Modified mortgages: Lenders talking, then balking

Carolyn Said, Chronicle Staff Writer

Thursday, September 13, 2007

Congress, banking regulators and President Bush all are promoting a potential way for
subprime borrowers to avert foreclosure. Called loan modification or loan workout, it
means changing a mortgage's terms to make the payments more affordable.

Mortgage lenders have publicly embraced the concept, saying they care about "home
ownership preservation" and will work to prevent foreclosures. A "loan mod" might
involve freezing the interest of an adjustable-rate mortgage, for example - perhaps setting
payments at 8 percent instead of letting them soar to 11 percent.

But consumer advocates say it appears that few modifications are actually occurring, and
lenders refuse to provide any data to show how common the practice is.

Chase, Washington Mutual and Wells Fargo banks all declined to provide The Chronicle
with statistics on how many mortgages they modify and who qualifies, although all have
said publicly that they want to help troubled homeowners. Countrywide Financial, which
has also promoted its loan modification efforts, did not return calls.

"There definitely is a disconnect between what the lenders are saying and what borrowers
and counseling agencies are experiencing," said Kevin Stein, associate director of the
California Reinvestment Coalition, a statewide advocacy alliance that promotes access to
credit. "It is disheartening to hear from counseling agencies that things are not working
out the way they should. There is no accountability. There is no way for anyone to know
if what the banks say is coming to pass."

Around the Bay Area, workers at housing counseling agencies said they have seen few, if
any, loan modifications offered to their clients.

Lenders are uniformly unwilling to make loan modifications for homeowners whose
interest rates are resetting higher, said Rick Harper, director of housing at Consumer
Credit Counseling Services of San Francisco, which talks to about 1,000 delinquent
borrowers a month.

On the other hand, he said, for people with short-term financial crunches - from job loss,
illness or divorce, for instance - lenders today are more amenable to modifications and
forbearance. That allows homeowners to make reduced or no payments temporarily, then
the extra amount is tacked onto the loan at the end.
The catch-22 is that the homeowners who most need loan modifications are not those
with temporary problems. They are people who signed up for adjustable-rate mortgages
and now cannot make the escalating payments.

The problem is certain to get more acute. About 2 million ARMs are due to reset sharply
higher in the next 18 months. Because most of those homeowners cannot afford the
higher rates - and the softening housing market means they cannot refinance or sell for
enough money to repay the loan - those resets are likely to trigger a huge wave of
foreclosures unless the loans are modified.

"Lenders are not modifying these (adjustable-rate) loans," said Martin Eichner, director
of dispute resolution at Sunnyvale's Project Sentinel, a nonprofit agency that helps
consumers with housing problems. "A lot of these loans are so hopeless and irrational
that lenders won't even talk to us."

Lenders are tight-lipped about many aspects of loan modification, including how they
decide which borrowers qualify for workouts.

But anecdotal evidence suggests that the people who get loan workouts are those with
healthy financial profiles: good income, high credit scores, money in the bank, equity in
their house - in short, people who would qualify for prime loans or refinancing. That
effectively leaves out the homeowners who most need loan modifications. If their
finances had been sterling in the first place, they would not have been subprime
borrowers.

To be sure, many subprime borrowers have a basic problem that a loan modification
cannot solve: They cannot afford their houses. They never should have gotten the
mortgages they have now. They might have exaggerated their incomes or underestimated
the drain of monthly payments.

Still, it appears that more people might qualify for loan modifications than actually
receive them.

The Homeownership Preservation Foundation runs a hot line for troubled homeowners.
In recent months, a huge national campaign has promoted its (888) 995-4673 number.
The hot line counseled 15,207 people in the second quarter, analyzing their budgets in
detail. Of those, 26 percent were told they might qualify for a loan workout, according to
Tracy Morgan, a spokeswoman for the group. Another 28 percent were told to try to
improve their budgets then seek a workout.

The group has no data on whether any of those homeowners actually received a loan
modification.

