Lenders and loan-servicing companies say foreclosing on distressed homeowners is the last thing they want to do.
Federal Reserve Chairman Ben Bernanke has urged them to modify loan terms instead of going through the costly process of evicting homeowners and reselling their dwellings. He said writing down some debt now would be cheaper for lenders and investors in mortgage-backed securities than the alternative.
NELVIN CEPEDA / Union-Tribune
Maria Fuentes and her husband are in the process of selling
their house in Chula Vista for less than the amount owed in a short-sale agreement.
|
And Congress is considering a measure that would give lenders further incentive to modify loans by insuring up to $300 billion in loans for at-risk borrowers if lenders agree to lower the balances.
Yet despite months of encouragement to help out distressed homeowners, consumer groups say the mortgage industry isn't doing nearly enough to stem the rising tide of defaults and evictions.
“It's not happening,” said Kevin Stein, associate director of the California Reinvestment Coalition. “To date, nothing significant has been put into place.”
Just this week, DataQuick Information Systems reported that foreclosures in San Diego County hit a record 1,556 properties last month, while lenders initiated the foreclosure process by issuing notices of default on an additional 3,139 homes.
One reason is that calls for more loan modifications have gone largely unheeded.
The Reinvestment Coalition, a consumer watchdog group in San Francisco, surveyed 38 loan counselors in December and found that for the most part, lenders weren't modifying loans. A May report from the state Department of Corporations expressed a similar concern, though it acknowledged improved efforts by loan servicers.
Mark Zandi, chief economist of Moody's Economy.com, said the continued weak housing market eventually will force lenders to be more flexible with distressed homeowners.
“We are going to get to a point where they'll have no choice,” Zandi said.
But real estate analysts cite several reasons why more loans haven't been modified. One problem is borrower denial, Zandi said, because they often wait too long to ask for help.
Another hurdle is that many loan servicers are understaffed. They say they weren't prepared for the dramatic increase in foreclosures. But Paul Leonard, director of California office of the Center for Responsible Lending, said servicers have had time to hire more workers if they wanted to do so.
“When times are good, all they do is collect their payments and send them along,” Leonard said. “When times have turned bad, they should be dipping into previous profits to have enough staffing capacity.”
Doug Thorpe, an independent mortgage finance consultant in Houston, blames the complex loan securitization process for modification delays.
Through the early 1970s, savings institutions typically held on to the home loans they originated, Thorpe said. Today, most originators quickly sell mortgages to wholesale lenders, who bundle them. Wall Street banks package them into securities sold to investors, such as commercial banks, hedge funds and pension funds.
A single mortgage might be part of an investment pool owned by several investors who must be consulted before modifications are made, Thorpe said. Many delinquent borrowers have two mortgages, which further complicates the process.
Even when they have the discretion to make loan modifications, service companies fear lawsuits from investors if they give too many breaks to borrowers. In such cases, the easiest thing for them to do is to say “no.”
“They can't get in trouble from the investor by foreclosing,” said Jack Guttentag, a finance professor emeritus at the Wharton School at the University of Pennsylvania. “That is what is expected of them.”
Kurt Eggers, a former member of the Consumer Advisory Council of the Federal Reserve Board, said some lenders are taking their time with modifications, delaying debt reductions in the hope that Congress will cushion their losses.
Indeed, the housing plan under consideration in Congress aims to ease the pain of writing down loan balances by letting the Federal Housing Administration back $300 billion in new, cheaper loans for distressed borrowers.
Servicers are hoping “that the government steps in, that the economy improves, that prices go back up, that something happens to turn this around,” Eggers said.
A turnaround won't help Maria Fuentes, 49, of Chula Vista. She and her husband, Rocky Segobia, 58, lost their struggle to keep up with their adjustable, interest-only loan.
The loan they received in late 2004 seemed like “a sweetheart of a deal” until the interest rate began adjusting upward, Fuentes said. What started as a $1,600-per-month payment rose to $1,900. Efforts to renegotiate were unsuccessful.
After Segobia was laid off, the couple began missing payments and pawned their wedding rings to make ends meet. When they learned that Fuentes was going to be laid off from her job with the San Diego Unified School District, they gave up. They're now selling their house on Del Mar Avenue for less than the amount owed in a short-sale agreement.
“We are going to walk away from our home with zero money in our pockets,” Fuentes said. “We've hit bottom.”
Not all distressed borrowers can be rescued, said Faith Schwartz, executive director of HOPE NOW, an organization formed by the lending industry last summer.
About 183,000 borrowers nationwide received some form of loan assistance through HOPE NOW in April, but the agency hasn't come close to matching the rapid pace of home-loan defaults.
Negotiating modifications “is not a perfect science and it is not a silver bullet,” Schwartz said. “Workouts have to be affordable and sustainable. . . . Not everyone can avoid foreclosure.”
One reason more people aren't helped is that nonprofit loan counselors often take the wrong approach, said former San Diego mortgage broker Phillip A. Bellante. He recently started the for-profit company Shortrefime.com to negotiate for borrowers who owe more than their property is worth.
Bellante's strategy is to persuade lenders and servicers to write down a portion of the debt and refinance borrowers into 30-year, fixed loans equal to 90 percent of each property's current market value.
While none of his loans has yet closed, Bellante said mounting foreclosures have made lenders willing to consider write-downs for his clients.
With an estimated 1.8 million adjustable subprime mortgages expected to reset at higher rates nationwide through 2009, the situation is likely to get worse before it improves.
The Mortgage Bankers Association reported this month that the seasonally adjusted delinquency rate for mortgages on one-to four-unit properties was 6.35 percent of all loans outstanding at the end of the first quarter.
That represented increases of .53 percentage points from the fourth quarter of 2007 and 1.51 percentage points from a year ago. California, Florida, Arizona and Nevada and were responsible for 93 percent of the increase in subprime, adjustable-rate-loan foreclosures.
Dustin Hobbs, spokesman for the California Mortgage Bankers Association, said more needs to be done, but he rejected the idea that lenders have been slow to respond. Like the rest of the business community, they didn't see the problem coming until it arrived, he said.
“There has been an unprecedented effort by lenders to work with borrowers to keep them in their homes,” Hobbs said. “No one is saying what we are doing is enough. We will continue to put more effort into the work.”
Emmet Pierce: (619) 293-1372; emmet.pierce@uniontrib.com
