Lenders Swamped by Delinquent Mortgages

By Dina ElBoghdady
Washington Post Staff Writer
Wednesday, April 23, 2008

Seven out of 10 troubled mortgage borrowers remain without a plan to work out their loans despite increased industry efforts to help them, according to a new report from a coalition of state attorneys general and banking regulators.

The group collected data from 13 of the largest subprime lenders from October through January and found that the lenders are overwhelmed by their workloads and unable to keep pace with the number of borrowers who are falling behind on payments.

"There still seems to be a disconnect between homeowners and their mortgage servicers," said Mark E. Pearce, North Carolina's deputy commissioner of banks. The report is the most recent effort to assess how well lenders are responding to foreclosure problems as they face increased pressure from policymakers and consumer advocates to provide swifter and more meaningful help. It also represents the only public attempt by a non-industry source to collect such loan data across states.

The findings were not all grim. The coalition reported that the number of late borrowers working with their lenders to prevent foreclosure has increased and that the measures taken by lenders to help them have become more aggressive.

Instead of rescheduling missed payments, more lenders reduced the overall burden by modifying loan terms. They lowered interest rates or extended the term of the loan to cut payments. Less often, they forgave part of the principal.

But the lenders are failing to make headway because they can't keep up with the number of delinquent loans. About 50,000 more loans were modified in January than in October, Pearce said. But 90,000 additional loans became delinquent during that time.

The coalition, which represents 11 attorneys general, two state banking departments and the Conference of State Bank Supervisors, said the lending industry will not make a dent in the foreclosure crisis if it continues to address the problems on a case-by-case basis.

Instead, it needs to change the system so that borrowers with similar problems are automatically handled the same way, the coalition said.

Almost two-thirds of the cases that lenders started from October to January were not completed in the next month, demonstrating how inefficient the current system is, the group said.

The focus of lenders "has always been to collect money, not to give a better deal to borrowers," said Tom Miller, Iowa's attorney general. "A shift in psychology needs to be made."

Lenders say they have made that shift because it is in their financial interest to avoid costly foreclosures. Paul Richman, a vice president at the Mortgage Bankers Association, cited a recent study by the industry-led Hope Now Alliance that found that lenders helped more than 1 million borrowers avoid foreclosure from July 1 to Jan. 31.

The Hope Now study included a larger sampling of lenders and gave a fuller picture of what's unfolding, Richman said.

The alliance collected data from 26 lenders that represent two-thirds of the prime and subprime market.

The coalition said that even though it had data from fewer lenders, those lenders represent 60 percent of the subprime market and give an accurate picture of what's happening on the front lines.

The Hope Now study, they said, counted short-term solutions as progress and so was overly upbeat.

"They were trying to make the situation look better than it was," Miller said.

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