Twin Cities Habitat for Humanity

On the front lines, some counselors who are helping to save homeowners from foreclosure by adjusting mortgage terms are seeing more success, though they're still losing more homes than they save.

Even though foreclosure prevention counselor Melissa Hansen's job is busier, it's gotten easier of late. In early October, the company handling a client's mortgage suggested simply subtracting $21,000 off her client's $121,000 mortgage debt.

Ocwen Financial went on to suggest a permanent cut in Thomas Stroud's interest rate to 8 percent -- even lower than his initial teaser rate -- so the building maintenance worker could manage the monthly payments on his north Minneapolis home, which otherwise was headed for foreclosure.

"I would like to say all this happened because I was so savvy and wonderful, but quite frankly the company just offered it," said Hansen, one of four counselors in a branch of the Twin Cities Habitat for Humanity that works to save homes instead of the nonprofit's better-known mission of building them.

Servicers long have been the bane of foreclosure counselors. Typically servicers say that they can't change mortgages, that they're just the hired help and their hands are tied.

But these are no longer typical times. Some 2.2 million Americans could lose their homes through 2008 because of subprime mortgages they can no longer afford.

And counselors say that, at least occasionally now, they're breaking through servicers' previous logjams. With credit markets tightening and Wall Street nervous about the deepening subprime crisis, President Bush in late summer asked servicers to modify terms for struggling homeowners. Congress, too, has been threatening new legislation to toughen mortgage lending rules.

And an industry trade group, the American Securitization Forum, whose 350 members including mortgage security investors, loan servicers and insurers, recently gave more encouragement to modifications.

The group estimates that two of every three contracts that servicers work under have no individual restrictions on modifications.

The counselors at Habitat for Humanity believe the signs are encouraging. Cheryl Peterson, manager of the foreclosure prevention program, said in recent months they're getting loan modifications for 20 percent of clients, "significantly higher than it's ever been." That comes as their work has increased. Already they've worked closely with 206 homeowners this year, up from 152 in all of 2006.

"Some lenders that I would have never guessed would modify, are starting to do it," Peterson said. "They're thinking it's going to be in their long-term best interest."

Lenders' backs are against the wall. With so many interest rates adjusting higher -- sometimes for people who can no longer afford the lower rate -- and housing prices stagnant if not declining, refinancing is out of reach for many, Peterson said.

And with Stroud's modification, Hansen had been asking Ocwen to consider a fixed rate for him. "This is the first time I've seen anyone knock off part of the principal debt."

Still, it's a slow slough through, one home at a time. Hansen has 39 case files in racks across her desk and piles on her cubicle floor, at various stages of completion.

And help often comes hard. In one file, for example, Hansen has stapled 12 notebook pages of telephone conversations with a servicer about one missing check -- a check that could trigger a Nov. 29 foreclosure for a couple even though the servicer admits someone at their end lost it.

Justifying the economics

Mortgage services have said their investors will sue them if they modify mortgages. Mortgage-backed securities come in all shapes: Some are all-principal; others, all-interest; some are high-grade, low-risk; others, the opposite. Given that variety, any changes servicers make will mean losses for some and not others.

And the losers will call their lawyers, the servicers said.

The industry forum says that about two-thirds of the servicing agreements out there will protect the servicers.

They can extend repayment plans, adjust interest rates and even forgive debt principal when a loan is in default or a default is "reasonably foreseeable," forum Executive Director George Miller said in an interview.

They can even charge the mortgage holders for the costs involved in all that, Miller said.

The servicers' obligation is to the best interest of the collective whole, based on "good faith" and "normal and usual" business judgment, the forum said.

At Ocwen, the Florida-based servicer of a $55 billion portfolio of 470,000, mostly subprime, mortgages, chief risk officer Bill Rinehart said about 75 percent of its 400-plus servicing agreements have no written restrictions on mortgage modifications.

When a single loan is in trouble, Ocwen calculates the cost of a foreclosure -- often 40 percent of the remaining debt -- against whatever terms will make the mortgage affordable to the homeowner, he said. Then they go with the one that delivers the best return.

"As long as we can justify the economics of the transaction as the best economic deal, we have the ability to go ahead with it," Rinehart said. "Who owns what piece of that, we don't know, and how those proceeds get distributed is not something we necessarily know."

But several consumer advocates call the forum's statements just public relations ploys, the guidelines not really intended to convince servicers so much as to reassure legislators.

The statements also speak only about fixing mortgages one at a time, case by case, which is how the industry says it should be.

Again, consumer advocates disagree. Many of them call for a fast, standard application process similar to the mortgage applications where people plug in their financial information and quickly get back word if they qualify and for what terms.

It's the best approach given the scale of the problem, said attorney Mark Ireland at the Foreclosure Relief Law Project in the Twin Cities.

Hit or miss

As recently as July, servicers were modifying only 1 percent of the loans whose adjustable-rates mortgages were resetting higher, according to the Center for Responsible Lending in North Carolina.

On the front lines, counselors like Hansen and Peterson see a confounding inconsistency. Ocwen, so generous to Stroud, has faced hundred of fraudulent foreclosure allegations across the country.

At Wells Fargo, one of several servicers accused of overcharging customers in bankruptcies, an agent in Minneapolis helped Peterson save an elderly couple's home -- even after they figured out Wells Fargo was neither the mortgage holder nor the servicer.

And the bad cases just keep coming. This month Hansen stunned a new client by explaining that the interest rate on her mortgage is scheduled to go up 1 percent every six months, that a prepayment penalty means she can't afford to refinance, and that a "balloon note addendum" means her 30-year mortgage is really a 50-year mortgage.

It's those kind of stories that convince Peterson it's time to expand public attention beyond the trap of adjustable-rate mortgages to the flat-out fraud she sees.

Hansen, who has been at her job just since February, finds working with servicers somewhat easier. "The first person I speak with has a better understanding of what the options are, although there are still a lot of hoops to jump through," she said.

Although Hansen made her work for Stroud sound easy, he gives her a lot of credit for saving his small stucco home with a corner screen porch and a flower box under the front windows.

"I'd gotten behind and I couldn't catch up," said the 48-year-old. "She stopped the sale of my house. I thought I was going to be living in the street."

By H. J. Cummins
StarTribune
November 26, 2007