Calls widen for broader foreclosure solutions

John W. Schoen Senior producer • Profile • E-mail

Launched by the White House in October to head off a rising tide of home foreclosures, the Hope Now Alliance said this week that it has helped over a million troubled borrowers trying to keep their homes. But critics of the program say it’s not clear how many of those homes will be saved over the long run.

Now, with foreclosures still rising, calls for a broader government and industry response are coming from community groups, consumer advocates, members of Congress and, most recently, Federal Reserve Chairman Ben Bernanke.

“It’s mostly a lot of hope and unfortunately not a lot of accomplishment at the moment,” said John Taylor, CEO of the National Community Reinvestment Coalition, which works with community groups to help homeowners. “I think there’s a great deal of exaggeration about what the impact has been. The real measure is: How are the foreclosure rates doing? The truth is the foreclosure numbers continue to rise.”

Fresh evidence of the deteriorating outlook came Thursday in a report showing that mortgage delinquencies - homeowners who are falling behind on their payments - rose to the highest levels in 23 years in the last three months of 2007. Borrowers who are delinquent for more than 30 days risk falling into default, which is the earliest state of the foreclosure process.

Home foreclosures soared to an all-time high in the final quarter of last year, according to the Mortgage Bankers Association.

Falling home prices have also added to the squeeze on borrowers, many of whom are seeing the value of their home dropping below the amount they owe. The latest Standard & Poor's/Case-Shiller index showed U.S. home prices plunging 8.9 percent in the final quarter of 2007. As a result, Americans' percentage of equity in their homes has fallen below 50 percent for the first time on record since 1945, the Federal Reserve said Thursday. That marks the first time homeowners' debt on their houses exceeds their equity since the Fed started tracking the data in 1945.

Economists expect this figure to drop even further as declining home prices eat into the value of most Americans' single largest asset.

Moody's Economy.com estimates that 8.8 million homeowners, or about 10.3 percent of homes, will have zero or negative equity by the end of the month. Even more disturbing, about 13.8 million households, or 15.9 percent, will be "upside down" if prices fall 20 percent from their peak.

That pace of foreclosures is expected to remain high this year as loans issued in 2005 and 2006 continue to reset to higher payments that many borrowers will be unable to afford. Many of these adjustable loans were sold with assurances that the borrower could refinance before the higher “reset” payment kicked in. But with home prices falling, many owe more than their house is worth, eliminating the option of conventional refinancing. If the economy worsens, and more people lose their jobs, that could increase the number of families at risk of losing their homes.

Video   Housing breakdown March 6: A panel of experts on CNBC dissects the latest data on the housing market, including a continued rise in U.S. home foreclosures. CNBC

On Monday, Bernanke told a group of community bankers that some 1.5 million subprime mortgages are scheduled to reset from just above 8 percent to about 9.25 percent, raising the average monthly payment by about 10 percent, to $1,500. Conventional 30-year fixed rates are currently at about 6 percent.

“The situation calls for a vigorous response,” said Bernanke.

The Hope Now Alliance said this week that more than a million homeowners have been helped with some form of loan modification or repayment plan. But critics note those statistics don’t indicate how many homes ultimately will be saved from foreclosure. A recent report from the Mortgage Bankers Association of third-quarter foreclosures found that some 40 percent of subprime borrowers who lost their homes previously had succeeded in modifying their loans or negotiating a new payment plan.

“A repayment plan or a one-month deferment when the loan is not affordable really doesn’t do much,” said Ira Rheingold, executive director of the National Association of Consumer Advocates.

Officials at Hope Now did not return several calls for comment.

Hope Now’s initial success has been in bridging a communications gap between borrowers and lenders. Many homeowners have had a hard time finding reaching someone at their lender with the authority to negotiate a loan modification. For their part, lenders report that some borrowers in trouble have ignored letters and phone calls intended to initiate a discussion about new mortgage terms.

But some consumer groups express concerns that the heavy representation of financial services companies on Hope Now’s board may mean the program is helping lenders more than borrowers. Bernanke has said some lenders need to add more staff to keep up with the rise in delinquencies and loan defaults; Hope Now provides a valuable service to lenders by collecting and assembling information about borrowers in trouble.

But the rising volume of calls fielded by Hope Now staffers has meant that some homeowners may not be getting the in-depth counseling they need to consider all of their options, according to Susan Keating, CEO of the National Foundation for Credit Counseling .

“The fact that the (Hope Now) Alliance secured very broad participation from the mortgage servicer and investor communities but utilized very limited resource from the counseling sector is really very unfortunate,” she said. “Because we’re using very little counseling resources to combat a very large problem.”

Keating says that so far only a handful of the NFCC’s 114 member agencies, with 900 offices around the country, have been tapped to help with the government’s foreclosure prevention program.

“We’re now into March,” she said. “This is not something that we’re seeing on the horizon. We don’t even have an endpoint yet. So why would you be doing this incrementally?”

That counseling is critical because the process of modifying loan terms still faces some thorny problems resulting from the multiple players involved in the financing packages sold at the height of the lending boom. Relatively few lenders held onto individual mortgages or even sold them one at a time to other lenders. That means many homeowners’ point of contact is a so-called “loan servicer” who represents the hundreds of investors who own the securities backed by individual mortgages.

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