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<http://www.nytimes.com/2007/03/22/business/22workout.html> March 22, 2007 For Some Subprime Borrowers, Few Good Choices By VIKAS BAJAJ
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At the end of last year, more than 2.6 million home loans were either past due for more than 30 days or in foreclosure. About 40 percent of them were made to people with weak, or subprime, credit. Most economists predict that the number of troubled loans will continue to rise this year as more mortgages are adjusted to higher interest rates and home prices decline further.
Last year, more than 37 percent of subprime loans were made without verification of borrowers' incomes, up from 15 percent in 2000, according to an analysis by JPMorgan Chase. Also, a third of borrowers took out a second mortgage, up from 6.8 percent in 2003, suggesting that they did not have enough money for a down payment.
For these borrowers, the best alternatives, according to some housing specialists, may include short sales, in which a lender accepts a sale for less than what is owed on the house, or a deed in lieu of foreclosure, where a lender takes ownership of a house instead of full payment of the mortgage.
Rising default rates have thus far had a modest impact on the overall economy, but economists fear that the problems could intensify if a broader range of borrowers, including those with stronger credit, start falling behind on payments. A big increase in the number of homes for sale, because of rising foreclosures, would put more pressure on prices and limit home buying and consumer spending.
The Senate Banking Committee will hold a hearing on problems in the subprime market today in Washington. Senator Christopher J. Dodd, Democrat of Connecticut and the committee's chairman, has suggested that the federal government may need to bail out homeowners in trouble, and some housing advocacy groups are calling for a moratorium on foreclosures.
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Loss mitigation efforts by mortgage lenders and government subsides, to be clear, can help borrowers and limit losses. But experience thus far suggests that a more concerted and coordinated effort will be needed. It may also require a change in the policies governing what can be done with securitized loans.
To increase a borrower's chance of making required payments, lenders can do things like lowering interest rates on the loans, waiving past-due payments and fees, and extending the periods in which low teaser rates apply to loans.
But the options vary greatly, based on who owns the mortgages. Generally speaking, loans held by the banks that made them in the first place can be modified most easily. Loans that have been securitized are typically subject to greater restrictions, according to the terms on which they were sold to investors. Payments made by borrowers whose loans have been securitized are collected and processed by mortgage servicers.
According to a Bear Stearns analysis, half of all mortgage securities that make up a widely followed index allow the servicer to modify the interest rate, principal balance or maturity of a loan; 40 percent allow some modifications but require approval from a ratings agency if more than 5 percent of a pool of mortgages is changed, and 10 percent of loan pools allow no changes. About half of all modifications are successful at preventing foreclosures, according to the investment bank.
The restrictions are intended to protect investors against tampering with the cash flow generated by the loans. But in times of greater distress, investors prefer modifications that let them continue earning a return rather than having the property foreclosed, a costly process.
"You will see a greater willingness to work with borrowers," said Gyan Sinha, a senior analyst who follows the subprime market for Bear Stearns.
Much of the revamping will start occurring once investors sell off or write down the value of the loans to account for decreases in home prices and the delinquent status of the loans, said Stan Ross, chairman of the Lusk Center for Real Estate at the University of Southern California. Some borrowers may find that they can stay in their homes if the value is written down enough.
"You mark the asset down to current value," Mr. Ross said, "then you look at the borrower and say, 'Is this the borrower that will repay me?' "
But housing counselors and lawyers who have worked on behalf of borrowers say their experience suggests that is not yet happening.
They say that many servicers are unwilling to discuss modifications until loans are at least three months past due, a point when many borrowers are in deep financial trouble. Also, servicers are often unwilling or unable to make big enough changes to account for inflated appraisals and income levels that were used in underwriting the loans.
"Some of them take hundreds and hundreds of hours" of work and negotiations, said Diane Thompson, a lawyer at the Land of Lincoln Legal Assistance Foundation in East St. Louis, Ill. "It seems to me that is a terrible waste of our resources. It would be much better if the bad loans were never made, and if they were made, we would get people to accept responsibility for them."
Officials at some big mortgage servicers declined to discuss their practices, but an executive at Wells Fargo, which services the seventh-largest subprime loan portfolio, according to Inside Mortgage Finance, a trade publication, says it has taken an active approach.
Mary Coffin, executive vice president for servicing at Wells Fargo Home Mortgage, said the company repeatedly warns borrowers about coming interest rate changes, gives them access to loss-mitigation specialists before they are delinquent for 90 days, and refers them to financial counselors if they need such help.
"The sooner that we work with them, the more success we will have," Ms. Coffin said. She also asserted that the company did not make loans that allowed customers to put little or no money down, which she acknowledged were a lot harder to modify or refinance because the owners typically had no equity in their properties.
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More borrowers may find themselves in a similar situation in the next two years as the first interest rate adjustments take effect on loans in 2004 and 2005. Those who continue to have spotty credit and little equity in their homes will be at the greatest risk because many lenders are no longer offering no-money-down mortgages to people with weak credit.
"If someone calls and says they want do a 100 percent loan," said Jeff Jaye, a mortgage broker in San Jose, Calif., "my antenna goes up. My first question is 'What's your credit score?' " -- Yoshie
