Heather Noble of Garden City, Mich., was approved for a modification of her home loan. (Paul Sancya/AP)
Some relief may be in sight for troubled US mortgages
As more than 5 million Americans fall behind on mortgages, banks signal a new willingness to reduce the principal.
By Ron Scherer | Staff writer of The Christian Science Monitor/ February 3, 2009 edition
Reporter Ron Scherer discusses what steps some banks are taking to recoup their mortgage business.
Reporter Ron Scherer
New York
Some homeowners who are having trouble paying the mortgage may be getting genuine relief.
An increasing number of lenders are now willing to do what they have long been reluctant to do: reduce the principal of a troubled loan. That shift is in part a recognition that home values have dropped sharply, foreclosure rates are soaring, and the political climate in Washington has shifted.
Advocates for borrowers hope the new modifications work better than prior efforts, which were not that generous: A government report found homeowners who modified their loans defaulted a second time at a very high rate last year.
The change in some lenders’ willingness to forgive and forget won’t come a moment too soon: Some 5 million to 6 million homeowners are now either behind on their mortgages or facing foreclosure. And over the next 12 months, the interest rates on $1 trillion in adjustable rate mortgages will be resetting at a time when the nation’s unemployment rate is climbing – factors expected to put more homeowners under financial stress.
The economy is now at a point where people can expect to see more restructuring of mortgages, says Alan White, a professor at the Valparaiso School of Law in Indiana. “It’s not too late to change course, and there are some indications we might be changing course.”
For example, last week, Federal Reserve Chairman Ben Bernanke wrote Rep. Barney Frank, chair of the House Financial Services Committee, to inform him the nation’s central bank has a new policy to avoid preventable foreclosures on the $47 billion in residential mortgages taken over from troubled financial institutions.
“This is important because the government will control more and more of these assets,” says Mr. White.
On Jan. 26, Wells Fargo, which purchased Wachovia Bank, said it would try to work with 478,000 Wachovia customers to avoid preventable foreclosures. In addition to term extensions and interest-rate reductions, “In geographies with substantial property value declines, we will even use permanent principal reductions,” said Mike Heid, copresident of Wells Fargo Home Mortgage in a statement last week.
And recently, Citibank broke with other lenders in supporting legislation that will allow a bankruptcy judge to modify the principal on a mortgage. The legislation was voted out of a House committee last week.
The banks are also under increasing political pressure. Treasury Secretary Tim Geithner will soon announce a new strategy for reviving the financial system, President Obama said in his radio address Saturday. The administration has already said it will devote between $50 billion and $100 billion of the remaining bank bailout funds towards preventing foreclosures.
The new willingness by some lenders comes at a time when new data indicate that, unless a bank is more generous with negotiations, a sizable number of borrowers will default again. In December, the Office of the Comptroller of the Currency issued a report that found, in the first quarter of last year, 25 percent of modified loans redefaulted in one month and 58 percent redefaulted in eight months.
At a national forum for housing in December, John Dugan, the Comptroller of the Currency, asked why the number of re-defaults was so high. “Is it because the modifications did not reduce monthly payments enough to be truly affordable to the borrowers? Is it because consumers replaced lower mortgage payments with increased credit-card debt? Is it because the mortgages were so badly underwritten that the borrowers simply could not afford them, even with reduced monthly payments? Or is it a combination of these and other factors?”
Groups that advocate for troubled homeowners say the answer is not that complex.
“Right now we have loan modifications that don’t reduce the monthly payment,” says Jim Carr, Washington-based chief operating officer of National Community Reinvestment Coalition, a group of 600 local development organizations. “It’s hard to believe how anyone can conceive of that as making the loan more affordable.”
In the past, the mortgage industry has supported efforts such as the Hope Now Alliance, which estimates it prevented 2.2 million foreclosures last year. A lot of its efforts go toward voluntary interest-rate moratoriums by lenders or efforts to modify mortgages without affecting the principal amount due.
However, future revisions may also need to factor in how much homes have dropped in value. “Someone who may have been in a $100,000 loan at the peak of the market now [is] looking at a house valued at $75,000, which means the mortgage company has to write off 25 percent of the loan,” says Tony Brancatelli, a Cleveland city councilman and expert on troubled housing. “The mortgage companies are still not writing down the loans enough to meet the market losses.”
