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."
In light of the bruising publicity, shrinking income from delinquent loans and threat of further regulation, the mortgage industry is under growing pressure to help more homeowners in trouble. Most of the largest lenders have loosened their guidelines for modifying loans, where they can. On Tuesday, Countrywide Financial, cfc the nation's largest mortgage lender, will announce plans to refinance or modify $16 billion in subprime ARMs that will reset through next year.
But the problems that created the mortgage crisis are complex, which makes it harder to find fast and broad-brush solutions.
The majority of loans made in recent years were bundled and sold as securities, which have contractual terms that make it harder to renegotiate with delinquent borrowers. What's worse is that lending standards last year and early this year were recklessly low. Fraud was rampant. Many of the subprime borrowers who got loans simply shouldn't have. Those loans — no one knows how many — can't be saved.
Proposals to help
Federal and state policymakers, meantime, have been proposing a flurry of measures to help homeowners and to exert more control over the mortgage industry. The Bush administration unveiled a plan in August to reform the Federal Housing Administration and change the tax code. House and Senate committees have held hearings and voted on legislation to give housing agencies more latitude to help troubled homeowners. But it's unclear when any laws will be passed or how many homeowners they can rescue.
House Financial Services Chairman Barney Frank, D-Mass., said Monday he's "not encouraged" by the pace of the financial industry's response to try to restructure loans. He's planning a regional meeting with lenders, servicers and community groups to try to spur better communication and faster action on loan restructurings or workouts.
In a speech last week, Treasury Secretary Paulson warned that there's an "immediate need" for lenders to modify and refinance more loans. The housing downturn, Paulson declared, is "the most significant current risk to our economy" — a view shared by Federal Reserve Chairman Ben Bernanke.
More evidence of that risk is expected Wednesday and Thursday when figures on September home sales will be released. The numbers are expected to be dismal, with sales in the San Francisco area, for example, off 40% from a year ago, according to DataQuick Information Systems. Nationwide, foreclosed homes are swelling the glut of homes for sale. Those homes are weighing down property values and hurting sellers who've paid their loans on time.
Brian Bethune, an economist at forecasting firm Global Insight, predicts that the economy will feel the brunt of the housing problems well into 2008. Global Insight expects the drop in residential investment to subtract what he calls a "massive" 1.5 percentage points from economic growth over the next six months. Considering that the potential growth rate of the economy is about 2.8%, that's effectively like "having a baseball team and instead of putting out nine players, you put out five," Bethune says.
Economic fears will put pressure on the Federal Reserve to cut interest rates again when it meets next week. Yet some economists, such as Edward Leamer of the UCLA Anderson Forecast, don't think another cut is the answer. "The (Fed policymakers) need to close their eyes and pray at this point," Leamer said. "A cut in rates isn't going to revive the subprime market."
In Michigan, Ohio and Indiana, the majority of homeowners who are falling behind on their mortgages are suffering from problems linked to job losses in the auto industry. About 20% of the nation's homes in foreclosure are in one of those three states.
Jesse Jackson, head of the Rainbow/PUSH Coalition, toured cities in Michigan last week and will meet the Fed chairman Tuesday. "This is a huge economic tsunami that has the potential to really sink the economy," he told USA TODAY.
In Michigan, 71% of African-Americans who bought or refinanced their home last year received a subprime loan, according to an analysis of federal loan data for Genworth Financial. gnw
At the same time, in California, Florida and Arizona — the states with the most new defaults — many in default can't refinance because home prices are falling, and they owe more to the bank than their homes are worth.
Katrina Vizinau of Community Housing Development of North Richmond, Calif., says about 90% of the people who call her group for help aren't able to refinance, because lenders say they have little or no equity in their homes. Further, many of her clients are late on their mortgage payments, meaning their credit scores have taken a hit.
As federal regulators seek a coordinated response, Vizinau has had better responses from such major lenders as Bank of America bac and Wells Fargo. wfc Most of Vizinau's clients are black and Latino. But she sees some older borrowers who were persuaded to refinance to tap into home equity.
"What really breaks my heart is, it's not like they have time to start all over," she says. "They've used all the cash that they took out. They're just stuck, and they're just waiting. … They can't refinance because they're on a fixed income."
Bair, the FDIC chair, wants lenders to take a more sweeping approach, instead of painstakingly reassessing each individual mortgage. She wants them to quickly move the estimated 80% of borrowers who have kept up their monthly payments at the starter rate of their ARMs into fixed-rate loans.
"We have a mounting crisis here, and we need to take a systematic approach," Bair says. In the future, she says, the financial industry clearly needs tighter lending standards. But for borrowers who are already in high-cost adjustable-rate products, "I don't think you need to re-underwrite those loans. You have a two- or three-year payment history."
Concern among loan servicers
Some loan servicers, including Litton Loan Servicing, say Bair's plan would expose them to lawsuits from mortgage investors if the servicers reduce the interest rates on loans that aren't at serious risk of default. "The loan servicer has to walk the line of having a fiduciary duty to the investor and, at the same time, help homeowners stay in their house," Litton says. "We are required to look at each loan individually."
A report from Moody's last month found that lenders modified a scant 1% of subprime ARMs. But Countrywide's CEO of Loan Administration Steve Bailey argued that Moody's analysis was flawed. Moody's took a static sample of loans and looked at how many had been restructured three months after the loan reset.
Countrywide's own sample of 100 subprime ARMs showed that 43% of borrowers had paid off their loans eight months later, and 39% were still making their payments on time.
What's more, Bailey says, many people forget that job loss or a reduction in income, followed by illness and divorce, are the most common reasons why people default on mortgages. In July, Countrywide found only 1.4% of borrowers had fallen behind as a result of a higher payment tied to an ARM reset.
But Michael Kanef of Moody's says the increase in payment puts more stress on the borrower and raises the risk that the borrower will default in the future.
Bailey counters: "If the primary driver of foreclosures is a significant reduction of income, and property values do not continue to appreciate, that is going to make foreclosures continue to rise, and there really isn't anything to fix that."