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When Bank of America Corp. sent letters to 60,000 struggling homeowners offering to slice an average $150,000 off their loans, the lender got an unusual response from most of them: silence.

Homeowners who fell behind on their payments began receiving the mailings in May, part of the bank’s effort to meet terms of the $25 billion industry settlement over foreclosure abuses. More than half haven’t responded as “borrower fatigue” causes them to tune out the offers, said Dan Frahm, a spokesman for the Charlotte, North Carolina-based bank.

“The number of customers responding is lower than we expected, given the significant assistance available,” Frahm said in an interview. “We are working very hard to determine why response rates are lower than expectations.”

Bank of America, which pledged almost half of the fines and assistance in the February settlement with state and federal officials, is critical to determining how many U.S. homeowners are helped by the landmark deal. Housing advocates say that relying on the same companies that committed loan servicing abuses to avert foreclosures may result in yet another program that helps fewer people than intended.

Previous efforts to bolster the housing market haven’t helped as much as expected. When President Barack Obama announced the Home Affordable Modification Program, or HAMP, in 2009 he set a goal of 3 million to 4 million renewed loans. Fewer than one million have been permanently modified.

Principal Reductions

Bank of America, the second-biggest U.S. lender by assets, will offer principal reductions to more than 200,000 clients by August, Frahm said. Other steps include cash incentives to sell a delinquent borrower’s home for less than the amount owed and a pilot program to turn owners into renters, he said.

Homeowners are exhausted from fighting foreclosure and may think offers to cut loans by one-third aren’t legitimate, Ron Sturzenegger, head of the lender’s Legacy Assets Servicing unit, said last month at a conference in Denver.

“In many cases, customers unable to make their mortgage payments are overwhelmed by the process,” Sturzenegger, 52, said. “Unfortunately, many customers may just be tired of the process and thinking about giving up.”

Initial solicitations went to those who were delinquent for the longest and may have abandoned their homes, Frahm said. The response may improve as the lender reaches those who have been behind for shorter periods, he said, declining to give specific figures.

‘Incredible Dysfunction’

The company has about 1 million customers who have missed at least 60 days of payments, about 85 percent of whom were inherited from the 2008 takeover of Countrywide Financial Corp. The bank, which has posted more than $40 billion of costs tied to faulty home loans and foreclosures, has about 50,000 people working to help distressed homeowners.

Borrowers have lost faith in Bank of America and other servicers, said Lisa Sitkin, managing attorney at Housing and Economic Rights Advocates in Oakland, California. Those seeking modifications have had their paperwork misplaced, been told conflicting messages and have had applications rejected based on incorrect information, she said.

“There’s incredible dysfunction in the way they set up their systems to handle this, and when mistakes happen, which is constant, they have very little ability to correct them,” Sitkin said. “If Bank of America is complaining about borrower fatigue, they can look to themselves for the reason.”

Lost Paperwork

Hassan Fallah, 59, said he has been trying to modify his Countrywide loan on his Brentwood, California home since late 2009. The hotel manager’s tax returns were lost by Bank of America, service representatives didn’t return calls or referred him to people no longer employed by the lender, and he was eventually told he didn’t qualify for the government’s Home Affordable Modification Program.

This year, Bank of America reviewed his case for the settlement’s debt forgiveness program. A May rejection letter overstated his monthly income by $1,400 and left blank inputs that should have stated potential savings, he said.

“It’s been nothing but a horrible experience with Bank of America,” Fallah said in an interview. “I would not want anyone to go through what we went through the last two and a half years.”

The lender, which had set a July 11 foreclosure date on his home, is reviewing the case after the California monitor for the settlement got involved. Fallah said he bought the two-story house in 2003 with a 30-year loan fixed at almost 6 percent interest. Making payments became difficult after his annual income fell by $20,000.

