We were paying the mortgage, but not much else," said Sharri Olsen of Scarborough.

The Olsens, a middle-income family with children, had watched as their adjustable-rate mortgage on their three-bedroom home tripled over two years to unaffordable payments of $3,700 a month.

In 2009, they had tried and failed to modify their mortgage with their lender, American Home Mortgage. After a year of lost paperwork, the loan servicer for AHM denied their modification because they made too much money, then sent them a bill for $8,000 in back payments and fees.

The Olsens paid it and were able to fight off the foreclosure notice, but they still needed to reduce their monthly mortgage payments.

They looked for other options. By now their credit rating had been trashed by following the advice of the loan servicer to not pay the mortgage while under consideration for a loan modification. A conventional loan from a bank was no longer within reach.

"I called an independent company in Massachusetts for help getting a modification," said Olsen. "The guy on the phone said he could do it for $5,000. Well, that didn't make much sense to me. We might as well be paying on the mortgage."

It was probably a scam. Mortgage rescue scams were off the charts in 2009 and early 2010. Foreclosure prevention programs are free.

Sharri Olsen decided to go back to American Home Mortgage and try again.

"I didn't know what else to do," she said.

This time the loan servicer said they would definitely qualify - their savings were gone.

Maine beefs up foreclosure prevention in 2009

A home is typically considered in default after 60 days of non-payment. Over 3,000 homes went into default state-wide last April, according to the Maine Bureau of Consumer Credit Protection.

In November, the number climbed to over 4,000 homes in default - over 400 of those were in Knox, Lincoln and Waldo counties.

Many of those will end up in foreclosure, but it will be as few as possible if William Lund, superintendent of the Maine Bureau of Consumer Credit Protection, has anything to do with it.

The bureau's foreclosure prevention program, which was started in 2009 as a result of a new state law designed to help distressed homeowners, fields hundreds of calls to their hotline daily and refers over a 100 cases a week to housing councilors at Penquis, Maine State Housing Authority and other agencies who offer their services for free.

"This is hard, but we have had successes," said Lund, who has seen the foreclosure prevention program grow over the past year to become the busiest in the bureau. The program intervenes in the loan modification process and advocates for the homeowner.

Lund, who was manning the foreclosure prevention hotline because most of the staff was getting advanced training on loan modification programs, said it was common for lenders to lose paperwork and for homeowners to have to send it over and over again, each time causing a delay in response that marches homeowners further along the path to foreclosure. At the same time, homeowners rarely get to talk to the same person twice.

"It's still happening," said Lund. "It hasn't gotten any better. I had two people who called this morning that reported the same thing."

The problem is mostly with large mortgage lenders, like Countrywide, GMAC, American Home Mortgage, and with the large national banks like Bank of America.

"A small percentage of the foreclosures are with Maine banks," Lund said. Local banks tend to have stricter loan application guidelines and work with customers if things go wrong, he said.

Loan servicers can benefit from foreclosures

For large lenders and big banks that hire loan servicers to do the day-to-day management, it's another story. The lowest bidder for the servicing contract may be a call center in Mumbai. That leaves the homeowner in the odd situation of talking to someone who has no authority to change the terms of the loan and unable to talk to those who do.

But the loan servicers have a lot of power. They can deny loan modifications.

The Congressional Oversight Panel reported on December 14 that lenders may want to avoid foreclosures, but the loan servicers can turn a substantial profit from foreclosure-related fees and it may be in the best interest of the servicer to move a loan to foreclosure.

Added to that, foreclosure departments of large banks and lenders are separate from loan modification departments and may not be communicating with each other.

Given all those variables, when a homeowner sends in the paperwork to a loan servicer for a modification, the information can easily get lost or not be shared with the foreclosure division.

"There is a total disconnect with the attorney for foreclosure," said Lund. "So a homeowner can get a foreclosure summons and complaint while in the loan modification process."

If the loan servicer working on a loan modification tells the homeowner to stop paying the mortgage or ignore a foreclosure summons, the homeowner could be out on the curb with furniture on the lawn before they know it.

The December 14 report held the Treasury Department responsible for failing to hold loan servicers accountable for lost paperwork or for refusing to modify eligible loans.

At the heart of the conflict of interest is that Fannie Mae and Freddie Mac were put in charge of loan servicing oversight. This is a lot like the fox in the henhouse: Fannie and Freddie are government-backed enterprises that buy mortgages and sell mortgage-backed securities and deal with the same loan servicers they oversee. It would not be in their best interest to penalize them, according to the Congressional Oversight report.

