Major hurdles stand in way of foreclosure relief

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

Last year, when Courtney Scott went looking for a house in the Atlanta area, she signed up for a home buying class with a local community group. That’s where Scott, a retired nurse living on a disability payment, learned about a state-sponsored homeownership program for low-income households.

She applied for the program and was told she qualified. After finding a home for $95,000, she applied for a mortgage with one of the program’s lenders, Bank of America. Based on her 34 percent down payment, some additional savings and her monthly Social Security income of $865, the bank approved the $65,000 loan.

But although the bank approved the loan, the monthly payment of $602, including insurance and property taxes, ate up some 70 percent of her income. By March, with her budget stretched to the limit, Scott began to try to get her loan modified to more affordable terms.

It hasn’t been easy.

One bank representative told her she didn’t qualify for a modified loan because she was not yet behind in her payments, she said. After she eventually fell behind, she was told she had to be in her house for a year to qualify for a new loan. After 12 months in her home, she said she was told she didn’t qualify for a new loan because she hadn’t made 12 consecutive, on-time payments.

“Every time I talk to someone, with what looks like an option, they come up with a reason why it doesn’t work,” said Scott, 60.

A spokeswoman for Bank of America, citing privacy reasons, said the bank couldn’t comment on individual customers’ financial details.

Scott is one of hundreds of msnbc.com readers who have reported serious problems wading through the thicket of red tape surrounding any efforts to modify troubled mortgages. Their experience puts a spotlight on roadblocks preventing a broader approach to cleaning up the nation's mortgage mess.

Despite the trillions of dollars in federal money advanced or committed to shore up the nation's financial system, efforts by lenders and government agencies have failed to halt the relentless rise in foreclosures. Relatively little has been spent directly to help head off home foreclosures, in part because of opposition from some lawmakers and Bush administration officials who fear rewarding bad decisions by borrowers.

President-elect Barack Obama has signaled that his administration would take more aggressive steps to stem the tide of foreclosures, which threatens to toss millions more Americans out of their homes, prolong the slide in house prices and deepen the global recession.

"We've got to start helping homeowners in a serious way to help prevent foreclosures," Obama told reporters this month. “Deteriorating assets in the financial markets are rooted in the deterioration of people being able to pay their mortgages and stay in their homes."

Other government agencies and regulators — from the Federal Reserve to the Office of the Comptroller of the Currency — have echoed that call in recent weeks.

But those efforts will face the same legal and financial hurdle that so far have stymied more aggressive housing relief efforts. After a year of gridlock in Washington, some foreclosure relief advocates are renewing calls for more radical reforms that could include a change in bankruptcy laws that would allow judges to modify mortgage terms — a move the lending industry has strongly opposed.

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After this fall’s $700 billion rescue package and recent debate about the auto industry bailout, Congress also faces pressure to move more aggressively and spend taxpayer funds to try to break the financial and legal logjam that threatens to send millions more homeowners into foreclosure next year.

“I do think we’re going to come to a point early next year when it becomes obvious that the foreclosure problem is so severe that we’re going to have to take a shot a something like this,” said Moody’s Economy.com chief economist Mark Zandi.

Workouts that don't work
Efforts to reverse the rise in foreclosures began in earnest in October 2007, when the White House unveiled the HOPE NOW Alliance, a voluntary industry effort to help homeowners work out unaffordable loans. Since July 2007, lenders working with the HOPE NOW Alliance have reworked some 2.7 million mortgages, according to the group’s data. Roughly 1.7 million of those involved repayment plans, which typically increase the monthly mortgage bill to make up for missed payments.

Many homeowners find the new payment even harder to keep up with, a big reason the “redefault” rate, the number of loan workouts that later fail, is rising. More than half of all homeowners who had their loans modified in the first half of the year are already in default again, according to the Comptroller of the Currency.

A second option is to lower the monthly payment by stretching out the term of the loan, resetting interest payments to current market rates or forgiving some of the principal. Since July 2007, just under a million mortgages were modified to change the terms of the loan, according to HOPE NOW data.

“Within the world of workouts, we are seeing a lot of repayment plans and not a lot of modifications,” said Adam Levitin, a Georgetown University law professor who recently wrote a paper on the problems servicers are having modifying loans.

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