Lowest Rating

Bank of America had the lowest rating of any large lender in a December survey by Ann Arbor, Michigan-based American Customer Satisfaction Index LLC. ConsumerAffairs.com, a news and advocacy website, also gave the company a low rating, and an online forum for complaints about Bank of America mortgages can be found here.

Frahm, the Bank of America spokesman, acknowledged that botched customer interactions “could be a reason for lower-than-expected response rates.”

The firm is attempting to overcome their misgivings with appeals by mail, FedEx Corp. packets, e-mails and phone calls and may work through community housing groups, Frahm said. Homeowners may be better off getting a loan modified this year, before tax rules that exempt principal forgiveness as income for some filers expire, he said.

Bank of America is “confident we will meet our obligations under the settlement,” he said.

Bank Rules

The lender requires only verification of income for the modifications, he said. Those who qualify must be at least two months behind on payments on a mortgage that’s larger than the value of the property. Bank of America can’t make the offer to most of its delinquent borrowers because loans owned by Fannie Mae or Freddie Mac aren’t included in the settlement.

The February settlement was hailed by Housing and Urban Development Secretary Shaun Donovan as providing “immediate relief” to distressed homeowners. That could be in jeopardy if servicers fall short and foreclosures aren’t prevented, which may cause the U.S. housing market to dip again, said Mike Calhoun, president of the Center for Responsible Lending.

It was allegations of shoddy mortgage servicing, including using so called robo-signers to cut corners while seizing homes, that prompted a 16-month investigation and the accord with 49 state attorneys general and the Department of Justice.

“The whole nature of the settlement was ‘We had a broken system,’ and now you’re asking people to trust this system,” Calhoun said. “A lot of people are reluctant to believe the banks.”

Lenders’ actions may be even more important because part of the settlement’s $2.5 billion of state funds for foreclosure prevention has been diverted to other purposes, such as propping up local budgets, according to a Bloomberg Government report.

Better Response

Other firms involved in the settlement, including Wells Fargo & Co. and Ally Financial Inc., indicated they may be getting a better response than Bank of America.

Wells Fargo, the biggest U.S. mortgage servicer, persuades 80 percent of those who are at least two months delinquent to work with them, said Tom Goyda, a spokesman for the San Francisco-based firm. He declined to give a specific figure for modifications linked to the settlement, as did the other banks.

GMAC Mortgage, the bankrupt lender owned by Detroit-based Ally, said it has reached out to half of eligible borrowers and the response has been “high,” according to Susan Fitzpatrick, a spokeswoman for the business.

Prequalified Offers

JPMorgan Chase & Co. is being “proactive” by sending some customers prequalified modification offers that require only a signature and automatically cutting interest rates for others, said Amy Bonitatibus, a spokeswoman for the New York-based firm. Mark Rodgers of Citigroup Inc. declined to comment.

The settlement’s effects on mortgage bonds appear marginal so far, Fitch Ratings said this week. About 30 percent of modifications to loans packaged into private securities included balance cuts in June, up from 20 percent in February, the firm said, attributing the change to an existing trend.

Bank of America and JPMorgan were singled out as failing to properly implement HAMP, the U.S. Treasury Department said last year. The firms, whose CEOs have denounced principal forgiveness as unfair to those paying their debts, miscalculated borrower incomes on one-fifth of loans, Treasury said.

Joseph Smith, the former North Carolina commissioner of banks assigned to police lenders as part of the settlement, declined to comment before a report due in September, said spokeswoman Laura Brewer. He can work with state officials to sue companies that don’t operate in good faith, she said.

Just as with HAMP, firms probably aren’t devoting the resources needed to adhere to the settlement, making enforcement by regulators crucial, said Diane Thompson, an attorney specializing in mortgage issues at the National Consumer Law Center in Boston.

“If the attorneys general and the monitor are willing and able to crack down on Bank of America and the other servicers, the settlement may help a lot of people,” Thompson said. “If they don’t, it will be yet another disappointment.”