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 NeighborWorks America 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."
http://sfgate.com/cgi-bin/article.cgi?file=/c/a/2007/09/13/MNJ8S1FKC.DTL
