Foreclosure gridlock threatens economy

Treasury Secretary Hank Paulson said Monday said he is confident an agreement will be reached soon with lenders working on a plan to freeze loans at "starter" rates for many homeowners. In a speech to a housing conference, Paulson said the White House is also working with state and local housing finance agencies to help refinance borrowers in trouble. And he called on Congress to pass legislation giving the Federal Housing Administration more leeway in providing insured loans to borrowers who are having trouble refinancing their loans.

So far, progress in heading off these looming foreclosures has been extremely slow. Of some $950 billion in loans scheduled to reset this year or next, only 1 percent have been modified after resetting earlier this year, according a survey by Moody’s Investors Service released in September.

Unless the pace of foreclosures can be slowed, the housing market is going to get worse before it gets better. But based on interviews with borrowers, mortgage brokers, regulators, attorneys and other foreclosure experts, the process of modifying these loans is badly broken.

“You’ve got this massive gridlock,” said Ira Rheingold, executive director of the National Association of Consumer Advocates, which represents attorneys who act on behalf of homeowners facing foreclosure. “People sort of think they need to do something, but no one knows what to do. You’ve got all these different parties involved. How do you bring them all together?”

Paulson acknowledged the difficulties in getting various players involved to agree on new guidelines.

"The company collecting your mortgage payment every month is most often doing that on behalf of those who own the mortgage," he said Monday. "And they are limited in decisions that they can make on behalf of those ultimate owners who are spread all over the world."

The gridlock starts with the borrower who has fallen behind — or knows that they’re about to once their monthly payments jump. Most of the mortgages written at the height of the lending boom were resold to other lenders or bundled in portfolios with hundreds of other loans, chopped up into securities and sold to investors. As a result, some borrowers are having trouble even identifying the right company to contact.

Once the mortgage holder is identified, borrowers face a daunting task getting through to the right person. Foreclosure specialists like John Reed, president of a St. Mary’s, Pa., firm that works with borrowers to head off foreclosure, say they’re not having much luck either.

“We leave messages with people, calls are not returned or they’re returned the day before a foreclosure date is scheduled,” he said. “We’ll get phone calls — and I’m talking routinely — that are just completely after the fact and aside from the point and just too little, too late. And they’re dead serious about, ‘Now what can we do about this?’”

Some homeowners say they get conflicting information from different departments at the same lender. Sometimes, that's because of miscommunication within the lender. The department devoted to modifying loans, for example, may not have received notice that the foreclosure process has already begun, according to Ellen Harnick, a policy analyst at the Center for Responsible Lending.

“Once things get referred to the foreclosure attorneys, (the lender) needs to communicate a new game plan to them — that (their) job is not to do everything possible to foreclose as quickly as you can,” she said. “The new game plan is work with the borrowers to modify.”

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