Why Mortgage Rescue Plans Aren't Enough

Laura Davis started falling behind on her home loan payments about a year ago, so she turned to her mortgage company for help. Davis, 41, wanted to work out a plan that would allow her to continue paying off her mortgage so she and her two children could stay in their Colorado home.

But, despite numerous e-mails and a letter to the company, the help never came. Recently, Davis, a single mother who works as a teacher's aide, received a notice from the company: It said that if she didn't make up her missed payments by next month, she would face foreclosure.

"I just kept hoping there was something out there that would help," she said. "But, at this point, I'm ready to pack up our stuff and get out of the house."

Even as the government and major banks unveil new programs aimed at reducing the ever-growing number of American foreclosures, critics and homeowner advocates worry that there are still many homeowners who won't benefit, including those like Davis.

Kathleen Engel, a law professor at Cleveland-Marshall College of Law in Ohio, said that Davis' story isn't unusual. Many home loan companies –- specifically, mortgage servicers that are in charge of collecting payments on loans -– just haven't had the resources necessary to cope with requests for help from homeowners.

"Servicers were not geared up to deal with defaults," Engel said. "The servicer model was designed to collect payments and distribute them and manage the loans. ... They simply don't have the skill, they don't have the operational capacity, and they don't have the people power to do this. I think their call centers are overwhelmed with requests."

There are banks that devote more staff to work on foreclosure prevention efforts -– last month, JPMorgan Chase announced it was hiring 300 new loan counselors and was establishing 24 new regional counseling centers "to provide face-to-face help in areas with high delinquency rates."

But Engel said that, in some cases, mortgage servicers' failure to provide timely help in the first place sowed seeds of distrust among borrowers, making them reluctant to reach out for help today.

"Even if (servicers) are up to speed now, that doesn't change borrowers' perception of whether the servicers will help them," she said.

Loan Modifications: Investors in the Mix

Lack of manpower at and distrust of mortgage companies are just two of the obstacles facing struggling homeowners. Ira Rheingold, executive director of the National Association of Consumer Advocates, said that the new programs don't address the issue of second mortgages.

A borrower with two mortgages can't avoid foreclosure without both modifying his or her first loan and also making some sort of arrangement with whoever owns their second mortgage. According to the Center for Responsible Lending, roughly half of all subprime loans -– loans that are granted to borrowers with poor credit history and, as of late, have been among those most likely to fall into default -– are attached to second mortgages.

Critics also say that the new plans, which include programs announced this week by the Federal Housing Finance Authority and Citigroup, don't tackle the types of mortgages that are most often at risk for default: those that are owned by investors, rather than banks. While banks commonly service such mortgages, the agreements they hold with investors limit how and when they may modify the loans.

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