Lenders Cite Gains On Loan Relief
But Half of Modified Mortgages at Risk, Regulators Say

By Renae Merle
Washington Post Staff Writer
Tuesday, December 23, 2008

A government-backed alliance of mortgage lenders yesterday said it kept 2.2 million homeowners out of foreclosure this year, even as a separate report showed that many of those people likely fell back into trouble.

The lender alliance, Hope Now, said it is on course to double the number of loan modifications it completes in 2009. But the group could not estimate how many of the homeowners it had helped fell back into delinquency -- a problem rattling regulators and industry leaders.

Hope Now also said the recession could be a stumbling block to efforts to prevent foreclosures. About 40 percent of homeowners that call the industry's hotline have experienced a job loss or decrease in income.

"Obviously borrowers who don't have jobs can't pay the mortgage," said John Courson, chief operating officer of the Mortgage Bankers Association, a member of Hope Now.

More than a year into the foreclosure crisis, industry and government leaders are still struggling to make loan modifications more effective. More than 50 percent of loans modified this year were delinquent again within six months, according to a joint report yesterday from two federal bank regulators, the Office of the Comptroller of the Currency and the Office of Thrift Supervision.

There are problems with both industry and government programs. For instance, Hope for Homeowners, run by the Federal Housing Administration, has been criticized as too expensive and onerous to substantially reduce the problem.

"I think we all believe that more efforts can be made by industry and government to help homeowners," said Tom Deutsch, deputy executive director of the American Securitization Forum. "Ultimately the macro-economic conditions have made it a much more challenging environment."

The Treasury Department faces pressure to include loan modification programs in its request to Congress to release the second half of the $700 billion financial rescue package. The Obama administration should consider appointing a foreclosure prevention czar, said Rep. Barney Frank (D-Mass.), chairman of the House Financial Services Committee. Loan modification programs "have not worked well, but I think they have the potential to do a substantial amount," he said.

There have been some successes. The number of loan modifications initiated in the third quarter increased 13 percent from the previous quarter, according to the report from the bank regulators. Hope Now said its members are now more likely to perform more substantial types of loan modifications. And several lenders, including Citigroup and J.P. Morgan Chase, have announced their own programs.

"It's complicated. Nothing is easy, but we are seeing better, improved results," said Faith Schwartz, executive director of Hope Now.

The industry is planning more programs to streamline the loan modification process next year and increase efforts to contact hard-to-reach homeowners, she said. Hope Now will release detailed data next year on the types of modifications being performed to better judge what works best and expand its efforts to try to help at-risk homeowners avoid foreclosure, Schwartz said.

Consumer advocates continue to push for more aggressive loan modification programs. For example, many distressed homeowners are unable to refinance into better loans because their home is worth less than what they owe. But many lenders are reluctant to lower the principal owed to make up for the difference.

Bank of America included principal reductions in a loan modification program it initiated earlier this year, and mortgage servicer Ocwen Financial performed thousands of principal reductions this year, accounting for 70 percent of the industry's efforts, according to a recent Credit Suisse report.

About 23 percent of Ocwen's loan modifications include principal reductions, helping the company achieve a lower re-default rate, said Paul Koches, Ocwen's general counsel. After six months, Ocwen's modified loans have a re-default rate of about 25 percent, significantly better than the industry average, he said. "We view principal reductions as a last resort when we approach a modification," he said, but sometimes it's a necessary component.

But many lenders have resisted cutting the amount owed to them. Under the Hope for Homeowners program, the government initially required lenders to reduce the principal to 10 percent less than the home's value. Last month, it revised that to 3.5 percent.

Many industry and government officials are looking to a program developed by the Federal Deposit Insurance Corp. this summer for delinquent customers of failed California bank IndyMac as a potential industry model. Under that program, borrowers' payments can be lowered to 38 percent of their gross income.

But there may be problems with that model, too, according to a Nov. 20 Standard & Poor's report. There "are no assurances restructuring loans under this program will prevent future delinquencies or eventual foreclosures on the property," the report said. "And if the housing market continues to deteriorate and unemployment rates continue to climb, will the government roll out other, even more generous, restructuring programs?"

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