A Manayunk foreclosure by Bank of America shows mortgage program's flaws

It might make financial sense for Lisa Fiorilli to just walk away from her home in Manayunk — a tidy, three-story rowhouse on one of the neighborhood's familiar, hilly streets that rise up from Main Street and the canal.

But Fiorilli, facing foreclosure after a two-year bureaucratic tangle with Bank of America over a mortgage modification, would rather stay and fight — even if her home is now worth less, as she says bank officials have suggested, than what she owes on it.

Fiorilli's saga — backed up by a thick file of documents and call logs — is a story of a mortgage accommodation dangled and apparently snatched away for flimsy reasons, such as a phone payment that came in 35 cents short, and another payment that came in two weeks early. That's no misprint: early, not late.

Bank spokeswoman Jumana Bauwens did not have details of the case available last week, but said the bank was escalating its inquiry — something Fiorilli, a former executive with experience in customer service, says she had requested repeatedly to no avail.

But Bauwens said she'd learned enough to understand at least some of Fiorilli's frustration. "It's obvious that she hasn't received the level of service from Bank of America that she should have," Bauwens said.

At the very least, Fiorilli's story helps illustrate larger problems identified by distressed homeowners and consumer advocates: the shortcomings of the federal government's Home Affordable Modification Program, and the foot-dragging or incompetence at banks that have agreed to implement it.

Fiorilli, 52, offered to share her story to help show how the program appears from a consumer's perspective, and to show how HAMP needs to be improved to have any hope of meeting its goal: helping the nation recover from the housing bubble and the 2008 financial collapse without the stronger medicine that some have urged and lenders have fought, such as pushing banks to write down the principal on underwater loans.

Multiply Fiorilli's real estate experience millions of times, and you have a key chapter in the story of what went wrong in the U.S. housing market.

Fiorilli bought her house for $137,500 in February 2002, as the frenzy of the housing bubble was building and bidding wars were growing common in Philadelphia and around the country. She remembers how homes, including hers, went for their asking price or more, sometimes on the day they were listed, and she remembers her agent's advice to act fast or lose out.

A native of Lafayette Hill, and in the midst of a difficult divorce, Fiorilli found Manayunk's urban vibrancy to her liking. Within several years, it seemed like a good investment, too.

As the bubble grew, Fiorilli refinanced to cut her interest rate and withdraw cash for home improvements. By early 2009, when she was laid off and the economy lay in shambles, she was a short way into a $225,000, 30-year loan on a house appraised near $300,000.

Extended unemployment compensation was a lifeline, but Fiorilli is now happily past it. After nearly two years without a job, she began working as a product-development consultant and also landed a full-time position.

Not that her personal recovery was smooth. "I could literally wallpaper my house with the number of resumés I sent out," she says. But it pales beside her real estate nightmare.

After struggling for months to make her full $1,700 mortgage payments, she contacted Bank of America for a loan modification just before it began the foreclosure process. But when a housing counselor at Consumer Credit Counseling Service of Delaware Valley (recently renamed Clarifi) suggested HAMP could work, Fiorilli applied. With unemployment compensation of more than $2,000 a month, she seemed to qualify.

Bank of America never showed her how it arrived at her trial-modification payment of $722 a month, which included her nearly $200 in escrow. But it's easy to see how it could. In return for federal incentives, the program allows lenders to cut interest rates to 2 percent, lengthen a loan term to 40 years, and agree to put off repayment — to forbear — on a portion of principal until a balloon payment at the end of the loan.

With forbearance of about $50,000, a $225,000 loan would meet the target: a principal and interest payment of about $530 a month, low enough to meet the program's requirement that payments not exceed 31 percent of monthly gross income.

So what went wrong? Fiorilli has gotten multiple answers.

She says she dutifully made her monthly payments starting in March 2010, paying by phone to ensure she knew the right amount. When she got a letter denying her a permanent modification six months later, it said she failed because of "trial plan default."

Baffled, she finally got a bank rep to compare the bank's records against her own statements, revealing the 35-cent shortfall. Fiorilli says he encouraged an appeal.

Every time she called, she says, she got a different answer. Sometimes she was told she'd finally been approved. Others times, she was told she'd been declined. Her pleas to speak with an executive with actual decision-making authority were ignored.

Then, this spring, she got another denial letter. This one said that her initial appeal was valid, but that now she didn't qualify because of the financial formula.

When she called this time around to question the decision, asking pointedly whether "anybody should lose their house over 35 cents," a new bank rep denied that the tiny shortfall was the reason for the initial denial.

Instead, she blamed it on the fact that Fiorilli's first payment came in March 2010, before her modification was due to begin April 1. Funny, since Fiorilli has two Bank of America letters dated in early March 2010 urging her to make her first payment immediately.

Could the unemployment be an issue? Alys Cohen, an attorney at the National Consumer Law Center, says the rules changed in mid-2010 to limit use of unemployment compensation in the HAMP formula. But, like Fiorilli, Cohen says a borrower shouldn't be held to new standards for a trial modification that started months earlier. "Any lender who leads someone on for that long without determining basic eligibility should be required to make a loan modification," she adds.

Fiorilli made 13 trial-modification payments before Bank of America started refusing them. Since then, she's put aside the funds, and is prepared to pay what she'd agreed to. But she doesn't intend to give up.

"I can't allow them to take my home because they made a mistake," she says.

Cohen says the incentives for modifications may be too weak, at least without a stick along with the carrot. She also worries that the ability to tack on fees gives lenders "financial incentives for incompetence and unreasonable delays."

Ironically, borrowers like Fiorilli, committed to paying off a loan rather than walking away, are offering a gift to lenders.

If her foreclosure winds up in Philadelphia's conciliation program, Clarifi's Anita Brown predicts, the judge will see it that way, too. "The court is going to say, 'Excuse me, Mr. Bank of America, are you nuts? Take the money and get out of here.'?"

But there are larger points worth remembering. All those loans that now look so foolish in hindsight? There were two parties to each, a lender and borrower, who both thought the homes were worth more than they are now. And lenders' lax standards and outright fraud fueled the frenzied bidding wars. Some lucky sellers cashed in, and the rest of us suffered.

Both sides need to give a little. Above all, Fiorilli's story shows how far we still have to go.