Shortly after the new year, John and Mona Breidenstein started to get anxious about their $427,000 adjustable-rate mortgage. The interest rate would reset this year, and the Santa Maria, Calif., couple feared they wouldn’t be able to afford the higher payments.

When they got the loan in 2005, a broker had assured them they’d be able to refinance before their payments jumped. But that was before home prices fell, loans became harder to get, foreclosure sale signs appeared down the block and John had to take five months off work to battle cancer.
For eight months, they say, they pleaded with their lender, Countrywide Financial Corp., to modify their loan — to no avail.

“Our loan adjusted this month — $800 more a month we are hit with,” Mona, who works in a church office, said last month in an e-mail to The Times. “Why won’t they work with the homeowner? All we wanted was a fixed-rate loan.”

In recent years, lenders have been reluctant to do such “workouts”: lowering the interest rate or changing other terms so that financially stressed borrowers can pay less and avert foreclosure. Countrywide, for example, says it modified the terms of 14,000 loans last year — about 1 in every 585 of the 8.2 million mortgages for which it was the servicer, or bill collector, at the end of the year. Housing activists say lenders usually make only temporary changes if they make changes at all.

But with foreclosures skyrocketing and government officials including Gov. Arnold Schwarzenegger and President Bush joining housing advocacy groups in pressing lenders to be flexible, it’s easier for borrowers to get a hearing these days.

Countrywide agreed late last month to ease the Breidensteins’ loan terms, a change Mona attributed to The Times’ asking it to discuss the mortgage. Calabasas-based Countrywide, the largest U.S. mortgage lender, said it was hard to modify loans when borrowers are unemployed and suggested that John’s return to work as an alarm installer was the deciding factor.

Workouts are controversial because they potentially let speculators off the hook for their bad decisions. They also are complicated by the fact that lenders like Countrywide sell most of their loans and can’t modify many of them without permission from the investors.

Nevertheless, Marietta Rodriguez, national director for housing programs at the nonprofit counseling group NeighborWorks, thinks the industry is at a “turning point” on workouts.

“We’re getting calls from high-level federal agencies saying, ‘We hear you folks know the most about this.’ ”

According to Secretary of Housing and Urban Development Alphonso Jackson, 500,000 borrowers with sub-prime loans — higher-cost mortgages for people with weak credit or heavy debt loads — could lose their homes in the next 18 months because interest rates will be resetting at higher levels.

Jackson and Treasury Secretary Henry M. Paulson Jr. met with major lenders last month and said they wanted to identify troubled borrowers and get them in touch with cost-free counselors from nonprofits such as NeighborWorks, ACORN and the Homeownership Preservation Foundation. They encouraged the lenders to refinance loans or modify current mortgages.

Lenders say they try to prevent foreclosures because seizing and selling a home typically costs them $30,000 to $50,000. Foreclosure sales also depress the value of nearby homes. And a Chicago study backed by the Homeownership Preservation Foundation found that costs to local governments exceeded $30,000 per foreclosure in some cases, owing to the loss of tax revenue, increased policing and higher demand for social services.

The Mortgage Bankers Assn. said there were no official statistics on workouts at individual lenders or industrywide. But Moody’s Investors Service said it surveyed 16 firms handling customer service on 80% of existing sub-prime loans. Just 1% of the surveyed borrowers facing an interest rate reset had had their loans modified, the study found.

Many large servicers relied on “passive letter-based contact” to reach customers facing loan adjustments, Moody’s said, instead of phone calls and other more thorough attempts to assess potential problems. Nonprofit groups say many troubled borrowers shrink from their growing debt problems and often throw such letters away unopened.

Big commercial banks with sub-prime operations generally get higher marks. London-based HSBC Holdings has been reaching out to borrowers well before their loans adjust to determine whether they are under stress, said Bruce Dorpalen, director of housing counseling for ACORN, the Assn. of Community Organizations for Reform Now.

Dorpalen praised an HSBC program that resets interest rates by calculating how much money borrowers need to buy food, clothing and other basics and then seeing what income remains to pay the mortgage. On a few occasions, he said, HSBC has cut the interest to 0% — which Tom Detelich, who oversees HSBC North America’s consumer lending, said was possible because the company didn’t sell the loans it serviced.

Other housing advocates said HSBC’s workout program usually resulted in only short-term modifications. “It is not our experience that HSBC is better or more flexible than other lenders,” said Matthew Lee, executive director of Fair Finance Watch in New York.

Countrywide Financial — which generally has sold its loans while handling bill collection for a fee — has a reputation for being inflexible, advocacy groups said, “although there are signs that’s starting to change,” Dorpalen said. Working with loan servicers to reach troubled borrowers has become “much easier than it was just six months ago,” said Tracy Morgan, spokeswoman for the Homeownership Preservation Foundation, which has counseling agreements with 37 lenders.

Of the homeowners her group counseled this summer, Morgan said 22% were candidates for loan modifications because “they have a financial situation that could support a workout.” An additional 18% were advised to consider selling their homes. The biggest group, 27% of those counseled, needed to get their spending and saving habits in line to be considered workout candidates, she said.
Source:

http://www.latimes.com/business/la-fi-workouts4oct04,1,7682772.story?ctrack=1&cset=true