Loan modifications that supposedly help homeowners, just postpone foreclosure
Kay, about to lose her Duluth home, was relieved when her bank finally granted her appeal for help with her mortgage.
Then she read the new terms. The interest rate had not dropped. Her monthly payments went up, not down, and they’re scheduled to go up again — by almost a-third — in seven years.
“I took it because I felt like it was the only option I had,” said the single mother who asked that her full name not be used. “But in seven years, I’ll be sitting exactly where I am now. I will have to move out.”
Kay would be counted among the 950,000 mortgage modification successes made last year in the housing market free fall, as tallied by Hope Now, a coalition of mortgage industry and financial counseling institutions. It also estimated that 2.2 million home foreclosures were prevented by flexible lenders, such as Kay’s.
But counselors at several foreclosure prevention agencies in Minnesota, as well as several new studies, say those numbers are misleading, with the vast majority of modifications still leaving homeowners with mortgages they can’t afford. Counselors say many modified mortgages still have the same esoteric terms that sunk so many subprime borrowers: “interest-only” and “balloon” payments, as well as scheduled interest rate increases — now called “stepped rates” instead of “adjustable rates.”
“It’s exactly how subprime lending worked,” said Dan Williams, a mortgage counselor at Lutheran Social Service in Duluth. “The same problems will happen again in two or three or five years. That’s not ending the housing problem. That’s extending it.”
December data from the U.S. Comptroller of the Currency showed 36 percent of borrowers who had arranged new terms on their mortgages were in default — or 30 days behind on payments — within three months of their modifications. The figure was 53 percent by six months.
“Borrowers took the first deal thrown at them because they didn’t want to be thrown out of their homes,” said Guy Cecala, publisher of the industry newsletter, “Inside Mortgage Finance,” in Bethesda, Md., explaining the high rate of redefaults.
Several lenders made no apologies for the temporary nature of the fixes. They have a right to full repayment, they said, and in the meantime the modifications buy struggling homeowners valuable time to improve their finances.
“We’re doing the best we can in this current economic climate,” said Jumana Bauwens, spokeswoman for Bank of America, which acquired Countrywide Home Loans, one of the country’s biggest subprime lenders. “Giving people years [of relief], we believe, is a reasonable amount of time. Hopefully, property values will come back and they’ll be able either to sell their home or refinance, or they can call us and we’ll reassess at the time.”
Kay’s modification wrapped $6,300 of missed payments into principal, raising her original 2007 mortgage from Homecomings Financial to $129,300. Her interest rate remained fixed at 7.25 percent. Her interest-only monthly payments went from $747 to $781 for seven years, so she will still owe $129,300 at that time. Because she’s being held to her original 30-year deadline — June 1, 2037 — she will have just 20 years to pay it all. Her monthly payments would then be more than $1,000 for the duration.
A new study found such terms are typical. Of 21,000 modifications last November, 68 percent wrapped missed payments and other charges into the principal, according to Alan White, the researcher and a law professor at Valparaiso University School of Law in Indiana. That added about $11,000 to the average $210,000 mortgage and led to higher monthly payments in 45 percent of cases, White said.
Foreclosure prevention counselors — at Lutheran Social Services, Habitat for Humanity and ACORN — cited several subprime-like terms on modified mortgages. Minneapolis Habitat senior counselor Cheryl Peterson saw a modification that reduced monthly payments by recalculating the mortgage for 50 years — but it also kept the original final payoff date, in this case 28 years out. A “balloon payment” for any unpaid balance is due then.
In another, a Countrywide modification to an adjustable rate mortgage for a Duluth home, dropped the interest rate from 8.625 to 6.625 percent for five years, “and then it went back to the original crappy loan,” Williams said.
Counselors also are critical of a new round of pre-packaged modifications from lenders such as Citigroup and J.P Morgan Chase. The offers were welcomed as an attempt to speed relief to homeowners — sometimes even before they have payment problems — but observers say they are failing.
Lenders say they are working hard against a huge problem. Bank of America committed in October to modify 400,000 loans over the next three years, Bauwens said.
Homecomings Financial, a GMAC company, has been modifying record numbers of mortgages: 15,400 last November, compared to 2,000 in 2007, spokeswoman Jeannine Bruin said. “We had folks working through the Thanksgiving holiday,” Bruin said. “We don’t want to foreclose on anyone who wants to stay in their home.”
It’s the principal
Counselors argue that until lenders drop loans’ principals, to reflect the drop in home values, redefaults will continue. The Valparaiso study found about 1 in 10 modifications reduced loan principal. The vast majority are done by Litton and Ocwen loan servicers.
Cecala said Congress could offer more incentives to lenders to forgive principal, but an existing one isn’t promising: In Hope for Homeowners, the government insures mortgages that lenders mark down to 96.5 percent of their market value. Launched in October, it was touted as potentially preventing 300,000 foreclosures; so far, only 400 have even applied
Even borrowers are resistant, Cecala said, since “they have to share any future appreciation with the government.”
