Digging Out of Delinquency
Can Be Tough for Borrowers

As mortgage delinquencies climb, lenders say they are taking new steps to work with homeowners in financial trouble. But many borrowers say red tape and other obstacles are keeping them from resolving their problems.

The sharp rise in delinquencies in recent months is straining mortgage companies' ability to respond quickly to borrowers, with such solutions as new repayment plans or modifications to loan agreements. Borrowers often must make many calls before finding someone in a position to help them, by which point their problems may have worsened. The process can be particularly complicated when mortgages have been packaged into securities and sold to investors, which can limit the mortgage company's flexibility in working out a solution. And for some borrowers, there may not be a good solution, apart from the sale of their home or foreclosure.

"If you're a borrower trying to deal with [a mortgage company] ... or even a private attorney, you're likely to run into brick walls," says Iowa Assistant Attorney General Patrick Madigan, whose job includes working on behalf of Iowa homeowners.

Benjiman Johnson, a single father on a fixed income who lives in Sacramento, Calif., fell behind on his $300,000 mortgage in January after the combination of loan and property-tax payments became unmanageable. He says he's talked to at least a half-dozen people at the company that services his loan, GMAC Mortgage, "but nobody wants to pay attention to what you can do. It's like being talked to like a child." Now, Mr. Johnson has put his house up for sale. But given the weak housing market, he hasn't gotten any offers.

A spokesman for GMAC, a unit of GMAC Financial Services, says, "Because of federal privacy laws, we cannot comment about specific customers." He adds: "We strive to reach out and work directly with our customers to try to resolve issues when they arise."

The mortgage-delinquency rate climbed to 2.87% in the first quarter from 2.51% at the end of last year, and from a recent low of 2.03% in the fourth quarter of 2005, according to a new study by Equifax Inc. and Moody's Economy Inc. That's the highest level since the companies began tracking delinquencies at the beginning of 2000. Delinquencies also were up sharply for home-equity loans and lines of credit.

"The erosion [in credit quality] is greater than I expected," says Mark Zandi, chief economist of Moody's Economy.com, who expects mortgage delinquencies will peak at about 3.5% in mid-2008. "It's the noxious mix of all those aggressive loans now facing resets combined with falling house prices and a deceleration in job growth, particularly in some markets."

Until recently, mortgage delinquencies had been at historically low levels, with low interest rates and rising home prices making it easy for those who ran into trouble to refinance or sell their home. Now, as problem loans increase, lenders have tightened their standards, adding further to pressures on the housing market. As long as job growth remains strong, Mr. Zandi says he doesn't expect the housing downturn to derail the economy, but the impact on consumer spending is likely to be "more pronounced" than previously expected.

In an effort to head off loan problems, mortgage companies are using computer models to predict which borrowers are most likely to run into trouble. They are also reaching out to borrowers earlier and encouraging them to get in touch if they are having trouble meeting their payments. Last week, Bear Stearns Cos.' EMC Mortgage unit announced it was creating the "EMC Mod Squad," a team of 50 loan-modification specialists who will help delinquent borrowers avoid foreclosure. The specialists are charged with being "more counselors than collectors," says EMC President John Vella.

Working out a solution is easiest when the borrower's income has been interrupted, perhaps because of illness or job loss. Then, the amount owed can be added to the mortgage balance or repaid over several months, says Steve Bailey, senior managing director of loan administration for Countrywide Financial Corp., the nation's largest mortgage lender. Finding a solution is more complicated when borrowers can't afford their monthly payment on an ongoing basis because of a decline in their income, an interest-rate increase or other factors. Countrywide has become more willing to lower the interest rate or outstanding loan balance for such customers, but the chances are greater if borrowers live in the home and can show they are committed to paying the lower amount, Mr. Bailey says.

Lenders say the sooner they hear from a borrower in trouble, the easier it is to work out a solution. But housing counselors and government officials say that's often not the reality. "We don't look at it as a viable option," says Pam Canada, executive director of NeighborWorks Homeownership Center in Sacramento, Calif., which counsels borrowers in financial distress. In many cases, it's more effective for borrowers to turn to family members for help or to sell their home to get out from under their debts, she says.

Mortgage payments are typically collected by loan-servicing companies, which are also charged with resolving any problems. Sometimes the servicer is also the company that made the loan. But often, it is working on behalf of another party, usually investors who own mortgage-backed securities.

When problems arise, borrowers are often first referred to the loan servicer's collections department, says Ken Wade, chief executive of NeighborWorks America, a non-profit group in Washington that works on affordable housing nationally. Only later, when things are worse, are borrowers shifted to loss mitigation, where someone may have the authority to modify the terms of their loan or come up with another solution, he says.

The red tape can be greater when loans have been packaged into securities and sold to investors, as two-thirds of mortgages are. In such cases, trust documents determine how problem loans are handled. Roughly one-third of bond deals include restrictions on the number of loans that can be restructured, according to a recent analysis by Credit Suisse Group that looked at 31 deals made up of subprime mortgages.

Even where there aren't specific restrictions, the servicer may not be able to change the terms of the loan until the borrower is at least 30 days delinquent, even if it's clear that trouble looms, says Doug Duncan, chief economist of the Mortgage Bankers Association.

Rules for modifying loans can be vague, leading to legal disputes between servicers and investors. Changing the trust agreement can require the approval of the investors, who can be difficult to locate. Mr. Duncan says his group is meeting with investors, borrowers, lenders and community groups to find ways to overcome such obstacles and come up with ideas for new products aimed at troubled borrowers.

The rise in delinquencies has been steepest in markets that benefited heavily from the housing boom, including parts of California and Florida, according to Equifax and Moody's Economy.com. On an absolute basis, delinquencies are highest in areas such as Detroit-Livonia-Dearborn, Mich., and Brownsville-Harlingen, Texas, where employment has been weak.

In a sign that more borrowers are having trouble getting back on track, the number of mortgages in default climbed to 1.16 million on an annualized basis in the first quarter, from 900,000 last year. Lenders report defaults to credit bureaus when they begin the foreclosure process. Some borrowers refinance, go on a repayment plan or sell their home before the foreclosure is completed.

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