to the mortgage reaching foreclosure, the bank will work with Ms. Pinkerton to explore viable and appropriate considerations, which may include rescission."

Simon also noted that Pinkerton had been sent letters in March and April saying that she'd canceled her application for a modification.

Pinkerton said she'd never asked to cancel her application, and when she called Bank of America to ask about the letters, she was told to disregard them. She did once reject a modification offer, but that was because it would have significantly raised her monthly payments. She says a Bank of America employee told her to appeal the offer because it had erroneously calculated her income at twice its actual level.

Peterson has been more successful. After the foreclosure sale, she made a number of frantic calls and finally got a bank employee to admit there'd been a mistake, she says. But nothing could be done about it, she was told.

After being contacted by various employees who said they'd been assigned to help resolve the matter, but who then couldn't be reached, she eventually hired an attorney.

Earlier this month, Bank of America rescinded the sale and returned the title to Peterson.

It's unclear whether the bank paid a premium to the buyer of Peterson's property in order to get it back. Bank of America's Simon said, "We continue to work on resolution of remaining third-party issues."

In general, Simon said such mistaken foreclosures "have been relatively rare, compared to the volume of defaults and foreclosure activity in today's economy." Across the country, about 4 million mortgages are currently more than three months delinquent.

"Any problem in this regard is of tremendous concern, and we have put additional checks and practices in place to further limit the possibilities," he added.

To Peterson, the lesson from her experience is clear. "This system is broken," she said. "You can't trust what the bank tells you."

The Obama administration’s mortgage modification program is more than two years old. From the beginning, it’s been apparent that the participating banks and mortgage servicers were breaking the program’s rules. The administration has long argued it has little power to do anything about it. But now, after millions of homeowners have been rejected, the government has decided it’s finally time to crack down.

On Thursday, the Treasury Department announced it would be withholding government subsidies to the country’s three largest mortgage servicers, which are also among the U.S.’s largest banks: Bank of America, Wells Fargo, and JPMorgan Chase. The banks won’t be getting more money until they show “substantial improvement.”

“It’s important that the Treasury is acknowledging servicer noncompliance,” said Alys Cohen of the National Consumer Law Center, “but that’s been a problem for two years.” The action, while “better than nothing,” underscored the fact that many homeowners had been hurt during that time, she said.

Earlier this year, we reported extensively on Treasury’s lax oversight of the program, including its reluctance to penalize banks. Treasury gave us a variety of reasons for that reluctance: that the government’s power was actually quite limited, for example, or that if Treasury did penalize the banks, their performance would get even worse or they’d drop out of the program.

From almost the beginning of the program in 2009, Treasury has been sending mixed messages about its ability to penalize banks. In late 2009, Treasury warned in a press release that banks could face “monetary penalties and sanctions” for not abiding by the program’s guidelines. But a spokesperson later told us that Treasury didn’t have the power “to assess punitive fines or penalties.”

Asked today during a conference with journalists what took so long, Treasury official Tim Massad essentially framed the decision to withhold subsidies as not such a big deal. It was merely “a next step” in Treasury’s ongoing efforts to get banks to fairly evaluate homeowners’ applications for modifications, he said. As we reported earlier this year, Treasury’s oversight so far has mostly involved working with banks to get the problems fixed, and using carrots rather than sticks.

Massad also said Treasury hadn’t taken this step earlier because it only has the power to withhold incentive payments that are slated for completed modifications. Withholding incentives wouldn’t have made sense back in 2009, he argued, since so few modifications had been completed then. Treasury was making few payments at all to the banks.

It’s a confusing argument to make. There was a spike in permanent modifications in early 2010, leading to a jump in payments to the banks. Together, the three banks have collectively received $252 million in taxpayer incentives. None of those funds will be affected. Instead the government will be withholding payments going forward, which so far this year amount to a collective rate of about $19 million per month.

For banks the size of Bank of America, Wells Fargo, and JPMorgan Chase, which together reported $13.6 billion in profits in just the first quarter of this year, that’s not much of a penalty. Moreover, Massad said the payments would resume if the banks made the necessary corrections to their operations.

Treasury said there were problems in how the servicers communicated with homeowners and evaluated their modification applications. One measure, which gauges how accurately the bank calculated the income of homeowners in modifications, found that the three banks typically made errors about a quarter of the time.

Two of the banks pushed back against the findings. Wells Fargo said it was “formally disputing” Treasury’s assessment and argued that the government relied on outdated data that didn’t adequately reflect the improvements the bank had made in the past year. In particular, a Wells spokesperson said the bank’s internal reviews found that it was doing a better job of hewing to the program’s guidelines in calculating homeowners’ income.

A Chase spokesman said the bank disagreed with the assessment, but he stopped short of saying the bank would be disputing it. “We have made significant improvements since the modifications that Treasury reviewed and continue to work hard to keep improving our processes and controls.”

