Foreclosure gridlock threatens economy

The foreclosure process itself can baffle homeowners.

Carlos Hall, a production manager for a Dallas-area packaging company, has spent almost a year in foreclosure limbo. In January, after his monthly payment jumped from $931 to $2,400, he began falling behind. He said he tried to refinance with his lender but was told his house had lost too much value. In August, he said he got a letter saying the loan was in foreclosure and the house would be sold the next month. A community housing group he was working with was able to postpone the sale. In October, he says he answered a knock on his door from someone offering to refinance his loan who told him house was due to be sold in foreclosure Nov. 6.

“I’ve been going through this since January — it’s been very stressful,” he said.

On Monday, Hill said, his lender told him that the investor holding his loan would not go along with a modification and that his new foreclosure date was in January. He said his interest rate, which started at 7.9 percent, is now at 12.9 percent and will soon rise to the 14.9 percent cap.

Some borrowers wait too long before asking for help, so many lenders try to contact them when they see a potential default coming. But lenders often have trouble getting through, according to Alexis McGee, president of foreclosures.com, a Web site that tracks foreclosure activity.

“There’s a huge fear of dealing with the bad, mean bill collector on the phone,” she said. “A lot of (homeowners) have disconnected phone numbers, or they’re throwing out their mail. They’ve got hundreds of letters sitting there and they’re just frozen in fear of what to do.”

Part of the problem stems from the sheer volume of loans going bad — an outcome that few lenders were prepared for. The fact that so many mortgages were pooled and sold to investors adds another level of complexity.

“The problem is just so big and so unanticipated that to have the sufficient manpower to do this, Wall Street and these other servicers need to go outside their four walls,” said Nicholas Bratsofolis, chairman of Refinance.com, a mortgage bank based in New York.

Modifying a mortgage loan is a complex task under the best of circumstances. In many cases, the information in the original loan may be incomplete, especially in the case of “no documentation" loans that were popular with both lenders and borrowers at the height of the boom. Today, underwriting standards are much tighter, making many loans difficult to modify, according to Michael Zoretich, a mortgage broker in Brookings, Ore.

“If you switch from a non-verification of employment status, and income and asset status —where you’re going to fully verify everything during this transition — you’re going to see in excess of 50 to 60 percent of the notes in California go into the can, because they’re not going be able to qualify under those new guidelines," he said.

Many state and federal officials have called on the lending industry to streamline the refinancing process. Bair has proposed that borrowers with adjustable loans who are current and able to pay the starter rate be allowed to convert to a fixed-rate loan at the initial rate. (California recently won agreements from some lenders to adopt similar guidelines, but the agreements are voluntary.)

Fixing those starter rates for the life of the loan would vastly simplify the process of modifying loans and, in many cases, would amount to refinancing homeowners into mortgages at current market rates. Bair estimates that about half of subprime loans written in 2006 have starter rates above 8 percent.

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