MARTHA COAKLEY: The fault of lenders
The worst possible outcome for a mortgage loan is foreclosure. On that much, consumer and loan servicer advocates can agree.
It’s when you talk about the numbers, and the best way to avoid that outcome today, that the differences arise.
A report released last week by officials in 37 states, using data from 13 of the top 20 subprime mortgage loan servicers and the nearly 15.5 million loans they were servicing as of Jan. 31, found that seven in 10 seriously delinquent U.S. borrowers were not on track for any type of assistance in January.
It further found that those numbers remain unchanged compared to when the data was last analyzed in October.
“In normal times, one would not expect a significant change in a four-month period; however, this time period involved a dramatic increase in public attention to the subprime mortgage crisis, a ramping up of efforts by the HOPE NOW Alliance, and the initiation of new creative outreach efforts by servicers and government officials,” the State Foreclosure Prevention Working Group concluded.
The group, which includes Massachusetts Attorney General Martha Coakley, believes the stagnancy is the result of “systematic failure of servicer capacity to work out loans.”
Systematic solutions aimed at large numbers of loans or categories of borrowers will prevent far more foreclosures than the case-by-case, “hands-on” loss mitigation approach most servicers now use, they said.
But the Washington, D.C.-based Mortgage Bankers Association has found the opposite.
It says borrower outreach and the assistance efforts of lender/servicer-backed coalition HOPE NOW have made a significant impact in recent months, helping 1.2 million homeowners avoid foreclosure between July and February – and insists case-by-case loan workouts are the way to go.
“That’s the only way to get to a real workable solution,” said MBA Vice President for State Government Affairs Paul Richman.
He further noted that all of the top 20 servicers report data to HOPE NOW. Those that are national banks do not, citing advice from their regulator, the Office of the Comptroller of the Currency.
Many local nonprofit agencies that assist borrowers facing foreclosure, as well as state agencies including the Division of Banks, refer troubled borrowers to the HOPE NOW hotline.
Coakley spokeswoman Amie Breton said the reasons some borrowers aren’t yet on track for assistance could include the possibility that they’ve tried and failed to get help, haven’t tried or can’t be reached by their loan servicer.
It could also be that the number of delinquent loans is rising faster than servicers can keep up, she said.
The report also found that nearly two-thirds of all loss mitigation efforts by servicers aren’t completed within 60 days. It suggests that could mean many loss mitigation efforts actually fail to close at all, rather than just taking a long time to complete.
“Based on anecdotal reports of lost paperwork and busy call centers [from the servicers], we are concerned that the servicers overall are not able to manage the sheer numbers of delinquent loans,” the report stated.
Asked whether some delinquencies are simply the unfortunate result of a borrower who never should have gotten a loan he didn’t qualify for, and cannot be helped for that reason, Breton said that Coakley sees the problem as the fault of lenders, not borrowers: “The lender should never have made the loan.”
‘Unprecedented Efforts’
The report found significant delinquency rates in subprime adjustable-rate loans – the loan type the Federal Reserve Bank of Boston and others have cited as most likely to default – even before the interest rate adjusted.
The percentage of subprime loans facing reset in the third quarter of 2009 that are currently delinquent jumped from 21.4 percent last October to 28.5 percent in January, it found.
The 13 top servicers participating in the Working Group study were servicing 10.3 million prime loans and 5 million subprime loans as of January.
Just over 5 percent of the prime loans, and 25.3 percent of the subprime loans, were 30 or more days delinquent.
Some servicers had significantly more loss mitigation efforts in process than others in both October and January.
The servicer with the greatest percent of loans 60-plus days overdue in mitigation was attempting it on 65 percent of the loans last October and 46 percent in January; the one with the smallest number of such loans in mitigation was making that effort on about 2 percent of its loans in October and 10 percent in January.
Coakley’s office has declined to reveal the names of servicers involved.
The report noted that 10 of the 11 servicers that reported loss mitigations in process are making more loan modifications now than before.
MBA, which announced last week that it would be starting a new loss mitigation workshop for lenders and servicers, said the course will go over mitigation options including modifications (in which the terms of a loan, such as interest rate or adjustable status, are changed); reinstating a loan in arrears after a borrower has caught up with missed payments and legal fees; informal repayment plans (for example, allowing a borrower to tack on portions of two or three missed payments onto subsequent payments); and forbearance – giving a borrower extra time to make up missed payments before foreclosure.
John Golden, MBA’s senior vice president for education, said mortgages commonly default due to illness, death, divorce or job loss.
He said he didn’t have statistics on particular loan types that might default more often, but acknowledged that “there are a mix of reasons why loans go into default.”
But lenders, like borrowers, want to avoid default, MBA’s Richman said. He said a key means of making that happen is through outreach.
“Our servicers are taking unprecedented efforts” to reach borrowers, he said. “They are sending out letters, following up with phone calls, and some people are hiring people to knock on doors.”
Servicers also are participating in local outreach efforts, such as the Homeowner Foreclosure Prevention Workshop sponsored by Boston Mayor Thomas Menino’s office on March 29.
Richman said MBA rejects large-scale approaches to slowing foreclosure losses such as granting temporary moratoriums or allowing bankruptcy judges to modify loans.
“These are very bad policy ideas. They sound good but when you delve in, they will increase costs and cut down credit,” he said.
Breton said the Working Group has been discussing various large-scale solutions with lenders and servicers but won’t reveal what they are until the parties agree.
The Working Group isn’t backing any specific federal means of solving the problem, but members support approaches that “recognize the extent and scale of the foreclosure crisis,” its report said.
