No help for 70% of subprime borrowers

Pennsylvania foreclosures

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NEW YORK (CNNMoney.com) -- Seven out of 10 seriously delinquent subprime mortgage borrowers are still not getting the help they need to keep their homes, according to a report released Tuesday by state officials working to stem the foreclosure crisis.

"We're still way behind," said Iowa Attorney General Tom Miller, who helped form the State Foreclosure Prevention Working Group, a coalition formed last year by 11 state attorneys general and bank regulators.

The coalition is working with lenders and companies that service mortgages to try to keep people from losing their homes. It drew its statistics from 13 of the 20 major servicer companies, which handle about 58% of all subprime loans.

More than 1 million of those loans, or nearly 25% of the total, were delinquent as of Jan. 31. And foreclosure proceedings have begun on 300,000 of them - an 8% increase since October.

Mortgage servicing companies, which manage accounts and process payments, play a key role in efforts to help delinquent borrowers work out affordable mortgages. Workouts can take the form of simple repayment plans or more comprehensive loan modifications that involve reductions in balances or interest rates.

Many subprime loans are adjustable rate mortgages, meaning their interest rates jump after an introductory period. Borrowers who had not fallen behind on their payments before their rates reset can benefit from a simple freeze of their rates. Many subprime borrowers took out loans they could not really afford - making workouts more complicated.

The report showed that 28.5% of subprime adjustable rate mortgages that won't reset until spring 2009 are already delinquent. About 21% of these same loans were delinquent in October.

One step forward, two steps backward

The state officials said Tuesday that workouts have not kept pace with the rising tide of foreclosures.

"Our collaborative efforts to date have failed to prevent a large number of unnecessary foreclosures," said Mark Pearce, North Carolina deputy commissioner of banks. "We need to find solutions that fit the size of the problem we are facing."

The report, which surveyed efforts by lenders and servicers and programs like Hope Now, found that the number of borrowers getting help each month has increased to nearly 261,000 in January from about 210,000 in October. But because the ranks of troubled borrowers is growing so quickly - to over 1 million at the start of the year from 820,000 last fall - the proportion of mortgage rescues has remained essentially unchanged.

Mortgage industry leaders are looking at the data with more of a glass-half-full perspepctive.

"We've helped more than 1.2 million people through the process. That is a significant accomplishment," said Paul Richman, the vice president for government affairs with the Mortgage Bankers Association. "But we still have a big problem reaching out to borrowers."

Many at-risk borrowers still do not respond to the efforts of mortgage servicers to contact them, according to Richman. When they finally do ask for help, they may have fallen way behind in payments, complicating any rescue plan.

Currently, the preferred remedy for lenders is to allow borrowers time to make up missed payments. For seriously delinquent borrowers, loan modifications are the only viable answer. Only 27% of the workouts completed in January, little more than 24,000 borrowers, involved modifications.

But of the loans that were still being worked out as of January, 53% were headed for a comprehensive modifications rather than less effective repayment plans.

Too many loans to work out

One reason why mortgage servicers have fallen behind in workouts is that they are overwhelmed, unable to cope with the sheer numbers of delinquent loans, according to the report. About two-thirds of all mortgage modification efforts take more than six weeks to complete.

"We're finding the servicing system can't manage and re-underwrite millions of loans," Pearce said. "The case-by-case approach [they're using now] was not designed to handle the numbers of loans they're dealing with."

The report said that delinquent loans are "clogging up" the system, slowing the pace of modification efforts and possibly adding to the number of vacant homes in many communities.

The Working Group made two recommendations to improve the rate of mortgage modifications: Slow down the foreclosure process to give servicers more time to find solutions for individual borrowers, and take a more systematic approach to modifying loans. That would eliminate some of the intensive counseling that is now the rule for nearly every borrower.

Many seriously delinquent borrowers are in the same boat, more or less, and servicers should be able to take a uniform approach to their workouts, according to Richard Neiman, the New York superintendent of banks. Applying a streamlined workout model toward a large percentage of the borrowers would free up staff to address the borrowers facing thornier issues.

It's not only staffing problems that have slowed mortgage modifications; there's also reluctance on the parts of some servicers to act.

"Some servicers fear that if they modify loans down, they run the risk of litigation somewhere down the road if the borrower eventually defaults," said Neiman.