Bank of America’s spokesman said, “We acknowledge improvements must be made in key areas, particularly those affecting the customer experience” but said the bank had made “great progress.”

In addition to the subsidies to banks and mortgage servicers for providing modifications, the program also gives homeowners payments of up to $5,000 toward their mortgage. So far, about $206 million total has been paid out. Those payments won’t be affected by Treasury’s actions against the banks.

As we reported today, many homeowners have received a mortgage modification only to find themselves once again at risk of foreclosure because of errors by their mortgage company. An informal survey of legal-aid organizations suggests this is a frequent problem.

ProPublica investigated six homeowner cases. The cases involved four different mortgage servicers and a range of problems. All are among the largest servicers: Bank of America, JPMorgan Chase, Citibank and PHH Mortgage.

JPMorgan Chase

Chanel Rosario of Staten Island, N.Y., finally got her modification last year after years of trying. The offer came after a New York judge told Chase's attorneys they "should be ashamed" of their conduct and threatened to hold them in contempt of court. But after months of making payments, Rosario called up Chase and discovered that something was wrong. The payments weren't going toward her mortgage, and Chase was still reporting her as delinquent.

Another Chase homeowner had a similar problem: Her modification had somehow disappeared in the company's computers. The Oregon homeowner, who preferred to remain anonymous, signed and began a modification last July. But she received a letter months later telling her that she'd been rejected for a modification. One month after that, she received a foreclosure notice.

After months of trying to figure out what was happening, she was offered a new modification, the terms of which were identical to the one she'd signed -- except for the addition of over $8,000 to the balance of her loan. Understandably, she turned it down. But after having made every payment on her modification for nearly a year, the foreclosure notices continue to arrive.

Contacted by ProPublica, a spokesperson for Chase said that the bank would honor the modification and had "changed her status to current."

As for Rosario's situation, the spokesperson said the bank would reach out to her and her husband "to discuss their situation."

Citibank

Michael Skadeland of Chicago, Ill., was among the first homeowners to receive a modification through the government's Home Affordable Modification Program (HAMP) way back in November 2009. After making payments for more than a year, he was puzzled when his account wasn't credited $1,000. One of the main benefits of HAMP for borrowers is up to $5,000 in incentive payments toward the mortgage, applied yearly.

After months of phone calls trying to figure out what was going on, he was recently told by a CitiMortgage employee that he wasn't in fact in a HAMP mod, despite his signed contract. He'd been put into a different modification plan and was never told about it.

Mark Rodgers, a spokesman for Citi, said the bank was looking into the case and hoped "to resolve it promptly."

Skadeland said that he'd spoken to a Citi employee Wednesday who said that the bank had made a mistake and would offer a settlement of $5,000 for the error.

Bank of America

In Nevada, Adil Baeza and Najwa Elbahi of Reno inexplicably received a foreclosure notice three months after starting a modification last year with Bank of America.

Bank of America spokeswoman Jumana Bauwens said that the bank apologized for the error, which happened because "after completing the permanent modification, we found that we did not prepare the documents correctly to show the forbearance they were entitled."

Bank of America rescinded the foreclosure and took "corrective actions to fix their credit reports, delinquency and fees associated with this error" in January of this year, she said.

Geoffrey Giles, the attorney representing the couple, said the bank only corrected the error after he interceded and that the couple was owed other compensation. "Previously [Bank of America] was making generous deals with homeowners they did this to, but the problem is apparently so widespread that they have thought better of the process, so now they are just saying 'sorry.'" Giles said he was handling a number of similar cases.

Carolyn Chaney of Seattle, Wash., had a different problem with Bank of America. Five months after beginning her modification in August of 2010, she received a notice from Bank of America informing her that she owed $1,400 in missed payments and late fees.

Contacted earlier this year by ProPublica, Bauwens of Bank of America said the notice had been sent in error and that all the late fees would be waived.

Bank of America, like the other servicers contacted for this piece, did not respond to questions about whether these problems were widespread or what steps the company was taking to prevent these sorts of errors.

PHH Mortgage

In West Haven, Conn., Anthony Bondi had made three payments of about $850 -- the payments specified in his modification agreement -- when he received a statement from PHH Mortgage asking for over $1,800. "What they did to me was wrong," he said.

Dico Akseraylian, a spokesman for PHH, said the company was "ready to honor the loan modification agreement as accepted by Mr. Bondi," and that it had attempted to reach him "to address this matter," but wouldn't say whether the company had made a mistake or not.

Jeff Gentes, an attorney with the Connecticut Fair Housing Center who worked with Bondi, said the jump in the payments was likely due to an accounting error by PHH and said such demands for extra money often pop up in the early months of a modification.