A week before Christmas, she got a letter saying that her mortgage was going to foreclosure, even though the bank hadn’t reviewed her application for a loan modification. Desperate to save her home, along with her substantial down payment and the equity she’s accumulated by making repairs, Scott says she spent several hours on the phone trying to get through to bank representatives. When she finally reached them they were unable to find her application.

They told her she would have resubmit it, which she did.

So she was thrilled when the good news arrived via e-mail Jan. 4.

“Your loan modification has been approved,” the e-mail said, asserting that a full package of documents was in the mail and a “workout negotiator” would soon be in touch by phone.

“This will be a great end to what has been an unnecessarily drawn-out story,” she told the National Consumer Law Center.

But Scott’s joy was short-lived.

On Jan. 12, she got a call from a bank representative who told her she didn't qualify for a new loan after all. A follow-up email confirmed the bad news.

“I am more confused than ever,” said Scott.

A Bank of America representative declined to comment, citing privacy laws, but said she would look into Scott's case.

The communications breakdown is more likely when foreclosures are handled by outside attorneys hired by a loan servicer, say housing counselors. If the lender or servicer doesn’t take the extra steps required to stop the clock on a foreclosure proceeding, it can easily overtake the process of modifying a loan, they say.

“The foreclosure process carries on a momentum of its own,” said Thompson. “Some of it happens more or less automatically once you start scheduling things. Once a sale is scheduled, someone has to actively intervene to stop the sale, and the current guidance from Treasury allows a foreclosure sale to be scheduled even if someone is making current payments on their trial modification.”

The Treasury official said that guideline is under review.

"We certainly hear the issue, and want to make sure the HAMP guideline on foreclosure prevents anyone’s home from going to sale," the Treasury official said. "We are looking at guidance to make sure the communication is clear."

The 'Black Box'

Homeowners who have been turned down for a modified mortgage report servicers often don't spell out why they deny an application, say housing advocates. With no formal appeals process, HAMP makes it extremely difficult for homeowners and their counselors to figure out whether their applications were properly reviewed.

Attempts to contact lenders and servicers often go unheeded, according to Brenda Lopez, chief operating officer at SurePath Financial Solutions, a HUD-approved credit counseling service in Camarillo, Calif.

“They say, ‘I don’t have access to that information,’ and then they transfer you, and then they’ll transfer you again,” she said. “Then they’ll tell you, 'The case is already closed, you cannot reach the negotiator and I don’t have that expertise to tell you why it got denied. It got denied.' And that’s it.”

Late last year, the government "issued instructions for servicers to specify in detail" why a borrower was rejected for the program and to consider other loan mitigation options, the Treasury official said.

Worse, say housing counselors and attorneys, there is no way to independently verify whether a lender or servicer has followed the government’s HAMP guidelines. That’s because the Treasury hasn't disclosed the "black box" formula used to decide which loans will get modified.

Under HAMP guidelines, lenders can deny a loan modification if the “net present value” of the new loan is less than the return they would get from not offering a new loan and going through with foreclosure instead.  In other words, the official guidelines allow mortgage servicers to base their decision entirely on whether the outcome is in the best interest of the lender or investor, not the homeowner.

Because the Treasury has kept the formula a secret, homeowners who have been rejected for modification can't check the lender’s math to correct possible mistakes about the borrower's income, home value, credit score or other critical pieces of data.

“As long as there is secrecy around the formula, and it’s not well understood how it functions, that’s a big issue,” said Reynaud.

In response to requests from housing counselors and attorneys, the Treasury plans to provide more information on the formula by the end of the first quarter.

That secret formula also has slowed loan modification negotiations with homeowners because many lenders are apparently unwilling to deviate from the formula, even if the investor holding the mortgage is willing to be more flexible, according to housing counselors.

“Many of the investors are anxious to do a workout that goes beyond the standardized approach the servicers have scripted,” said David Berenbaum, chief program officer at the National Community Reinvestment Coalition, which oversees a national network of housing counselors. “The servicers blow a gasket when our counselors call the investors directly. They get very upset with us. But ultimately there's nothing they can do.”

That kind of end run is exactly what happened last week in Scott’s case. While she continues to try to appeal her loan modification rejection with her bank, she was surprised by a call from someone representing the investor holding her loan, who said they were offering another chance to modify her mortgage with a slightly lower payment. (Scott is working with a local HUD office to follow up on the offer.)

The number of homeowners who have been helped by the program has been dismally small.

When first announced last year, Treasury officials said they hoped to stop as many as 4 million foreclosures. But HAMP guidelines initially were incomplete, and mortgage servicers complained they weren’t given enough guidance on how they should be applied.

For their part, lenders and loan servicers express their own frustrations with the HAMP program. They note some homeowners don’t respond to their outreach efforts, fail to properly fill out applications and often submit incomplete paperwork.

They also complain the HAMP program has been plagued with numerous revisions and delays in issuing technical details attached to broad guidelines. Since April 2009, new program requirements were released nine times, and more than 90 clarifications were issued for new or revised forms, reporting changes and policies, according to the Mortgage Bankers Association. The changes meant mortgage servicers had to alter their procedures and retrain employees, which added to delays.

In July, as the pace of foreclosures continued to rise, major lenders were summoned to a Washington meeting with Treasury officials. There, they committed to modify 500,000 mortgages by Nov. 1.

By the end of December just 66,000 homeowners had been issued permanent loan modifications, with temporary modifications in place for about 850,000 more who still faced the prospect of having it reversed by the lender.

The Treasury official said the major focus now is on converting those temporary modifications to permanent loans.

Some banks and lenders have done better than others, according to a recent report by ProPublica, an independent, non-profit newsroom that produces investigative journalism.

“The big names are among the worst-performing servicers,” according to ProPublica. “Bank of America, JPMorgan Chase, CitiMortgage and Wells Fargo together account for more than 60 percent of the 3.4 million mortgages eligible for the program. All four have converted a small percentage of the trials begun three or more months ago into permanent modifications. The highest is Wells Fargo, with only 13 percent."

Some housing counselors think the Treasury needs to get tougher with lenders and loan servicers who don’t follow the guidelines that call for a thorough loan review before moving to foreclosure.

“I don’t think Treasury has reached the point where they can even enforce their own directives, either because they don’t have the resources or the tools to punish the servicers,“ said Reynaud.

Others say the lack of enforcement is the result of problems with the program itself, starting with the contracts lenders and servicers signed with the Treasury to participate in HAMP.

“In most circumstances, all Treasury can do is ban servicers from the program,” said Thompson. “And that’s not a very effective way of getting them to make modifications if they’re not already making them.”

Treasury officials say they expect to make some relatively minor changes this week to HAMP guidelines. But a growing number of stakeholders think broader changes are needed.

Lenders note that, since foreclosures began surging more than two years ago, the primary cause has shifted from rate adjustments to job loss, which leaves homeowners unable to manage even a lower monthly payment.

The MBA wants to see the HAMP program modified to include standard guidelines for loan forbearance, in which lenders temporarily suspend payments until the borrower can find a new job. It also wants to HAMP guidelines expanded to include interest-only loans, which the trade groups says could help more people get an affordable loan.

Others suggest it’s time to revisit a proposal, fiercely opposed by the lending industry, to allow bankruptcy judges to modify mortgages from the bench. Primary mortgages are currently the only form of debt excluded from so called “judicial modification.” Housing advocates say changing the bankruptcy law would dramatically speed the pace of loan modifications and save millions of homes from foreclosure.