Despite the best efforts of banking behemoths such as Citigroup (C) and JPMorgan Chase (JPM) to reach out directly to mortgage borrowers facing foreclosure, there is growing sentiment that no amount of bailing can save this sinking ship.
“If it were just a matter of reworking these mortgages and renegotiating monthly payments, I’d feel a lot better about these programs. But there are just too many other forces at work,” said Debi Averett, founder of the widely read real estate blog HousingDoom.com.
Home values that have yet to reach a bottom, rising unemployment figures, and the difficulties inherent to renegotiating mortgages that have changed hands many times, to name just a few of those forces.
Meanwhile, the numbers just keep getting worse: foreclosure filings rose 71% in the third quarter from a year ago, and nearly 4 million homeowners are currently at least one payment behind, according to the Mortgage Bankers Association.
The Center for Responsible Lending, an advocacy group, has amended its estimate of the number of foreclosures expected from late 2008 through 2009 from 1.1 million to 2.2 million.
Banks have responded in kind.
Citigroup earlier this month imposed a moratorium on most foreclosures as part of a broad program aimed at preventing mortgage defaults and ultimately keep homeowners in their homes.
The bank said mortgage holders facing foreclosure who want to stay in their homes can do so if the home is their primary residence, the borrower is working in good faith with Citi and can prove sufficient income to continue making renegotiated monthly payments.
The bank said 130,000 borrowers with mortgages totaling $20 billion have been targeted, in particular those in areas where unemployment is rising and homes prices sinking.
In a proactive gesture, Citi said it will reach out to an additional 500,000 homeowners who are not yet late on their payments but who have been deemed risky.
Citi’s efforts mirror both in detail and spirit those announced recently by Fannie Mae (FNM) and Freddie Mac (FRE), the quasi-government mortgage servicing giants now under governmental oversight, as well as efforts by JPMorgan Chase and Bank of America (BAC).
Each has proposed to help homeowners through so-called mortgage “workouts,” in which the terms of loans are voluntarily modified by lenders to fit borrowers’ ability to pay.
There is suspicion in some real estate corners that the private banks have stepped up their efforts to reach out to mortgage holders only under pressure from the government, which is holding out as a carrot billions of dollars of rescue funds.
In any case, a number of very real obstacles stand poised to block the success of these modification programs.
For instance, what happens to the borrower whose loan is modified to manageable terms, just ahead of that borrower getting laid off from his or her job. Is it renegotiated again to meet that person’s new income level?
Indeed, studies have shown that nearly one-third of borrowers who’ve had their mortgages modified are in trouble again after three months.
And what about the borrower whose loan is now "under water," the term used to describe a mortgage that is now larger than the value of the home on which it was based?
His loan may be renegotiated, but he’s still got to pay off a mortgage that far exceeds the value his house. If the guy next door to him threw in the towel and foreclosed, and the house is resold at its current value, the first homeowner is facing a neighbor whose mortgage payments are considerably lower than his.
At some point, the first homeowner asks himself why he’s bothering, and he defaults as well.
Averett suggested it makes economic sense to foreclose in some cases.
“The homeowner says, ‘I’m paying a fortune for my mortgage. I’ve got to save for retirement. I’ve got to put my kids through college. I’m getting out too,” she said.
That person might be better off renting a home at half the amount he or she is paying for their mortgage -- very plausible in some areas of the country.
The problem is that throwing in the towel leads to more foreclosures, which pushes down the value of homes even more, which leads to more foreclosures, and so on.
Michael D. Calhoun, president of the Center for Responsible Lending, has expressed skepticism that voluntary loan modifications could have a significant impact on the swelling number of foreclosures.
In testimony before Congress Wednesday, Calhoun strongly recommended allowing bankruptcy judges to oversee the modification process, saying it’s the “most efficient and cost effective” solution.
“Judicial loan modifications will provide a strong incentive for servicers and investors to make voluntary programs work, since they will have clear authority to avoid judicial modifications by offering their own workout solutions outside of bankruptcy,” said Calhoun.
“Bankruptcy courts already modify loans for all manner of other debts, including mortgages on vacation homes and investment properties. They should be permitted to do so for a homeowner's primary residence, which is typically the asset most critical to a family's financial and physical security,” Calhoun added.
Averett believes the only cure for the rapid rise in foreclosures will be the stabilization of housing prices. But she was philosophical about loan modification programs.
“They will help some people in some instances, but there are just too many forces against the homeowner. There’s a lot of people you simply can’t help,” she said.
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