The Sub-Prime Crisis Isn’t Over Yet

Homeowners desperately trying to save their homes from foreclosure in the sub-prime lending crisis are being led through a maze full of wrong turns, dead ends and blind alleys as they seek relief from lenders.

As defaults soar, the government is calling on lenders to put loan modifications on a fast track. Although lenders say they are trying to keep up with growing pleas for assistance, it is still incredibly frustrating for homeowners to change the terms of a mortgage.

"The [government is] putting out information, but that definitely hasn't trickled down to ground zero," said Ed Smith Jr., vice president of governmental affairs and industry relations for the California Association of Mortgage Brokers. "The feedback we get is (borrowers) go through the voice-mail rigmarole. The first person they talk to generally isn't someone who is in a position to make a decision. The customers get put into voice-mail h**l."

Sub-prime borrowers have been hardest hit by the current credit crunch. Nationwide, nearly 2 million adjustable-rate sub-prime mortgages will reset from low introductory rates to much higher rates through 2008.

John M. Robbins, immediate past chairman of the Mortgage Bankers Association, said that victims of predatory lending deserve help from the industry.

Recently, the Federal Reserve proposed regulations to eliminate deceptive lending practices, but the new rules won't help the thousands of homeowners who are going into default, and some will even see their monthly payments rise as much as 30 percent.

“Amid growing political pressure, loan servicers have increased efforts to modify mortgages,” DataQuick analyst John Karevoll said concerning the November decline.

A FASTER PACE

The loan initiative endorsed by the White House reflects a growing effort by lenders to rework loans, said Michael Gross, managing director for loan administration for Countrywide Financial Corp., the largest U.S. mortgage lender. "We are being very proactive in reaching out to borrowers who we believe are most at risk," Gross said.

Modifying loans is cheaper than foreclosing and trying to sell homes during a housing slump, Gross said. At Countrywide/Bank of America, modifications are accelerating.

"In November of 2006 we completed approximately 800 loan modifications," he said. "In November of 2008 we completed approximately 8,500."

In part, the new plan calls for freezing mortgage rates on sub-prime adjustable loans for five years for people who are likely to fall behind when interest rates rise.

Exactly how many households will benefit remains the subject of debate. The White House says 1.2 million homeowners could be eligible for either a fast track to refinancing or a fast-track loan modification, but final numbers will depend on economic conditions, housing prices and decisions made by borrowers and loan servicers.

“Many sub-prime borrowers, also must worry about a prepayment penalty. Such penalties can equal six months of mortgage payments,” a representative said.

A reinvestment coalition surveyed 33 of California’s more than 80 mortgage counseling agencies. Fifty-seven percent of those surveyed reported foreclosure and 33 percent reported short sale as the most common outcomes for borrowers who can't make payments.

In short sales, lenders agree to accept less than they are owed so borrowers with declining home values can sell and avoid foreclosure. Unfortunately, “It often takes so long for lender approval that such sales fall through,” said John Puhek, a broker and owner of a real estate and mortgage company in San Marcos, Calif.

“If lenders have been slow to react to the lending crisis, it's because they weren't prepared for the surge in foreclosures that began this year,” said Dustin Hobbs, spokesman for the California Mortgage Bankers Association. "They have had to up their productivity and staffing levels in a hurry."

Another reason for delays is that loans were bundled into securities and sold to Wall Street investors and are now difficult to untangle. A loss-mitigation officer may have to win modification approvals from Europe or Asia.

Gabe del Rio, homeownership director at Community HousingWorks, said that access to these loan modifications is improving gradually. Some lenders "are being aggressive with loan modifications," he said. "Certainly people are stepping up to the plate."

“Borrowers should never assume that getting out of a bad loan will be easy,” del Rio said. “In the end, it's up to them and their counselors to convince lenders that a modification is appropriate.”

"Contact your lender and expect it to be hard," del Rio said. "Get your paperwork together. Work with a professional that knows what they are doing. Stick with it. Don't give up. It will be worth it in the end."