Why Mortgage Rescue Plans Aren't Enough

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.

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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.

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.