Family faces foreclosure after following the rules

After struggling with medical crises and recession-related lost income, Susan and Robert Gerke thought they had jumped through every hoop that their bank, CitiMortgage, required for them to get a loan modification.

They made 11 trial payments on time, sent in paperwork as requested and stayed in close touch with Citi. So it came as a rude shock when they received the foreclosure notice on the San Rafael home they've owned for 15 years.

"We were so sure we could keep it and that they were really working with us, I just feel blindsided," Susan Gerke said.

The house is scheduled to be foreclosed upon on Dec. 29, leaving the family of four - the Gerkes, their 22-year-old autistic daughter and Susan's 86-year-old father, who has Alzheimer's disease - without a place to live.

Their story mirrors those of thousands of other homeowners who've been denied long-term relief under the government's Home Affordable Modification Program. The pace of conversion from trial plans to permanent modifications has slowed dramatically, dropping from about 55,000 a month early this year to just 28,000 in September, government records show.

What sets the Gerkes' situation apart is that as longtime homeowners, they have significant equity in their home.

Penalized for equity

In fact, their attorney, Marilyn Sullivan, said the couple are being penalized for that equity.

"Citibank gave them a HAMP loan modification and took it away from them - because the house is worth more than the loan, so Citi will financially benefit from foreclosure," she said.

Citi spokesman Mark Rodgers wrote in an e-mail discussing the typical approach to equity, not the Gerkes' case: "In general, a borrower with positive equity in their property has the ability to refinance or sell their property and pay off the loan in full to avoid foreclosure. A modification is still an option if the borrowers' income can support a payment that passes the (net present value) test when compared against liquidation."

Net present value is a formula banks use to determine whether foreclosure or loan modification would be better for them financially. Under HAMP, banks may pick the option that nets them more money.

The Gerke family's difficulties escalated in 2008, when Robert Gerke began using a wheelchair because of multiple foot and leg injuries and neuropathy. Around the same time, Susan Gerke became gravely ill with an intestinal disorder that required major abdominal surgery. Both health crises racked up large medical expenses.

Even earlier, Robert Gerke's business as a consultant and writer in advertising and marketing had suffered as the economy crumbled. He is the family's sole breadwinner, as Susan stays home with her father and their daughter. The couple exhausted their retirement savings to stay current on their mortgage payments.

The Gerkes received a loan modification in September 2009. A month later, Robert Gerke's income improved thanks to a long-term consulting contract, something they said Citi ignored when it later denied them a permanent modification.

In July, Susan Gerke said, she attempted to make her 12th trial modification payment by phone and Citi told her it would not accept it because they had been "tracked for foreclosure."

Sullivan, the attorney, said the bank committed several errors in the process, including not complying with the California rule that lenders must discuss loan modification 30 days before filing a notice of default.

Modifications hard to get

Studies show that getting a permanent HAMP modification is increasingly difficult.

Neil Barofsky, the special inspector general who oversees HAMP and the Troubled Asset Relief Program, issued a scathing report to Congress last month, detailing how HAMP trial modifications frequently backfire.

"Many HAMP borrowers, already contending with other hardships ... end up unnecessarily depleting their dwindling savings in an ultimately futile attempt to obtain the sustainable relief promised by the program guidelines," he wrote. "Perhaps worst of all, ... they may face back payments, penalties and even late fees that suddenly become due on their 'modified mortgages' and that they are unable to pay, thus resulting in the very loss of their homes that HAMP is meant to prevent."

After being contacted by The Chronicle, Citi's Rodgers said the bank would review the Gerkes' situation to see whether a foreclosure-prevention program might still be applicable. Late Wednesday, Sullivan said she had been informed that the family had been conditionally approved for a loan modification.

For the Gerke family, such a solution would be a lifesaver.

"My biggest concerns are my dad and my daughter," Susan Gerke said. "If we lose our home, then I'm going to have to put my dad in a (residential care) home. I know he'll decline very quickly from that. My daughter's birthday is in December, and she keeps asking if we will be home on her birthday. We love this house. It's not just my husband and I losing a place to live; it would have some very serious repercussions for my dad and my daughter. I'm so afraid of that."

E-mail Carolyn Said at csaid@sfchronicle.com.

This article appeared on page C - 1 of the San Francisco Chronicle