But mortgage servicing companies also are aware there is a risk in writing down the principal in a mortgage. “You can destabilize market values,” says Ed Delgado, a senior vice president at Wells Fargo in Fort Mill, S.C. “A homeowner who has been granted a principal reduction could potentially be more willing to discount a sale price, versus a homeowner who did not enjoy a similar reduction in obligation.”
One mortgage servicing company that has been lowering the principal amount owed is Ocwen Financial Co. Nineteen percent of all the modifications in the company’s portfolio included some component of principal reduction, says Paul Koches, executive vice president and general counsel for the company based in West Palm Beach, Fla., in an interview. “The average loan balance for these loans, pre-mod, was $157,000, and the average principal reduction was $33,000,” he says in an e-mail.
“Principal reduction is a last resort,” he adds, but is preferable to foreclosure, which results in less money for the investors who made the original loan. Ocwen’s redefault rate is half the national average.
Advocates for borrowers say it’s critical that lenders give some leeway to troubled borrowers.
“A lot of time, the interest-rate cuts have just not been that great,” says Moe Bedard, founder of Loan Safe Solutions. “People need a little breathing room.” Mr. Bedard says hard-pressed borrowers are taking loan modifications but still redefaulting. “Some are saying, ‘I’ll take the modification, but in six months I’m outta here.’ ”
That is one reason some people counsel the need for a holistic approach. “You could be modifying the loan, but there could be other debt and issues in the household,” says Marietta Rodriguez, who runs the homeownership program at NeighborWorks in Washington, D.C. “You need to look at … changes in income or other debt loads.”
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Comments
2. Nosmokingcigar | 02.04.09
I’ts about time some thought is to be given to reducing the morgage rate for seniors who pay on time and do without needed things to keep out of foreclosure. How about helping this group instead of the deadbeats.
3. Nosmokingcigar | 02.04.09
How about giving some consideration to those seniors who pay their morgages on time by doing without needed things to prevent foreclosure. Reducing out interest rates to the average without the fees associated with refinancing.
4. noname | 02.04.09
My country wide loan was “re-worked” last year when I got into trouble. I was 60 days late, the only option offered was to incorporate the late amount into the next 6 monthly payments, raising my monthly payments by about 30% for 6 months. No other option was offered. I was able to do it, but I bet that many can not.
Even after my troubles I cannot support the concept of “principal reduction”. I agreed to the terms going in, just because the market didn’t go my way does not change my obligation. To quote Newt Gingrich “you can’t have capitalism on the way up and socialism on the way down”. Unless you want to become France..
5. eloise fuentes | 02.04.09
Banks, and i mean all of them, need to step up to the plate and rewrite these overvalued exotic loans…it is the banks fiduciary & responsiblity under TILA & HUD to name a few, to due their due dilgence to make sure a borrower is not over leveraged…and can repay the loan..
.stated…subprime.&.option arms vehicles…are the majority of these toxic products in trouble…& these illegal loans are sinking the nation…and which, if you do the math, were set up to fail…the only ones who made money on these products were the bank executives…
Who buy the way CONTINUE TO PROFIT..with tax payer funds!……SHAMEFUL!!!
6. david d. kelman | 02.04.09
i was recently unemployed for 2 months - the longest of my whole adult life.
although i’ve now started a new job, many of us CSM readers have gotta be thinking to ourselves, “There but for the grace of God go I.” This economy is simply scarey.
7. cindy | 02.04.09
The biggest issue is the banks are not willing to talk to you if you are not behind on your mortgage payment. you have prim. borrowers that have rates adjusting and values are down so low that you can not refi.to a fixed loan.
I went through hope and my lender bofa would not even talk to me.
8. Amber Atuatasi | 02.04.09
The statment above is correct. Modifing a mortgage for a couple of hundred dollars is a waste of time. The mortgage rate must be cut to 1 or 1.5% so that mortgages are cut in half or more. Then borrows mortgage is managable. Then people can afford their homes. The government has helped the Banks, now help the people.
9. Jeanette | 02.05.09
How much did Chase pay WaMu for mortgages? I heard it was ten to twenty cents on the dollar. If this is true, Chase can make a sizable amount of money by accepting reduced mortgages. Did Chase get taxpayer money to bailout WaMu? Taxpayer money does not subsidize all banks.
No matter whose at fault for this economy, we need to find solutions. Since California property values decreased by 50% or more, does it make a difference if the banks discount the current mortgages? Many homeowners owe twice as much on their homes as the current market value. Many of my neighbors just walk away. The houses, only a couple of years old, fall apart and yards turn to weeds. We have at least one development that has become a ghost town.
