The foreclosure bailout that almost blew up
Gail Burks, who counsels troubled Las Vegas homeowners, says she encounters endless obstacles as she tries to get people the help they need.
NEW YORK (CNNMoney.com) -- Lenders claim they want to help troubled mortgage borrowers stay in their homes. But the reality is that many foreclosure prevention counselors are running into lots of obstacles.
That frustrates Gail Burks, who counsels homeowners in Las Vegas. "If the securities industry can do what they claim, why is it so time consuming and difficult on every case?" she asked.
Burks, who is president of the Nevada Fair Housing Center and sits on the board of the National Community Reinvestment Coalition, started out fighting housing discrimination in 1993.
These days she devotes much of her work week to foreclosure prevention, a hot topic in Nevada, which now leads the nation in delinquency filings. Her job is to act as the middleman between the lenders, who want to protect their bottom lines, and homeowners desperate to hold onto their homes.
She often runs into problems as she tries to negotiate loan work-outs because most mortgages are packaged together and sold to investors. That makes it difficult to determine who owns the loans.
"You almost need a flow chart of potential investors so that you can call them. It's like trying to hit a continuously moving target," said Burks.
Take the case of one Las Vegas couple, who fell behind on their payments and faced foreclosure. For nearly two months Burks worked with them, and their lenders, to permanently lower their payments to affordable levels.
That task was challenging because it involved two different loans; the couple used a second mortgage, also called a piggy-back loan, to avoid having to come up with a down payment. Burks wanted to combine the two into a single loan and negotiate an interest rate reduction.
The primary loan, issued in 2005, was an adjustable rate mortgage (ARM) on a home purchase of $303,200. After two years, payments adjusted up from $1,667 to nearly $2,200 a month. The second loan was an adjustable rate home equity line of credit for about $61,000.
The couple could afford the original payments on the loans, but they told Burks that they didn't realize that their primary mortgage came with an adjustable rate that would reset higher, although they were aware that their home equity line was adjustable.
Since the husband was an injured Iraq War vet, the Veteran's Administration stepped in to help negotiate a mortgage modification, but the lenders didn't co-operate. The VA gave the case to Burks.
A single mortgage servicer administered both loans, but they were owned by two different investors. That led to complications. The primary loan holder was amenable to changing the terms of the couple's mortgage, but the secondary lender, which held 20% of the debt, was not.
Burks could not get any answer as to why.
"They just flatly refused to say," she said. She offered to ensure the payments by having the borrowers set aside funds, in cashiers checks, made payable to the lender. She pledged to monitor payments on the modified loan for one year. But it was still no go.
Weeks went by. She made little headway. The couple fell $17,000 behind. Since they were pursuing a work-out, they weren't in danger of getting thrown out of the house, but the process was rough on everybody, including Burks.
Piggy-back, no-down loans are particularly vulnerable to default, because there's often little or no equity for owners to draw upon if they hit a rough financial patch. Indeed, the delinquency rate for them is growing much faster than for traditional mortgages, according to Keith Gumbinger of mortgage research firm HSH Associates, more than doubling since 2004.
And these secondary loans often complicate foreclosure prevention.
"Piggy-backs are hard to restructure because the two loan holders have competing interests," said real estate attorney, Don Lampe. Both lenders have to agree to any mortgage modifications. And secondary lenders often balk because, when a foreclosed home is sold, the owner of the first mortgage gets all of its debt repaid before the second gets a penny.
These days, "The second lender is not going to get a damn thing most of the time," said Gumbinger. "Even where house prices haven't fallen, the [foreclosure] costs eat up the home's value."
In the case of the Vegas couple, the home equity lender refused to agree to a loan modification and then, after weeks of negotiations, sold the loan to another lender, jeopardizing all of Burks' work.
"We then had to modify the two loans separately," said Burks, "and we're still awaiting paperwork on the modification for the second loan. At least the foreclosure is on hold."
The work-out she put together is a very good deal for the couple. The entire debt will be in a fixed-rate loan at 3.75% for five years. After that, Burks will work with them to refinance into a long-term, fixed-rate loan .In addition Burks succeeded in getting all fees and penalties waived.