January 18, 2008

Foreclosures, Lenders' Preferred Fix

By Renae Merle

At a time when mortgage lenders were touting efforts to help homeowners avoid foreclosure, delinquent borrowers were almost twice as likely to lose their homes as they were to reach an agreement with their lender that would allow them to stay put, according to a Mortgage Bankers Association survey released yesterday.

The survey provides insight into the third quarter last year, when the nation's foreclosure rate, 1.69 percent of outstanding loans, reached a historic high. The industry has since agreed to a Bush administration plan that will freeze rates for 600,000 homeowners with adjustable-rates loans. Consumer advocates have said that the plan does not go far enough in preventing foreclosures.

A top regulator yesterday said mortgage lenders are moving too slowly to modify subprime loans, which are among the most likely to default. "We must see a pickup in the pace, and the sooner the better," Sheila C. Bair, chairman of the Federal Deposit Insurance Corp., said at a conference.

The Mortgage Bankers' report found that lenders began foreclosure on 62 percent of delinquent borrowers during the third quarter and that homeowners who did get help were more likely to have their lender set up a repayment plan than to lower or freeze their interest rates.

That represents progress, association officials said, noting that the industry has modified loan terms sparingly. This was the group's first formal study of the practice.

The foreclosure rate was exacerbated by speculators, borrowers who did not respond to efforts to contact them and borrowers who defaulted on a previous repayment plan or loan modification, they said.

"The mortgage industry took major steps during the third quarter to help those borrowers who could be helped," said Jay Brinkmann, vice president of research at the Mortgage Bankers Association.

For instance, California-based Countrywide Financial, the nation's biggest mortgage lender, said this week that it had helped more than 80,000 borrowers keep their homes last year, with most receiving loan modifications and long-term repayment plans.

According to the Mortgage Bankers' report, lenders modified 9 percent of all delinquent loans, or 53,573 loans, lowering or freezing the interest rates. They set up repayment plans for 29 percent, or 182,702, allowing borrowers to stay in their homes. Lenders began foreclosure procedures on the remaining 62 percent, or 384,388 loans. Of those, 29 percent were in default despite a previous repayment plan or loan modification.

Consumer advocates said the report points to the industry's misplaced priorities. For all types of mortgages, lenders established three times as many restructured repayment plans as they did modifications, which could include lowering the interest rate. For adjustable-rate subprime loans, they established seven times as many repayment plans as loan modifications.

Lenders are "focused on short-term repayment plans that don't help people in the long run," said Ellen Schloemer, director of research at the Center for Responsible Lending. Repayment plans are "great if people have short-term income disruptions but not if they need structural changes to loan terms to make it affordable long term."

Mortgage lenders have been shifting to more modifications as the economy has stumbled and as accounting rules have made it easier for servicers to change contracts, said Bill Longbrake, senior policy adviser for the Financial Services Roundtable. "Repayment plans do work quite frequently, but they are not always the right solution," he said. "Because of current [economic] circumstances, more modifications are beginning to be done."

That shift will be illustrated in a report to be released today by the industry-backed Hope Now Alliance, which will outline the types of plans that lenders provided in the last six months of 2007, Longbrake said. The Financial Services Roundtable is part of the alliance.