Lenders say it's only common sense that they apply due diligence to candidates for
modifications.
"If the borrower is not going to be able to handle even a modified loan in the long term,
it's probably good for the lender, investor and borrower to face that fact early on," said
Tom Kelly, a spokesman for Chase, which services half a trillion dollars of mortgages.
"To extend somebody so they can make payments for (an additional) six months and then
face foreclosure anyway, (doesn't) accomplish very much. We've incurred more costs on
behalf of the investors (and those) investors are not much closer to getting their money
back. If the borrower can't handle it, they can't handle it."

In talking about investors, Kelly is referring to the fact that most mortgages today are
packaged and sold on Wall Street in a process called securitization. That creates
roadblocks for loan modification because the bank that collects consumers' payments
often does not have the authority to decide about a workout. Securitization also raises
concerns about tax and accounting consequences of loan modifications.

But this summer, Congress aggressively pushed government agencies to help remove
those impediments. The Securities and Exchange Commission and the Financial
Accounting Standards Board issued letters saying that loans could be modified even
before the homeowner had missed payments if it was "reasonably foreseeable" that
default might occur.

Kelly said Chase is proactively calling ARM borrowers two to five months before their
reset date to make sure they are aware what their payments are likely to be. If
homeowners say they cannot afford the higher rate, Chase contacts the investors to see if
they are willing to offer a workout.

"We want to get as high and fair a rate as the contract allows, but we want to also be able
to collect it," he said.

There are several reasons loan modifications could help all parties and might start
becoming more common as the wave of ARM resets hits.

Politically, they are palatable because they do not involve a taxpayer bailout for
homeowners who got in over their heads. Instead, the lender (or investor) picks up the
tab, but the homeowner obviously still has to consistently make payments.

Financially, they make sense for lenders and investors compared with the alternative of
foreclosure. A foreclosure can cost the lender from 20 to 40 percent of the loan balance,
said John Mechem, a spokesman for the Mortgage Bankers Association in Washington,
D.C. "There's a real incentive for lenders wherever possible to work out some sort of
agreement," he said.

Chris Cagan, director of research and analytics at First American CoreLogic, a research
firm in Santa Ana, agreed.

"The lender would rather have a performing loan than have a (property) vacant, possibly
for a year in a slow market, paying taxes, maintenance, insurance and finally selling it at
a discount. They really don't want to do that. They'd rather keep that thing on their books
as a performing asset and not have to take a hit. It's not because they love humanity."

Resources

Places homeowners can seek assistance with loan modification:

-- Your bank. Lenders emphasize that financially stressed homeowners should contact
them well before the loan is scheduled to reset higher. Ask if your loan can be modified,
for example, by fixing the rate below the scheduled reset amount. Ask if you qualify for
"forbearance" - temporary reduction or suspension of payments. Consumers can also ask
a community group to contact their lender on their behalf. Phone numbers of major
servicers' loss mitigation departments are at links.sfgate.com/ZTG.

-- ACORN Housing - www.acornhousing.org; (866) 672-2676 or (888) 409-3557. This

nonprofit has programs with many lenders to help homeowners negotiate affordable loan
workouts, payment agreements and foreclosure prevention. It also advocates for policy
reforms to stop predatory lending.

-- Homeownership Preservation Foundation - links.sfgate.com/ZMV, (888) 995-4673.

This community development group offers free foreclosure-avoidance counseling and
assistance contacting lenders.

-- HUD-approved housing counseling agencies - links.sfgate.com/ZMW, (800) 569-

4287. The U.S. Department of Housing and Urban Development sponsors housing
counseling agencies throughout the country that offer advice at little or no cost.

Source: Chronicle research

Loan mods: Who qualifies?

About one-quarter of the 15,207 homeowners counseled by the Homeownership

Preservation Foundation's hot line in the second quarter were considered possible
candidates for loan modification. Another 28 percent were seen as potentially eligible if
they improved their budgets.

The group does not have follow-up data to show whether consumers who were
encouraged to pursue a loan modification were able to get one.

Recommended solutions for counseled homeowners:

-- Try to get a loan modification - 26 percent.

-- Try to improve their budget then pursue loan modification - 28 percent.

-- Seriously consider selling the home - 19 percent.

-- Check with NeighborWorks organizations for financial counseling - 12 percent.

-- Schedule follow-up calls - 3 percent.

-- Put on credit-counseling consolidation plans - 1 percent.

Source: Homeownership Preservation Foundation

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