Mortgage Modifications" Are Becoming More Common, and More Lenient

By Jim Gallagher, St. Louis Post-Dispatch

Nov. 1--Banks and mortgage companies have foreclosed on 5,000 residential properties in the St. Louis region so far this year. But a growing number of homeowners are managing to save their houses by convincing lenders to cut their monthly payments.

Borrowers just shouldn't expect an easy time.

"Mortgage modifications" are becoming more common, and more lenient, although bottlenecks at mortgage servicers continue to frustrate homeowners. Many still are rejected and sent to foreclosure.

Latoya Williams is one of the lucky ones.

Williams, 33, lives in Berkeley with her 12-year-old son. Her troubles began when she lost her job, and had to take another one with a big cut in pay. Her paychecks dropped from $2,400 to $1,500 a month. She could no longer afford her $701 monthly mortgage bill.

"I'd try to catch up, and I'd get bills. There was a time I was

skipping the bills to pay the mortgage. Then I'd skip a mortgage payment to buy groceries," she said.

Williams called her lender, Bank of America, which offered her a deal. If she could make the payments on time for three months, the bank would cut her monthly payment.

The bank didn't mention a number, but a typical deal for someone such as Williams would take the monthly payment to about $611 per month, said Mary Fehner, housing counseling manager of the Catholic Charities Housing Resource Center. The Center gave Williams the money for her payment in August.

"I think it's a great process. It's going to help people afford their homes," said Williams.

In St. Louis, mortgage modification is a good news/bad news story. The good news is that deals such as the one that Williams received are happening more frequently, spurred by the Home Affordable Modification Program from the administration of President Barack Obama.

After a slow start last spring, the program -- which provides counseling to troubled borrowers and financial incentives to lenders -- is getting more traction.

Nationally, about half a million are in the "trial" stage of the process. Typically, homeowners make reduced payments on time for three months -- the trial -- and then the bank agrees to reduce interest rates and monthly payments for at least five years. In some cases, such as that of Williams, the borrower is required to make three regular payments before rates are lowered. Some new rates are as low as 2 percent.

The numbers in the program have been growing by about 100,000 per month since June. But as of September, they represented only 16 percent of people with delinquent mortgages. There are no figures for modifications in St. Louis. But there are indications that they are helping to slow the foreclosure tide.

Completed mortgage foreclosures fell 12 percent in the metro area in the first nine months of this year, even as unemployment rose and the region fell into the worst recession in a generation, according to figures from RealtyTrac.

"We're seeing a big number of homeowners fall well behind, but only a trickle are coming out on the other side as foreclosures," said Kevin Cottrell, who tracks foreclosures as part of the Kelsey Cottrell Realty Group in Ballwin.

Cottrell thinks rising loan modifications are part of the answer. But it could also be a logjam in the banks' overworked mortgage bureaucracy, or the effect of a deliberate slowdown in foreclosure proceedings last winter as major lenders waited for the Obama administration to announce its anti-foreclosure initiative.

For instance, Bank of America, which has the second largest share of the St. Louis banking market, says it is still delaying foreclosures for customers who might be eligible for the Home Affordable program. But the bank expects foreclosures to rise in the future as people prove ineligible.

The government says banks and mortgage companies that have signed up for Home Affordable handle 85 percent of the country's delinquent mortgages. Those lenders are showing a wide variation in performance.

CitiMortgage, based in St. Charles County, has the second- best record in the country, with 33 percent of eligible borrowers in trial modification stage as of last month. Other companies, such as MorEquity, Home Loan and HomEq, have zero percent.

NEW WILLINGNESS

The attitude of lenders has shifted markedly since the housing slump began in 2007, housing counselors in St. Louis say. Back then, many lenders saw foreclosure as the only option. When lenders relented, they often simply added late charges and missed payments on to the loan amount, without reducing the monthly payments. Most such modifications failed.

Now the modifications usually involve cuts in the interest rate and monthly payment. In rare cases, the principal is reduced.

"Unlike a year ago, lenders today really are more willing and able to modify, but it's still an extremely difficult problem," said Rob Boyle, chief executive at Petersen Housing and Reinvestment Corp., which counsels people with mortgage problems.

Self interest was part of the reason. Lenders took big losses as they tried to sell off foreclosed property in collapsing housing markets. Nationally, they often lost half the loan's value, although bankers say their losses in St. Louis are less.

"A 30 percent loss is not unusual," says Gary Douglass, CEO of Pulaski Bank in St. Louis, which has been aggressively modifying mortgages. "In some ZIP codes you just get hammered."

Government pressure also played a big role. Mortgage giants Fannie Mae and Freddie Mac are now under federal control. Big lenders such as Bank of America, Citigroup and GMAC are beholden to the government for multibillion-dollar bailouts, and hundreds of smaller institutions also took government money.