These homeowners did not expect to lose their jobs and have their homes devalue. Blaming them or the mortgage brokers who made the loans attractive and easy won’t solve the economic woes.
Reduction in mortgage principle seems fair. If the banks will short sell to investors, why not offer the same terms to homeowners? A short sale influences the market value more than a modification would. Banks also pay more in cost of transfers, commissions, and fees. Short sale companies make up to 20% in fees. A mortgage reduction could help keep homeowners living in their homes. Short selling to investors puts tenants (often former homeowners) into houses to which they feel little connection.
Think about your neighborhood, your community. How can you help build the economy? Saving homes helps save families and communities. Stop pointing fingers and offer a hand.
10. jon | 02.05.09
Rewarding bad consumer behavior results in just one thing: more bad behavior. The government — which encouraged and even required banks to loosen their lending standards — is now forcing banks to give irresponsible consumers a break that responsible consumers will not get. That makes zero sense. It sends the wrong message to future homebuyers who may be tempted to buy “too big.” I am in favor of loan modifications of every kind except reducing the loan principal. If Obama wants to jump start the economy, he should guarantee a super low mortgage rate — say 4 percent — so that responsible consumers with decent credit can buy homes from irresponsible consumers with bad credit. We shouldn’t be working to keep people in homes they cannot afford. (That’s what got us into this mess.) We should be helping those people sell their homes, so that they can buy homes they can afford.
The government is now guaranteeing that homes will appreciate in value. This is a very dangerous thing.
11. M. McDonough | 02.06.09
We are hard working people. We are not deadbeats. We are in the construction business and up until the economy dumped we had no trouble paying our bills. We have had no work now for 5 months. Our bank won’t modify our loan because we are not 3 month late. We can’t refi because we can’t show a good income right now. We are screwed. But the banks can get free money no problem. Something is wrong with this!!!
12. paul | 02.09.09
we should have let the banks fall. We are rewarding them for their greed and the fed reserve’ s manipulation of “notes”. Google >”who owns the fed reserve” be prepared to get angry.
Go to http://www.screwedbyunclesam.com start leaening and inform our elected officals that we want change or we will elect people that want change also
13. paul | 02.09.09
we should have let the banks fall. We are rewarding them for their greed and the fed reserve’ s manipulation of “notes”. Google >”who owns the fed reserve” be prepared to get angry.
Go to http://www.screwedbyunclesam.com start learning and inform our elected officals that we want change or we will elect people that want change also
14. paul | 02.10.09
we should have let the banks fall. We are rewarding them for their greed and the fed reserve’ s manipulation of “notes”. Google >”who owns the fed reserve” be prepared to get angry.
Go to http://www.screwedbyunclesam.com start learning and inform our elected officals that we want change or we will elect people that want change also
15. Craig | 02.11.09
Wow always somebody else to blame. Nobody forced these people to overextend themselves financially by agreeing to bad loans or not being prepared with 6-12 months of expenses in a savings account. So the people who save money and spend less then they earn get penalized and are forced to pay for other peoples inability to take care of themselves. We are moving closer and closer to socialism all the time. These people should be held accountable for their actions.
16. ReneIson | 02.20.09
You know I am getting older I was waiting for the interest rate to go down as I cannot sell my home so in order for me to keep it and stay in my home the interest rate have to go down. Why the heck dosent the govermewnt just lower the interest rates for the people that have been paying there morgage he is rewarding people who have not and who are living well above there means those people will end up lossing after the goverment rewards them. And I am going to be another that will loss my home. I was hoping that he would help out but now I am not so sure.I am on a fixed budget and have no savings . I will be on the street. There was talk about the interest going down but I do not see it. How long does a person have to wait.
17. cancer survivor | 02.27.09
Craig,
I believe you are right to a point. We certainly shouldn’t reward bad behavior. If you can’t afford it, don’t buy it. Pretty simple, right? Not exactly. Life happens. At 31, you would not expect that you would be striken with cancer. Even with insurance, my health has helped my husband, my neuro developmentally disabled child and I, loose everything we have saved for. We had a retirement, more than six months of expenses in savings…but, if you can’t work due to illness…you’ll loose your shirt. My point, most people were able to pay their bills until they lost their jobs. Now instead of living in master planned communities, many are living in Tent Cities. Is that accountable enough?
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1. AngieMom57 | 02.03.09
We need legislation that prevents banks that have gotten bail out money to keep those that have become unemployed due to the recent down turn in the economy to stay out of foreclosure, simple as that!