When mortgage rescues go bad
More than half of adjusted loans go into default again. The problem: Many workouts don't actually lower payments.
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| Chris and Cherita Barnes with their youngest, Tatiana. |
| 30 yr fixed mtg | 4.96% |
| 15 yr fixed mtg | 4.53% |
| 30 yr fixed jumbo mtg | 5.90% |
| 5/1 ARM | 4.21% |
| 5/1 jumbo ARM | 4.78% |
NEW YORK (CNNMoney.com) -- Good news: Lenders are ramping up their attempts to help troubled home borrowers.
Now for the bad: Most of the mortgage fixes being deployed are destined to fail.
Hope Now, the coalition put together to fight foreclosures, boasts that it has helped 3 million families stay in their homes since the housing crisis began in July 2007.
But a recent report issued by the U.S. Comptroller of the Currency (OCC) found that 53% of borrowers who had their mortgages modified in the first half of 2008 were already at least two months delinquent again. The report covered 60% of the outstanding primary mortgages.
Meanwhile, foreclosures remain on the rise: More than a million homes have been repossessed since the start of the meltdown.
Michael Van Zalingen has witnessed the problem first hand as director of home ownership services for Neighborhood Housing Services of Chicago, a non-profit group that provides foreclosure-prevention counseling.
Lenders and servicers take two approaches to working out mortgage problems: repayment plans and mortgage modifications. Repayment plans allow borrowers some time to make up missed payments. Modifications actually rewrite the terms of loans by freezing or lowering interest rates, extending the life of the loan, or reducing the amount owed.
Mortgage modifications are meant to be more effective. The problem, Van Zalingen said, is that they too often fail to reduce a borrower's monthly house payment.
The lenders often don't change the interest rates but merely freeze them at a high, unaffordable level, and then add missed payments into the balance, which increases it, according to Van Zalingen.
He said that one-third of his 121 clients granted modifications between January 2007 and June 2008 wound up with housing payments equal to a whopping 50% or more of their gross incomes.
"The modifications did not put any breathing room into their budgets at all," he said.
Before the housing bubble began, underwriters generally wouldn't approve mortgages that required monthly payments of more than 28% of a borrower's gross income.
Modifications that include interest rate reductions that result in lower payments perform much better. A recent Credit Suisse study reported redefault rates of only 15% for this kind of modification.
Chris and Cherita Barnes got a mortgage modification from their servicer, Ocwen Financial Corp., in March 2008.
But they're already behind again. The loan workout froze the 8.75% interest rate on their adjustable rate loan, but added their missed payments, interest and late fees back into the mortgage balance, raising it to $354,000 from $329,000.
The Barnes' new monthly bill came to $3,167, up from $2,890. That was better than it would have been had their interest rate continued to reset higher but it still pushed their mortgage payments, including taxes and insurance, to about 53% of their income.
The couple, who both work and have three kids, are now trying to figure out what to do next.
The Barnes' predicament is not unusual, according to James Jones, a foreclosure-prevention counselor with the East Side Organizing Project in Cleveland.
"I see quite a few of these [unmanageable modifications]," said Jones. "When we get offered them by lenders, we challenge them."
But many borrowers are terrified of losing their homes and, in that vulnerable state, will accept whatever lenders offer them -- especially if they don't have an experienced advocate helping them.
Van Zalingen said his counselors try to negotiate better workouts, but the modification offers are often presented on a take-it-or-leave-it basis, and many desperate homeowners take them.
Geoffrey Bagley is another borrower who received an unsustainable mortgage modification. After the monthly payment on his adjustable rate mortgage jumped to $2,400 from $1,300, he got a workout with the help of the National Community Reinvestment Coalition, a community advocacy group that offers mortgage-prevention counseling.
That workout may have pushed his payment down to $2,000, but it still represented more than 50% of the gross income he and his wife earn.
"That's because the lender based the modification on the Bagley's income with overtime," said Jesse Van Tol, a spokesman for the coalition. "But in a recession, that overtime often disappears."
Lately, the couple has lost hours at work and they started missing payments. They're trying to apply for another, more affordable modification, but it looks like they'll probably lose their Maryland home.
Modifications that don't involve some kind of principal reduction or somehow lower payments substantially "just don't work very well," said Mark Zandi, chief economist for Moody's Economy.com. But, he added, many lenders have recently gotten much more aggressive when it comes to loan modifications.
The attitude among lenders seems to be evolving. In just the past couple of months, JPMorgan Chase (JPM, Fortune 500), Bank of America (BAC, Fortune 500) and Fannie Mae (FNM, Fortune 500) and Freddie Mac (FRE, Fortune 500) announced more comprehensive foreclosure-prevention programs.
According to Paul Koches, an executive vice president at Ocwen, it makes no sense to modify a loan if it results in an unaffordable payment. The mortgage will simply default again, resulting in even wider losses.
Ocwen is now considering reworking that Barnes' loan.
"I got a call from Ocwen out of the blue," said Chris Barnes. "They now want to work with me to resolve my situation."
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