The bad news about modification is that many struggling homeowners still can't get one, and more people need them as unemployment grows. At U.S. Bank, the biggest bank by market share in St. Louis, half the people who ask about mortgage modification don't qualify.

The Home Affordable program aims to reduce monthly payments to 31 percent of income. But with other debts, such as car loans and credit cards, some people can't afford even a reduced payment.

And lenders generally won't modify a loan if the borrower lacks a paycheck or doesn't earn enough to make reduced payments.

Others might not be able to get help because their mortgage is owned by one of the many mortgage-backed securities once sold to Wall Street, and the investment agreement restricts modification.

People with a lot of equity in their homes can also be frozen out. As part of the program, bankers and loan servicers perform a cold calculation: If they can come out better by foreclosing than modifying, they'll foreclose.

ECONOMY WOES

A year ago, the foreclosure mess was mainly a problem of subprime loans made to shaky borrowers. Today, the bulk of the problem stems from prime loans made to borrowers who have lost their jobs, or taken pay cuts.

"The subprime mortgage crisis is in the rear view mirror and receding and receding. At this point it is the economy that is really producing foreclosures," says Karen Wallensak, who directs Catholic Charities Housing Resource Center.

In some ways, the subprime mess was easier to deal with. Subprime borrowers generally had jobs; their problem was that they couldn't afford higher payments when their interest rates reset. With lower payments, they could keep their homes.

Many of today's troubled borrowers have no paychecks, which makes even lowered payments impossible to pay.

"I had a heart attack on my job. Then I lost my job," said Rick West, 49, of Imperial. He was the sole breadwinner, supporting a wife, two young teenagers and an $890-a-month mortgage on his paycheck as a maintenance mechanic.

The $23-per-hour job disappeared in March, and now the bills are piling up.

"I was doing fine and making money. Now, I just can't find a job. I fell behind, and it's getting worse and worse," he said.

Last weekend, West and his wife, Maria, came to the Urban League's Restore Our Homes Housing Rescue Fair, hoping to find some relief from Bank of America, which holds their mortgage. They left without an answer.

It galls West to think that Bank of America took $45 billion from the government's bank rescue program. He thinks the bailout should have gone to struggling citizens such as him. "They gave the wrong people the money," he says.

In years past, troubled homeowners could escape foreclosure by selling their homes, sometimes walking out with a profit. The bursting housing bubble has destroyed that option. Nearly 30 percent of homeowners in St. Louis are "upside down," meaning they owe more on the mortgage than the house is now worth, according to First American Corelogic, a real estate tracking firm. That means they can't sell the house to escape foreclosure, unless the bank is willing to accept less than it's owed, a so-called "short sale."

Others looking for help at the Urban League fair included Diana and Russell of Manchester. Like several people interviewed for this story, they asked that their last names be withheld, out of embarrassment or worry about the reaction of employers.

Diana, 51, struggled along pushing a walker. She had a car accident in 2003, and the medical exam showed she had lung cancer. The ensuing treatment caused her to miss work, and she lost her job.

The couple had insurance, but medical bills still piled up and they refinanced the house to pay them, ending up with a $220,000 debt.

They kept up with the payments until Russell was laid off. He found another job, but his hours were cut. "We had a lot of bad luck over the years," said Diane.

The couple began calling their mortgage company, asking for a break. "Different people we talked to said different things," said Diana. "One day we counted 30 different people we were transferred to. Then you get disgusted."

That's not an unusual tale.

Counselors helping beleaguered homeowners say their biggest hurdle is an antiquated, overwhelmed, sometimes bumbling bureaucracy at banks and mortgage servicing companies.

The mortgage business was caught by surprise when sub-prime mortgage holders began defaulting en masse in mid-2007.

Banks say they've since beefed up their staffs to meet the foreclosure wave. "We've hired close to 4,000 employees, including several hundred in St. Louis," said Sanjiv Das, chief of CitiMortgage. That tripled the staff dealing with mortgage problems. U.S. Bank says it doubled its staff.

So the servicers are doing better now -- more loans are being modified -- but there are still problems.

As a result, mortgage holders wait and worry, not knowing if the next mail will bring a foreclosure notice. "You submit a viable workout plan and it may be months and months before you hear, and the client is quietly sinking deeper and deeper into the abyss," says Wallensak of Catholic Charities.

The Urban League's housing counselors thought they'd struck a deal for Cecelia Hester. Hester, 90, who is a widow and walks with a cane, has lived in the same house just west of downtown for 67 years.

Her income dropped when her husband died in 2005, and she couldn't keep up the $944 monthly mortgage payment. Counselors say CitiMortgage agreed to cut her payment to $666.

But when a reporter arrived to interview her, Hester said the deal wasn't quite done. "I was waiting for a package (with mortgage papers) and I never got the package," she said.

She said the Urban League had called and asked her to fill out more paper work.

"I got the Lord working with me. If I didn't, I'd be crazy," she said.

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