Few Borrowers Can Revise Mortgage Loans

By Monica Hatcher

RISMEDIA, January 23, 2009-(MCT)-Since defaulting on her mortgage more than a year ago, Marisela Gonzalez has attended foreclosure prevention seminars, spent hours on the phone with her lender, paid a consultant, availed herself of bankruptcy protection-everything in her power to hang onto her home.

“I thought to pack and just get out,” recalled the special-education teacher. “Then, I said, ‘No … this is my place. I’ve been here 15 years and I am not going to give it back to a bank just like that.’”

Yet Gonzalez is giving her Kendall, Fla., townhouse back to the bank, in this case the federal government, which took over lender IndyMac. Even with an offer to lower her interest rate, Gonzalez could not afford the payments and owes about $100,000 more than the house is worth.
Gonzalez’s attempts to stay in her home illustrate why regulators are having trouble stemming the flood of foreclosures at the heart of the nation’s economic crisis. And why some say it is imperative for the economy that a major chunk of the remaining $700 billion bailout bonanza go to helping homeowners drowning in debt.

Regulators, lawmakers and economists alike believe helping borrowers get into loans with more favorable terms-smaller loans, lower interest rates-is crucial to ending the recession. But despite the creation of a number of programs, only a small percentage of struggling homeowners have received help.

Lenders, watching out for their bottom lines, will go along only as long as helping the borrower will cost them less than foreclosing and reselling the home. Plus, they are skittish about staying on the hook with borrowers who are highly likely to default again.

Borrowers, for their part, often can’t afford the reduced payments. When they can, they question the sense of paying on a home that, as is the case in many places, is still falling in value. Investors, who represent a big slice of delinquent homeowners, do not qualify for a mortgage lifeline at all.

No one questions that the need is dire. Regulators from Federal Deposit Insurance Corp. Chairman Sheila Bair to Federal Reserve Chairman Ben Bernanke and the U.S. Treasury’s Neel Kashkari have repeatedly told Congress that more must be done to prevent foreclosures and stabilize falling home prices, saying both are required to lift the economy out of recession.
In November, the FDIC estimated that another 3.8 million mortgages would be 60 days to 90 days past due by the end of 2009.

Yet even the government’s own effort to modify loans, which is being held out as a national model for other lenders, has its flaws, housing advocates and other market observers said.
Of the 45,000 borrowers eligible for a workout under an FDIC program, 8,500 loans have been restructured. “Thousands more,” though, are in the pipeline, the FDIC said. The agency would not say how many borrowers could not be helped. And Hope for Homeowners, passed by Congress in July, was expected to help 400,000 borrowers avoid foreclosure with Federal Housing Administration guarantees of up to $300 billion in refinanced loans.

So far, only 350 loans nationwide have been refinanced, according to the U.S. Department of Housing and Urban Development.

The reason: Lenders have to agree to write the value of the loan down to 90% of the home’s current market value. Homeowners have to share half of any future equity with the federal government. Neither are eager to do that.

The numbers disappoint Guy Cecala, publisher of Inside Mortgage Finance, who asserts that across-the-board, automatic modifications are needed to contain the wreckage of the last six years. That might have been possible had bailout funds been used to buy mortgage-backed securities, putting control of the loans in the government’s hands rather than Wall Street investors, he said.

“If this is the best model we’ve got, we’re still in trouble,” Cecala said. “It is probably the most aggressive we’ve seen out there and you are still not getting a lot of success.”

It’s not clear what system will be used to implement a sweeping foreclosure-prevention program pledged by President Barack Obama during negotiations with Congress over the release last week of $350 billion in bailout funds.

Loan modifications are different from repayment plans, which help borrowers catch up on missed payments by doing things like folding past-due amounts into the mortgage balance or boosting monthly payments by a small amount to pay arrears a bit at a time. Generally, they’re meant to see borrowers through a temporary rough patch.

Modifications take aim at the mortgage’s structure. Plans can include converting adjustable interest rates to fixed, lowering rates and, in rare cases, forgiving some of the principal. Banks often will extend the life of the loan to reduce monthly payments as well.

Under intense public pressure, lenders have amped up loan modifications.

Hope Now, an alliance of nonprofits, lenders and the federal government, said more than 850,000 loans were modified through November.

The FDIC says only 4% of seriously delinquent loans each month are being modified. And data from the Office of the Comptroller of the Currency suggests the modifications may ultimately not be much help. The OCC found recently that 37% of mortgages modified in the first quarter of 2008 were 60 days past due within six months.

“Maybe the loan modification did not cut far enough; it may be that the loan was so poorly underwritten that nothing could help the borrower,” said Bryan Hubbard, an OCC spokesman. “It may be that borrower had more credit available and used it for other means and ran up debt elsewhere and the economy has taken a turn for the worse.”

Avi Shenkar, president of GMA Modification in North Miami Beach, Fla., said modifications still weren’t lowering payments enough for borrowers who took out teaser rate loans and owe far more then they could afford.

He also questions how willing banks are to work with homeowners, since eight out of 10 seeking help from GMA already have been denied a modification from the bank.

Jackie Duran, director of foreclosure prevention at the nonprofit Neighborhood Housing Services of South Florida, said many of their clients also got nowhere dealing with the bank.

“It’s obvious to us that lenders are not trying to help the homeowner but minimize how much they lose. They have a very thin margin for loan modification,” Shenkar said.

Gonzalez’s lender, IndyMac, looks at two things: whether modifying a borrower’s loan costs less than its estimated cost to foreclose, and whether payments can be reduced at least 10% and still account for no more than 38% of a borrower’s monthly income.

“We contractually have to act in the interest of whoever owns the loan,” said Evan Wagner, an IndyMac spokesman. Wagner said the bank has mailed offers to most of those eligible for a modification, a feat, considering the program has been in effect for only around six months.
Even when payments can be reduced, homeowners have to be convinced that sticking with a loan that is higher than the home’s market value-known as being underwater-is in their best interest.

That’s the main reason Gonzalez has decided to walk away. Gonzalez refinanced in 2006 into an option-ARM with a balance that grew over time, rolling in other debt like credit cards.

“I refinance for $245,000. I owe now $286,000-$41,000 was of the negative amortization in a year,” Gonzalez said. Her home’s worth: $175,000.

Wagner said Gonzalez was offered a deal almost a year ago that kept her payments essentially the same and reduced her interest rate to a fixed 8.4%. She insists she was told differently.
There’s little IndyMac can do for her now, Wagner said, since Gonzalez’s debts were discharged in bankruptcy court. She’ll have to leave her home soon.

“Where is the federal help for homeowners? Homeowners are losing in this deal and the banks are … not losing anything,” Gonzalez said.

But loan modifications are not about making homes better investments for borrowers, Wagner said. In fact, most homeowners will be worse off after their arrears, interest and fees are rolled into the balance after a modification, he said.“Our program is about affordability,” Wagner said. “… not about mitigating bad investment decisions. We’re not getting into that.”

IndyMac’s plan, he said, allows the bank to “help those that we can without encouraging the 90 percent of people who are making payments not to default themselves,” he said.

Cecala said many homeowners figure that if a modification’s goal is solely to have their monthly payments lowered, they’d be better off renting, thinking there was little hope of ever having equity.

“What they need to do is build an incentive to keep somebody in the home,” Cecala said.
As for Gonzalez, she’s fought, agonized and cried, but has finally come to terms with the idea of leaving her townhouse.

“At this point, I don’t really care. I’m tired of this BS,” Gonzalez said.

© 2009, The Miami Herald.Distributed by McClatchy-Tribune Information Services.