Hope Now: When loan workouts don't work out

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NEW YORK (CNNMoney.com) -- More troubled mortgage borrowers than ever are now being granted loan relief - but many will still wind up losing their homes.

About 40 percent of all subprime ARM foreclosures that occurred during the three months ending September 30 involved owners who had already worked out some kind of deal with their lenders, according to a report from the Mortgage Bankers Association (MBA).

And although Hope Now, the government-led alliance of lenders, mortgage servicers, investors and community advocacy groups, says it helped 545,000 subprime borrowers during the second half of 2007, 33% more people actually lost their homes than in the first six months of the year.

"The kinds of modifications [the industry] is talking about don't work," said Bruce Marks, chief executive of Neighborhood Assistance Corporation of America, a nonprofit, foreclosure prevention counseling group. "The only thing that works is reducing the monthly payments so that people can afford to pay."

Neither of the two types of deals that are primarily being offered to defaulting homeowners necessarily do that.

Many of those half a million borrowers cited by Hope Now were simply given more time to catch up on missed payments. They may have to make extra payments, or the missed payments can be added to the loan balance and the length of the loan extended.

For borrowers having problems already, these repayment plans may just delay the inevitable. "The payment plans don't work," Marks said.

The second category are true mortgage modifications, which involve rewriting the loans to lower interest rates or slash balances. Often, an ARM's interest rate is frozen so that it doesn't reset higher.

Neither approach is working well, says Marks, because the nature of mortgage-related problems have changed. They used to stem primarily from temporary economic hardships, like factory closings and job losses, rather than the affordability of the loans themselves.

"Mortgages are pushing people into foreclosure, not just life circumstances. That never happened before," Marks said. "[And lenders] are applying the old solutions [like repayment plans] to a new crisis."

He insisted that the only viable solutions are those that examine income and budgets, and lower payments to the point where borrowers can actually afford to make them.

Indeed, of the 545,00 loan work-outs touted by Hope Now, only 150,000 of them were true loan modifications. Repayment plans, which fail most often, accounted for 72 percent of the work-outs.

Default rates on subprime ARMs originated in 2007, at more than 8 percent as of August, were much higher than previous years, according to analysis from Friedman, Billings, Ramsey, an investment bank based in Arlington, Va. These are ARMs that have not yet gone through their first resets.

Despite increased foreclosure prevention efforts, a third of all mortgages delinquent by 60 days still end with foreclosure sales, according to a Hope Now report. During the first quarter of 2007, 35 percent of these delinquent loans resulted in foreclosure sales and in the fourth, 33.3 percent did.

Though these percentages have held steady, they represent steep increases in numbers; 92,000 households lost their homes to a foreclosure sale during the last three months of 2007, up 48 percent from 62,000 homes lost in the first three months of the year.

And those figures don't include the other families who voluntarily leave their homes through forced sales, or by simply walking away from their homes and mortgages.

"Hope Now remains a hopeful program," said John Taylor, head of the National Community Investment Coalition, a nonprofit community advocacy organization. "But, by their own numbers, they're talking about a small number of loans. And when they're talking about help, they're talking mostly about repayment plans."

The problem is only going to get worse. There are $500 billion worth of ARMs scheduled to reset in 2008, and the Hope Hotline only employs 450 foreclosure counselors. Meanwhile, call volume has grown to more than 4,000 a day, and many borrowers complain they can't get through.

The good news for distressed homeowners: It really is in the lenders' best interests to modify delinquent mortgages. The average cost of foreclosing on a home is in excess of $50,000, so it's usually a lot cheaper to keep borrowers in their homes, even if that means lenders will see a lower return on their investments.

Faith Schwartz, who heads Hope Now, acknowledges that the alliance had to gear up to meet the challenge, but she said great strides have been made in the less than four months of the organization's existence.

"All the different interests are aligned," she said. "Everybody wants to keep people in their homes."

Still, with home prices threatening to fall even further, lenders may have to do even more to keep owners in their homes and incurring even bigger losses in the short term, according to Marks.

"The only real solution is to permanently reduce the interest rates or the balances to what home owners can afford," he said.