Strapped homeowners go it alone

Chicago Tribune
August 10, 2008
By Susan Chandler

If you’ve got an adjustable-rate mortgage you can’t afford, get help from your lender. That’s the mantra chanted by a chorus of regulators and industry experts. 

But it’s not that simple. Since the beginning of the year the only way Lisa Harris and her husband, Lonny, of Glendale Heights are making their mortgage payments is by borrowing money every month from Lonny’s mother. Their mortgage interest rate has risen to 11 percent and is scheduled to adjust again in January. 

“I can’t afford this mortgage. It’s up to $2,400 a month,” fumes Harris, who has a three-bedroom, 11/2-bath home. “I can’t even open the bills, it makes me so insane.” 

Meanwhile, her retired mother-in-law, Karen Harris, doesn’t know how much longer she can keep taking money out of her retirement savings to keep them afloat. 

For months, mortgage lenders, banking groups and legislators have been urging struggling homeowners to reach out for assistance before they are in too deep. But in reality, many lenders are reluctant to modify loan terms unless a borrower has missed several payments. 

“It’s a Catch-22. Banks don’t want to open the floodgates to anyone who wants to modify their mortgage,” explains Jeremy Brandt, real estate investor and chief executive of 1-800-CashOffer. “I would never tell anybody to [stop making payments] to manipulate a bank, but the banks’ attitude is, ‘We’re not going to negotiate until it’s clear you can’t make your house payment.’ ” 

Growing problem
The size of the mortgage problem has reached staggering proportions. 

Five thrift-related servicers with the largest mortgage portfolios were handling payments on outstanding balances of $2.3 trillion at the end of March, according to the Treasury Department’s Office of Thrift Supervision. 

The percentage of borrowers behind on payments by at least 60 days rose for the fifth consecutive quarter in the first three months of 2008, to 3.23 percent, according to credit bureau TransUnion. 

The mountain of troubled loans is likely to grow. Mortgages made in 2007 are going bad at a rate surpassing those made in 2006. Until those bad loans work their way through the system, foreclosures are expected to remain at record highs. Lenders say they are doing their best to push through “workouts” that keep borrowers in their homes. 

Mortgage servicers, which are companies that collect payments from homeowners, completed a record 181,000 mortgage workouts in June, an increase of 14,000 from May, according to Hope NOW, an alliance between mortgage servicers, counselors and investors. 

In the second quarter of 2008, some 522,000 workouts were completed. Since July 2007, more than 1 million troubled borrowers have been helped. 

“I think they’re doing great,” Vicki Vidal, associate vice president of government affairs for the Mortgage Bankers Association, said of the industry’s efforts. 

Lenders have several options they can offer troubled borrowers, including repayment plans that call for borrowers to make up missed payments over a period of time. But repayment plans do little to help borrowers whose monthly payments are rising because they have adjustable-rate mortgages. 

For those borrowers, a better option is a loan modification that involves altering the mortgage terms. In many “mods” the borrower’s interest rate is lowered and fixed. 

To qualify for a modification, borrowers often must write a hardship letter, explaining the change in circumstance that made them unable to meet their mortgage payments. They also must submit financial information, including a detailed budget of expenses, so the lender can determine whether the borrower can afford even the lower payment. The lender can question whether the borrower is spending too much on cable TV or cell phones, for example. For those who are hanging on but still making payments, that may not be enough. 

Entrepreneurs’ woes
The root of the Harrises’ dilemma goes back to 2004, when they decided to refinance the home they bought in 1994. 

Lisa Harris and her husband were entrepreneurs who had recently bought an Evanston laundromat and a Park Ridge tanning salon. They didn’t have two years of regular income to report, but their credit score was a high 720, so they qualified for a low-documentation, 30-year adjustable-rate loan. The interest rate was 7.95 percent for the first three years. 

The rate would then adjust every six months and could go as high as 14.95 percent. The Harrises borrowed $193,500, making their monthly payment roughly $1,800. 

But the Harrises’ businesses closed and Lonny went to work selling cars; he brought home only $30,000 in 2006 and $60,000 in 2007, not enough to allow them to refinance with another lender. Lisa Harris, 39, has a small business in her home that brings in about $500 a month. Their 6-year-old has special needs, making it difficult for her to work outside the home. 

Their interest rate jumped in June 2007 and again in January 2008, reaching almost 11 percent. Lisa Harris called mortgage lender Countrywide’s “home retention” department in January and asked to have the interest rate reduced and fixed. 

She wrote a hardship statement. She faxed bank statements showing cash deposits from her in-laws. She filled out a detailed budget. After getting no answer for months, the Harrises were informed that they didn’t qualify for the program because they aren’t delinquent on their loan. 

In mid-July, Lisa Harris e-mailed the Tribune asking how she could join Illinois Atty. Gen. Lisa Madigan’s lawsuit against Countrywide, alleging fraud. The Tribune called Countrywide last week and asked the firm to lay out its loan modification policies. Two days later, a spokeswoman told the Tribune a “miscommunication” had occurred and the Harrises’ modification was done. 

Countrywide has agreed to reduce their interest rate to 7.25 percent for five years. As of Friday, Lisa Harris was still waiting for the new loan documents.

Loan type determines modification options

How can you find out if you qualify for a loan modification?

Call your lender, although it’s very likely they are just a middleman who forwards your payments to investors. If that’s the case, what they tell you will be governed by policies and agreements made elsewhere and that can make getting an answer on a modification request difficult and time-consuming.

If you think you’re getting the runaround, try to move past the front-line employee, recommends Jeremy Brandt, CEO of 1-800-CashOffer. Ask to speak to the representative’s manager and the manager’s manager. “You can say, ‘Nobody wants to help me until I’m behind, but I have to have my loan modified or I can’t make any more payments.'”

Even if your lender is sympathetic, your loan servicer may not have the authority to modify your loan.

If your loan is FHA-guaranteed, the Federal Housing Administration calls the shots. Under its policies, only borrowers who are behind in payments “for at least 90 days” are eligible for modifications.

Fannie Mae, the government-sponsored mortgage investor that also packages home loans into securities, specifies that borrowers be delinquent on three consecutive payments. Freddie Mac allows modifications on loans that are current but insists lenders seek its approval in each case, which means it may take awhile to get an answer.

Rules are harder to find in the private mortgage market, where investment banks have purchased loans to feed investors’ demand for mortgage-backed securities. For each batch of securities, there is an agreement that lays out the conditions under which a mortgage servicer can cut a deal with a distressed borrower.

In some cases, those agreements may prohibit loan modifications unless a loan is delinquent, but in most examples the standard is more flexible. Typical language calls for a loan to be “in default or imminent risk of default” before a lender can take action, said Vicki Vidal, associate vice president of government affairs for the Mortgage Bankers Association, an industry trade group.

The association worked hard with government entities and investors to clarify that streamlined standard last year.

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