Sharri Olsen: Loan modification attempt #2

On her second attempt to get a loan modification Olsen documented every conversation and piece of information shared with the loan servicer. She was in constant contact with her loan servicer, but three months later the sheriff was at her door with another foreclosure notice.

"No, no, no, no problem. That's what they told me," said Olsen, of the conversation she had with the loan servicer. "I said, let me make a mortgage payment. They said no, it would stop the loan modification. Nothing happened last time, did it? And I thought: that's true. Even the sheriff kind of shrugged like he had been through this a lot."

While she continued to work with the loan servicers on modification in one department, the foreclosure went through another.

The first time Sharri Olsen knew her house had been foreclosed on was October 1, 2010, when she saw a woman planting a SOLD sign on her front lawn.

Big lenders don't like to modify

Lund said there is little incentive for lenders to participate in loan modifications.

The U.S. Treasury Department aimed to prevent up to four million foreclosures with the Home Affordable Modification Program (HAMP). Now, it appears HAMP will effectively prevent fewer than 800,000 foreclosures, even as Treasury predicts up to 13 million foreclosures by 2012. HAMP had $30 billion to work with; it appears they will have spent roughly $4 billion on stopping foreclosures when the program concludes, according to the Congressional Oversight report.

The good news is that the 800,000 families didn't lose their homes and $26 billion of bailout money is reclaimed - but that is cold comfort to the millions facing eviction.

"Mortgages are binding contracts and lenders can't be forced to do loan modifications," said Lund. "It's basically voluntary if they participate."

The U.S. Treasury did provide incentives for lenders to participate in HAMP, but the carrot was too simple for the complicated, multi-layered lending and servicing industry.

"To be fair, lenders are not at the top of the food chain. They are answering to investors and brokers. The bank or lender's motivation is to keep investment money flowing," said Lund.

Maybe. Maybe not, but one thing is clear: the primary role of loan modifications turned out not to be saving homeowners from foreclosure. Instead, it was whether the lender benefitted more under a loan modification than if the property went into foreclosure, said Lund.

"The thing to remember is that any decisions to amend the mortgage contract or allow for a temporary reduced mortgage will only succeed if the lender benefits," said Lund.

The foreclosure prevention program is free

The Olsens started planning to move their family into a motel in October, but Sharri Olsen was on the phone trying to find an attorney to take her case in an attempt to get the auction and sale overturned. One lawyer said he would take it on for $6,000, but that the Olsens only had a five-percent chance of getting their home back. Another said, "I don't know what to tell you. Good luck."

Olsen was racking her brain for ideas when her co-worker suggested she contact Senator Olympia Snowe.

Olsen did. She explained the situation to a senate staffer who recommended the Bureau of Consumer Credit Protection's foreclosure prevention program. Then the senator followed up with a letter directly to American Home Mortgage.

Olsen contacted the bureau.

"They said we'll do everything we can," said Olsen. "The bureau was amazing."

Within days, Olsen was talking to someone at American Home Mortgage, not the overseas loan servicers.

The bureau's foreclosure prevention program isn't for the benefit of the banks: it's a government-funded program for distressed homeowners. There is no guarantee that foreclosure can be prevented, but the program and the councilors affiliated with it help shepherd homeowners through the possibilities and often contact lenders directly on behalf of the homeowner, thus fulfilling the role of mediator and coach.

Handing over the keys to the house

"A week ago, we got a document that overturned the foreclosure and rescinded the auction," said Olsen. "We got a rate that adjusts in 2014 to a cap of 4.5 percent, fixed, for thirty years."

Starting in February, the Olsens will be making a mortgage payment of $1,400 a month. The deed is back in their name. Their keys fit the locks.

"People don't believe it could get this bad," said Olsen. "I am so, so happy to have my home back."

In October, Lund reported to the Maine Congressional Committee that oversees financial services that the bureau's foreclosure prevention program had successfully convinced lenders to postpone or cancel 40 foreclosure auctions and overturn several auctions that had already taken place (when the bank was the buyer) and had assisted in 52 mortgage loan modifications that made monthly payments affordable.

Still, loan modifications are not that easy to get.

Lund said the success rate is not that high. "There are other outcomes: a delay in foreclosure to allow a homeowner to complete a sale or an agreement to do a short sale."

The foreclosure rate dropped this past fall. It was a false drop that happened because there was a hold on foreclosures due to sloppy loan application and review. That just delayed foreclosures; it didn't stop them. They are still in the pipeline.

Lund expects the Maine foreclosure prevention office to remain busy through 2012.

The Maine Foreclosure Prevention Hotline can be reached at 1-888-664-2569. All services are free.