Chetera Miller, a credit counselor for Neighborhood Housing Services of Chicago, has noticed that lenders are becoming more willing to cut deals with delinquent borrowers. She's been able to help eight homeowners restructure their loans over the past few weeks.
There's just one problem: That's only about half the number of financially strapped clients she's working with. Miller's caseload is expanding as more homeowners fall behind on their adjustable-rate mortgages.
A public outcry against the mortgage industry is growing louder. Lawmakers, regulators and consumer advocates say they are increasingly worried about the fallout from a record number of homes going into foreclosure. They're pushing the industry to move faster to aid homeowners, by forgiving past-due amounts, lowering rates and shifting people into fixed-rate loans.
Lawmakers also have proposed new rules, from a moratorium on foreclosures to tax changes. But so far, no one has a solution that would spare everyone from the pain of the mortgage crisis.
The impact goes far beyond individual families or blighted neighborhoods. Treasury Secretary Henry Paulson Jr., Federal Reserve officials and private economists say that what's become a full-blown housing recession threatens the overall economy. A sharp drop in home building and falling house prices could stifle consumer spending, raise unemployment and further spook the financial markets.
More than 2 million homeowners are behind on mortgages. And 2 million more borrowers with tarnished, or subprime, credit will see their payments rise before the end of next year as their adjustable-rate mortgages, or ARMs, reset to higher levels that could prove unaffordable.
Sheila Bair, chair of the Federal Deposit Insurance Corp., is frustrated by the slow pace of loan restructuring and refinancing.
"Washington needs to push hard on this," she said. "Our message is, 'Prioritize these folks, if they can convert' (to fixed-rate loans). That will free up more time to deal with some of the more challenging cases."
But Larry Litton Jr., head of Litton Loan Servicing, is equally frustrated. He restructured 2,000 loans last month to help subprime borrowers. This month, he'll do double that number, including changing the loan terms for 1,500 homeowners who have yet to fall behind but who wouldn't be able to afford their looming interest-rate increases.
"We are modifying more loans than we ever have, and despite that, the foreclosure volume continues to increase,
Normally, his company, which collects mortgage payments and handles late payments, helps about 60% of homeowners avoid foreclosure after they fall behind on their subprime mortgages. But with tougher lending standards, falling home prices in many areas and a lot of poorly underwritten loans, he said he can modify only about 45% of the bad loans he has on his books.
The housing crisis, Litton says, "is bigger than what people had originally thought. You're probably looking at a peak in these defaults in the third or fourth quarter of 2008."