Subprime mortgage saves depend on luck
(St. Louis Post-Dispatch Via Acquire Media NewsEdge) Jan. 11–Homeowners falling behind on their subprime mortgages find themselves caught in a grand game of financial roulette.
These borrowers are forced to ask lenders to modify the terms of their mortgages, such as cutting interest rates or stretching out payments. Conventional refinancing is out of their reach because of poor credit history or the lack of money to cover refinancing costs.
Banks now are more willing to consider this. But whether homeowners succeed depends in part on luck — on where a mortgage loan ended up in the vast paper shuffle that was mortgage financing before this year’s financial crash.
Was the loan kept by the bank that made it, or sold to another institution? Was it wrapped into a security, which was divided up and sold to dozens of different investors? If so, what limits does the security contract put on loan modifications? And what’s the attitude of the servicing company, which collects payments and handles foreclosures for the security holders?
Stacye Ford’s loan landed in a lucky spot, though she went through months of worry.
Ford bought her house in Bellefontaine Neighbors in 2005, and settled in with her teenage son. “It’s like a two-bedroom bungalow, a nice little starter house,” she says. “Everything was going fine.”
For a while. She bought it with a subprime mortgage of the type nicknamed an “exploding ARM” — an adjustable-rate mortgage that starts out at one interest rate, then adjusts higher after a couple of years.
The $692 monthly payment was affordable on her salary as a pharmacy technician. Then her property taxes rose. Then the interest rate on her mortgage jumped from 7.9 percent to 9.8 percent. She learned that her new payment would be $853, nearly half her monthly take-home pay.
At first, she began skipping other bills to pay the mortgage. Then she fell behind on the mortgage. “There was just nothing left,” Ford said. She felt she was about to lose her home.
So, she went to a meeting at her church for people facing foreclosure, and met Ruth Battle. “She was sent from God,” Ford said. “She went to bat for me.”
Battle, a senior vice president at Paramount Mortgage of Creve Coeur, took her case for free. She found the right official at the mortgage operation of JP Morgan Chase, and started the process of modifying Ford’s loan.
“The deal they gave her was outstanding,” Battle said.
Chase cut her interest rate to 3.1 percent for five years, rising eventually to 6.75 percent. Ford considers herself saved. “I think I was truly blessed,” she said. “There’s no way I could have worked that out by myself.”
WHO’S THE LENDER?
Ford’s luck took several forms. First, her loan was controlled by a bank that had the authority to modify it. Most mortgages are wrapped into securities with dozens of owners, and securitization agreements often limit the ability to modify loans.
Loan modification “depends on who the servicer is and what the pooling and servicing agreement allows,” says Chris Krehmeyer, executive director of Neighborhood Housing Services, which does foreclosure counseling. “There are a whole lot of nuances around each transaction.”
In a business in which mortgages and their servicing rights are often separate, Ford was lucky her loan ended up with JP Morgan Chase. St. Louis housing counselors say the bank is getting a reputation for helping struggling homeowners.
“They were way, way ahead of the curve in putting money into their loss mitigation department and modifying loans,” says Rob Boyle, chief executive at nonprofit Justine Petersen Housing and Reinvestment Corp., which negotiates for homeowners facing foreclosure.
Ford also sought help before a foreclosure notice arrived. Counselors say that many homeowners wait until it’s too late.
Citigroup also is known for modifying mortgages — a condition imposed as part of the bank’s federal bailout. Fannie Mae, the giant mortgage lender now controlled by the government, is pressing plans to modify loans and delay foreclosures. But its flexibility is often limited by securities agreements.
Other companies, such as Saxon Mortgage, are much tougher on troubled borrowers, counselors say. “They are at the bottom of everybody’s list. They are abysmal to work with,” Krehmeyer says.
A spokeswoman for the Morgan Stanley investment bank, which owns Saxon, says the lender is committed to working with qualified borrowers. She also noted that Saxon participates in Hope Now, a Bush administration effort to lessen foreclosures.
Still, modifications now are easier to get. “In the first quarter of this year, we found it very difficult to have loans modified,” Boyle said. That changed over the summer.
A Treasury Department survey of major banks showed that loan modifications rose 82 percent between the first and third quarters of the year across the nation. Payment plans, in which borrowers are given time to make up missed payments and penalties, rose 12 percent.
Pressure from Washington explains part of the easing attitude. But bankers and regulators say the mortgage industry also is recognizing its own interest.
Banks often lose half of their loan amount by foreclosing on a home and selling it in a weak market. Depending on the case, they may lose less money by easing the terms of a mortgage and letting the borrower stay put.
Arrangements often involve lowering the interest rate, or stretching out the term of the loan and adding late-payment penalties to the loan amount.
Even when loans are modified, they still fail at an alarming rate. A study by the Comptroller of the Currency shows that half of mortgages modified in the first three months of 2008 fell delinquent again within six months.
Comptroller John Dugan, the government’s main bank regulator, can’t explain the failure. It could be that payments in modified mortgages still are too high, he suggested. Or borrowers, who often have poor credit histories, may be using the lower payments as an excuse to run up credit card debt.
MORE HELP?
In Washington, a debate rolls on over whether the government should bail out homeowners, or find another way to speed modifications.
Senate Democrats, lead by Illinois Sen. Dick Durbin, want to let judges modify mortgages in bankruptcy court, over the mortgage holders’ objections. Currently, bankrupt homeowners must keep up their mortgage payments, plus pay make up for missed payments and penalties over time, or lose their homes.
Federal efforts so far have had limited effect. Last summer, Congress passed a law allowing the FHA to guarantee refinanced mortgages for homeowners who can afford the new payments. But the existing lender would have to reduce the loan to 86 percent of the home’s value and pay a fee in most cases.
The program was supposed to help up to 400,000 subprime borrowers. But it began operating only in October, and only a few hundred homeowners have applied so far.
Sheila Bair, chairman of the FDIC, has been pressing for mass modifications, using a formula she established at IndyMac Bank. The FDIC seized the failed bank last summer.
The program was supposed to help 65,000 IndyMac borrowers who are behind on their mortgages. But only 7,200 have signed up so far.
Bair is pushing for a national program designed to reduce payments for troubled borrowers to 31 percent of their income. To encourage lenders to participate, the government would pay half the losses if such loans default.
Meanwhile, the Missouri Housing Development Commission soon will start providing money for refinancing subprime mortgages. When the program begins, probably later this month, information will be available at www.mhdc.com. The MHDC normally supports first time homebuyers with cut-rate loans, operating through 65 private lenders in the state.
Though traditional refinancing often is out of the reach of troubled subprime borrowers, some can get out from under without special help.
Kerry Korte, 28, filed bankruptcy in 2004 after the breakup of a relationship left her on her own as a single mom. The bankruptcy blocked her from getting a conventional mortgage on her home in House Springs. So she took out a subprime, adjustable-rate loan.
Korte works for a title company, processing home foreclosure files. This fall, she thought her own name might end up in one of those files. Her interest rate was set to jump to over 10 percent, and she couldn’t afford the higher payments.
“I was scared,” she said. “It’s kind of like a helpless feeling.”
But Korte had been scrupulous in paying her bills on time since her bankruptcy. She had repaired her credit. A lender at Paramount Mortgage found her a conventional 30-year loan at 6.5 percent interest. “They got me out just in the nick of time,” she said.
