Need help from your bank before you're forced to default? Good luck with that. Conventional wisdom may tell homeowners who can see financial trouble approaching to reach out for help as soon as possible. But most borrowers trying to follow that advice are finding they can't get their bankers to discuss the options — including loan modifications — until they've missed payments.
"It is extremely difficult for any consumer who is not delinquent to even find someone to talk with at their lender," says Michele Johnson. "The consumer who is really being proactive and trying to do the right thing faces challenges that are unexpected."
A harsh reality Marvin Webb, pastor of the Bethlehem Missionary Baptist Church in Richmond, Calif., called his bank nearly two months ago to say that although his credit is good and he's current in his payments, he can see financial trouble coming. "They said they were looking for a loan they could put me in, something good. But they never got back to me," Webb says.
He called back recently. "I told them what they told me, and they still didn't have anything to say. You know, they take your number and (say) 'We'll call you back.'"
Logic suggests banks should help struggling homeowners early, renegotiating loans to avoid even-more-costly foreclosure. Ben Windust, Wells Fargo senior vice president for customer and default operations, says, "We can always work with any borrower who is having any kind of financial difficulty," even before a loan is in default. But those who work with homeowners say that, mostly, that's not happening.
"One of the really unfortunate contradictions of this crisis is that it's only when people have ruined their credit that they can get even a response from their bank," says Adam Kruggel, director of the Contra Costa Interfaith Supporting Community Organization. Part of the problem is banks are overwhelmed by the flood of people who cannot make payments. And that leaves plenty of struggling but still-current borrowers "hanging on and sometimes they are making enormous sacrifices; in some cases they are draining their entire life savings" to keep up their mortgage payments, he says.
Sean Woods was one of them. At this time last year, he was a mortgage broker in Goodyear, Ariz., an expensive suburb of Phoenix. He was earning about $12,000 a month, he says, so payments of roughly $4,500 a month on two loans for his family's home in a golf-course community seemed manageable.
Then, in February, Woods received what turned out to be his last mortgage commission payment. Record home prices in the Phoenix area had encouraged overbuilding, so prices were falling and sales were slowing. "I saw the writing on the wall," he says.
In late spring, he called Washington Mutual to say that although he was current in his payments, he was struggling. He was running through savings and using credit-card cash advances to make his home payments.
He asked to talk to the bank's loss-mitigation department. Typically, when you punch your loan number into the bank's phone system, you are routed to the bank's customer service or collection department, depending on whether your payments are current or overdue.
A collections officer's job is to recoup past-due payments and set up repayment plans allowing a homeowner to make full, regular payments plus a portion of the delinquency in order to catch up. But negotiating a lower interest rate or reduction in the loan principal is usually beyond the authority of the collection department, says Azucena Valladolid, chief operating officer at Consumer Credit Counseling Service of Nevada and Utah.
Woods says he told his bank, "I'm making the payments, but it won't be long before trouble will be upon me, before I start missing payments."
Loss mitigation basically told me, 'This loan is performing. You haven't missed a payment.' Basically (they said), 'Call us when you start missing payments.'"
In July his check bounced and his mortgage went into default. He got financial counseling and the bank offered a tentative modification offer.By then, though, he'd begun to question the value of a bank modification. What was the sense in committing to a plan without an income to support it? Shouldn't he just focus on getting work?
The big picture Like the troubled loans they are meant to fix, modification plans can include complex loan features: interest-only periods that reset in a few years, gradually increasing payments, or complicated formulas for sharing appreciation or equity. Some simply stretch the loan over 40 years reducing the payment amounts but increasing the total loan cost.
Woods, sadder but wiser, is keeping his options open. "I'm one of those homeowners that's troubled but also accepts the responsibility for signing these documents and getting into this situation myself," he says.
Today, his $597,500 home is worth about $435,000. "I paid over $100,000 in just payments for this home in the last two years and my principal payment may have went down $5,000. At some point, either you concede to be insane or you wise up and say it's better to walk away from this thing than continue to put money down a black hole."
Banks are making relatively few modifications. In the third quarter of 2008, only about 40,000 loans were modified — a small proportion of the millions of loans said to be in trouble. And 58% of loans modified this year were back in default within eight months, according to the Office of Comptroller of the Currency.
Rod Dubitsky, a banking industry analyst at Credit Suisse, says there's no consistent program or standard to help people who are struggling financially but who are still current on their mortgages. He says the government should analyze data from banks on modification agreements to see which modification plans are really working, then create a national program with uniform standards.
"The sad thing," Dubitsky says, "is that the message a lot of struggling 'currents' are getting is, 'Come back to us when you're delinquent.' I've heard it said that some servicers will coach the borrower to become delinquent (in order to get help)."
An unexpected rescue That's the advice friends were giving Barbara Quinn of Asheville, N.C., after she got little help when she called Ocwen, the company collecting payments on her home mortgage. She says she reached out to the servicer before her interest rate reset and added $300 to her house payment but "got bounced around from one person to another and really didn't get to talk to anyone who could talk with me."
Friends were advising her to stop making payments in order to get the bank's attention. She couldn't stomach that idea. "I was saying, 'I don't want to be in default on my mortgage,'" she says. "I'm not the kind of person to miss a payment."
Also, it scared her. What if the strategy didn't work? "Then you're out on a limb," she figured. "I was wondering, at 75 years old, what am I going to do? Live in the street?".
Take action and be proactive. If you run into a wall, call your Congress member and senators. (Find contact information here; enter your ZIP code next to "Find Your Officials" at the upper right corner of the page.) Also, grassroots activist groups work through the PICO National Network to press local, state and federal officials to take homeowners' needs into account in addressing the mortgage crisis.
The economy sank because some people over-borrowed for houses they couldn't afford, and financial institutions over-borrowed for investments they badly misjudged. Lawmakers solution is to borrow $800 billion that it cannot afford. How will adding $800 billion to the national debt (which will also raise interest rates) solve a recession created by imprudent borrowing? And who will bail out the American taxpayer when the bill comes due?
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