Without relief, mortgage mess will only worsen

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

Our story last week on the failure of the government's mortgage relief efforts drew a flood of mail from homeowners facing default and foreclosure. Once again, dozens of readers report spending months of fruitless effort trying to contact lenders, only to be shuttled from one rep to another, often getting conflicting advice.

I am among the millions that are having a hard time getting a loan modification through my bank … What I don't understand is why are the lenders holding out? … In the next 5 to 10 years it'll be more Americans with bad credit than good. Then who will be able to get any credit for anything?
— Berni B., address withheld.

Every time we write about this topic, our inbox floods with mail from readers trying to catch a break on their mortgage. Once again, dozens of readers report spending months of fruitless effort trying to contact lenders, only to be shuttled from one rep to another, often getting conflicting advice, eventually hitting the same dead end. Some of these readers report that, rather than cutting payments to reflect the recent drop in interest rates, lenders are offering to suspend payments for a few months — and then raise their monthly payment to make up the difference. That's hardly relief.

Despite assurance from lenders and mortgage servicers that they are doing everything possible to slow the foreclosure rate, it just isn’t working. As the Mortgage Bankers Association reported last week, the latest data show the pace of foreclosures and defaults hit a record in the second quarter. Separate data show the rise continued in July — from levels that were already substantially higher than a year ago.

Nearly two years after the government launched its first unsuccessful mortgage relief effort, Hope Now, some 13 percent of homeowners with mortgages are either in default or headed for foreclosure. A third now owe more than their house is worth; one recent research report figures that will rise to 50 percent by 2011 unless more aggressive measures are taken.

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I can’t speak for lenders — I have no idea why they aren’t moving more quickly to modify loans. There are many possible reasons — one of which is that they are hoping that homeowners will somehow figure out a way to keep making payments. Some readers report they are spending down their retirement savings while they try to work out a new loan.

Whatever the reason, the current process just isn’t working. As you point out, aside from agony each family goes through when it loses a home, their credit is destroyed. That’s not a great formula for getting a consumer-driven economy out of recession.

It’s also not going to help the housing market get back on its feet. Every time a foreclosed home is sold — either in a distressed sale or at an auction — that sale drags down the price of every other “comparable” home in the neighborhood. That puts more homeowners “underwater” on their mortgages, leading to more defaults and foreclosures, pulling home prices lower still.

It’s a vicious downward cycle. And until the lending industry or the government figures out a real solution, it’s hard to see how the economy can get back on its feet. No matter what Fed Chairman Ben Bernanke says.

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