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When Loan Workouts Don’t Really Work

Can we just stop the madness now and come out and say it - voluntary loan workouts aren’t doing much of anything to stem the mortgage crisis? Hope Now, a private sector group assembled by the Bush administration, released its latest numbers on Wednesday and, although they were, well, kind of awful, the Hope folks did their best to spin them. Sure, the number of workouts declined in May, the group said. But they’re on track to complete a total of about 520,000 workouts in the second quarter, the highest since the program began.

Of course it all depends on how you define “workout.” If you earn a modest income and you’ve got an interest only loan that recently reset so that your mortgage payment totals close to $4,000 or so - something not atypical these days - you need your loan modified entirely, the terms changed from top to bottom. You’ve got to convince the lender to reduce the interest rate on the loan or to convert it to a fixed-rate mortgage. That’s a true loan workout.

That’s where Hope Now was supposed to come in. The alliance of mortgage servicers, investors, and housing advocates was pushed by President Bush late last year as a private sector solution to the foreclosure crisis. A borrower would call the Hope Now hotline, and counselors would start the process of negotiating with lenders. But from the start, Hope Now was plagued by problems, with too few qualified counselors overwhelmed by too many callers. And lenders didn’t seem that interested in fully participating - they might agree to repayment plans that allowed borrowers to stretch out their debt a little longer, but they weren’t keen on reducing loan amounts.

Giving someone extra time to pay back a loan they can’t afford in the first place doesn’t do much except to push back the day they’ll be foreclosed on. That’s why Hope Now’s regular release of its numbers to prove its progress always has been misleading. The vast majority of the reported workouts are repayment plans, not true modifications. No one knows how well the workouts or the modifications have fared, and details never are released about the nature of the modifications reported. And in the meantime, foreclosures are soaring.

It gets worse. Just as Hope Now was releasing its latest statistics, the California Reinvestment Coalition announced that a survey of its 42 mortgage counseling agencies found that clients were more likely to end up in foreclosure than with a loan workout. The agencies also said that as a whole, the industry was unwilling to agree to loan modifications.

This is worth keeping in mind as debate continues over Congress’ mortgage rescue plan. Lenders certainly would have more incentive to refinance troubled loans under the plan, since the new mortgages would be backed by the government. But it’s all voluntary - lenders don’t have to participate. I wonder if anyone’s looking at Hope Now and wondering just how enthusiastic the mortgage industry will be this time around.

As nothing gets done, there’s just haggling over numbers, dubious claims of progress, and continuing fights in Congress. Here’s a look at what it’s like in the real world for borrowers in trouble, courtesy of The Record in Stockton, Calif.:

William McClamy, with a family of 10 that includes a grandchild, is in a world of hurt and frustration as he has wrestled futilely to get a home mortgage loan modified so he and his family can stay in their Tracy home.

He contacted the lender, Countrywide, when his adjustable-rate mortgage payment was about to jump $1,200 a month to $4,100 and was told the company couldn’t help, because he wasn’t behind on payments yet.

Seven months ago, he was in trouble and couldn’t make full payments and was passed from one Countrywide staffer to another to another. Still, nothing happened, he said. Countrywide didn’t respond to a request for comment.

“We’re in limbo,” he said. “We’re looking at foreclosure at any time now. They ignored us. They don’t care.”

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