Mortgage Mod Squad

With large numbers of homeowners falling behind on mortgage payments, lenders across the country are seeking ways to keep delinquent customers out of foreclosure.

One of the newest approaches: the Mod Squad, a roving 50-person team of problem-solvers who work for Texas-based EMC Mortgage, a subsidiary of Wall Street investment bank Bear Stearns. EMC services about 500,000 loans nationwide, with $78 billion in outstanding balances.

Named after a hit TV series from the late 1960s and early '70s, the Mod Squad consists of experts in loan modifications -- custom-crafted workout solutions for borrowers who no longer can afford their mortgages at current rates and terms. The object is to search for changes in the loan requirements that will permit the borrowers to remain in their houses, pay down their loans and avoid foreclosure.

"Foreclosing doesn't benefit anyone -- not the borrower, not the lender, not the bondholder," John Vella, EMC's president, said in an interview. However, recasting certain terms of the mortgage -- lowering monthly payments for a period, deferring unpaid principal and interest, or changing the rate -- may allow delinquent borrowers to get past the financial issues that caused them to fall behind.

What's unusual about the Mod Squad is that rather than waiting for homeowners to contact EMC when they get in a jam, the team is reaching out to borrowers, working with local consumer and credit-counseling organizations, and holding loan-modification educational meetings for borrowers in cities where delinquencies are rising.

Loan modification is one approach that mortgage servicers can use to reduce foreclosures. Other techniques include:

· Repayment plans in which unpaid balances are reduced over time through small, regular add-ons to borrowers' monthly payments.

· Forbearance agreements whereby principal and interest payments are reduced or even suspended for a period of time, enabling the borrowers to get their finances under control. Then the regular payments resume, along with gradual reimbursements of balances in arrears.

Remedies such as these are more commonly available than many credit-strapped homeowners may know. Major mortgage institutions including Freddie Mac, Fannie Mae and the Federal Housing Administration require loan-servicing companies to offer one or more plans to delinquent customers who have a reasonable chance of avoiding foreclosure.

The FHA even allows money to be advanced interest-free on behalf of delinquent homeowners to bring their loans current, up to a maximum of 12 months' worth of principal, interest, taxes and insurance. The mortgage company files a "partial claim" with FHA to obtain the funds needed to pay off all arrears. The borrowers are expected to repay everything they owe at the end of the loan term or from the proceeds when they sell their homes.