According to Guy Cecala, publisher of the trade publication Inside Mortgage Finance, 80 percent of subprime loans and 75 percent of "Alt A" loans -– loans that require less require less borrower documentation than traditional prime loans -– are packaged in securities owned by investors.
"Unless you come with something to deal with those loans and get investors to cooperate, you are not going to find any solutions," Cecala said.
In particular, some agreements don't allow for loan modification unless a borrower is already in default. In other words, borrowers who have been on time with their payments but risk missing payments down the road –- because of, for instance, an increase in the interest rate on an adjustable rate mortgage –- often have a harder time getting their loans modified.
"One of the arguments they make is we cannot modify mortgages -- we would be hurting our investors and violating the terms of agreement by modifying mortgages that are not in default because we can't anticipate that they're going to be in default," Rheingold said.
In a press conference Tuesday, federal officials announced the government's latest program aimed at foreclosure prevention: It targets homeowners who are 90 days past due on loans that are owned or guaranteed by government-run mortgage giants Fannie Mae and Freddie Mac.
The plan, which is modeled after a foreclosure prevention program instituted by the Federal Deposit Insurance Corporation at IndyMac Bank, would let eligible homeowners modify their loans so that their monthly payments amount to no more than 38 percent of their income. The modifications could include reduced interest rates, longer loan terms or deferred payments on loan principals.
At the press conference, Federal Housing Finance Authority Director James Lockhart urged servicers of mortgage-backed securities, and investors in those securities, to use the new government program as the standard for the industry as a whole.
"Not only will this streamlined program assist borrowers, but broad acceptance and effective implementation could stabilize communities and property values," he said.
Still, some critics say that urging servicers to voluntarily adopt the government's program isn't enough. Rheingold and Engel both say they'd like to see the government implement programs that would make loan modifications mandatory.
Thanks to a string of lawsuits, the government is forcing modifications on some loans owned by investors. Last month, Bank of America, which bought Countrywide Financial Corporation earlier this year, agreed to a settlement with 11 state attorneys general to cut interest rates and principals for nearly 400,000 Countrywide customers.
The attorneys general had filed complaints against Countrywide, alleging deceptive lending practices.
Bank of America put a positive spin on the settlement.
"We are confident that, together with the attorneys general, we have developed a comprehensive program that provides more solutions than ever before to assist troubled borrowers and put them back on the path to sustained home ownership," Barbara Desoer, president of Bank of America Mortgage, Home Equity and Insurance Services, said in a statement released recently by the bank.