NEW YORK – As home foreclosures mount, mortgage companies are knocking on doors, sending letters and making phone calls with a simple message for struggling homeowners: They'd rather modify your loan than foreclose.
EMC Mortgage Corp., specialist with a $78 billion portfolio of subprime loans -- for homeowners with weak credit -- this week launched a 50-person team it calls "the Mod Squad." Members will spend an unlimited time on the phone with troubled borrowers, sifting through their bills to compute a workable monthly payment. In an industry that often rewards workers for getting off the phone quickly, the team is preparing to speak to just three people a day.
"You can't just run this like a call center; it needs to be run like a counseling center," said John Vella, president and CEO of EMC. Right now, $2.14 billion in mortgages, 2.74 percent of EMC's portfolio, is in default, up from 1.93 percent a year ago.
Lenders have long modified loans for homeowners facing job loss, illness, divorce or a death in the family. But with many borrowers across the country struggling to keep up with mortgage payments, mortgage companies increasingly are prodding anyone who's having trouble making payments for any reason to give them a call.
Critics say lenders made loans to borrowers who weren't creditworthy with terms that would be impossible for them to meet. Whether the current wave of workouts will merely postpone foreclosures -- and delay bad loans hitting lenders' books -- is an open question.
Regulators will be watching to see how many are successful, said Susan Wachter, a professor of real estate and finance at the University of Pennsylvania's Wharton School of Business.
The scant public information on modifications makes evaluation tricky, said Thomas Lawler. The former chief economist at Fannie Mae now runs his own consulting business, Lawler Economic & Housing Consulting, in Vienna, Va.
Loose lending standards followed by lax modifications can merely delay a problem, Lawler said. He pointed to the raft of modifications done in the manufactured housing business in the mid 1990's, when easy credit led to a wave of defaults and reposessions.
"If people had known what the servicers were doing, red flags would have been raised; but by the time people knew what was going on, it was too late," he said.
Advocates say that half the people in foreclosure never talk to their banker before losing their house, and many could rework their loans if they only got help.
"It's tragic," said Colleen Hernandez, president of the nonprofit Home Ownership Preservation Foundation. "We have the capacity to help a whole lot more people."
Calls to her group have picked up markedly. Its 24-hour hotline, (888) 995-4673, is getting 300 calls a day, from 75 daily in the first quarter of 2006.
A modification helped Ana Rodriguez, 41, keep her family's home.
Rodriguez and her husband, Ricardo, bought a house in Chicago's Jefferson Park neighborhood in 1998. Their mortgage was $1,200 a month. After he lost his job as a machinist, the couple refinanced the home in 2004 with an adjustable rate mortgage. The new payment was $1,500 a month.
He found a new job, but a year later, he was out of work again.
Rodriguez, a secretary, called Chicago's department of housing, which referred her to a nonprofit. It worked with her mortgage company, Homecomings Financial, part of GMAC Financial Services.
"I did emphasize that if there was nothing they could do before we would lose our home, we wanted to sell it before losing," she said. "They said they were going to try to work everything out."
Her husband found a job soon after and the couple made three payments that included penalties and fees for the installments they'd missed. He quickly found a better job and the couple was able to refinance with a 30-year mortgage at 6.62 percent interest last October. The monthly payments are $1,600.
"We really got ahead of this one," said James Leyba, the community relations specialist at Homecomings who worked with the Rodriguez family.
New foreclosures hit their highest ever level in the fourth quarter of 2006, according to the Mortgage Bankers Association. Home owners are the obvious losers, but all the financial services companies involved lose. The lender loses the steady stream of payments it counted on. If it sold the loan as part of a securitization, a package of mortgage-backed securities, that investor loses. Loan servicers, who are usually paid a fraction of the interest on a loan, lose too.
With home values falling in some parts of the country, none of the finance companies want to be stuck owning a house that has depreciated, or, worse, a house surrounded by other homes in foreclosure. EMC says it loses, on average, 40 percent of the value of a loan in foreclosure and also has to pay taxes and other expenses on the property.
"The larger the loss of value and the greater the likely loss will be, the more flexible we are," said Larry B. Litton, Jr., president and chief executive of Litton Loan Servicing in Houston, which services $60 billion in mortgages. "We may waive past-due amounts. In extreme situations, we may even waive principal, if need be."
Litton said his company is modifying about 1,000 loans a month; up from 300 to 400 about six months ago. Vella said he hopes the Mod Squad will be able to modify up to 2,000 loans a month; six months ago EMC only modified about 400 loans a month.
EMC has hired an increasing number of contractors over the last three months to knock on the doors of shaky borrowers and drop off fliers asking the home owners to call the company. Last month, the contractors visited 3,000 properties.
The Mod Squad is planning a six-city tour; it hopes to attract struggling homeowners to information and counseling sessions with offers of $100 gift cards to Home Depot Inc. (MD).
Companies with older programs are trying to stand out. The Hope program sponsored by GMAC ResCap and Homecomings Financial, has a team of 20 loan workout experts, 13 of whom work out of the offices of community service non-profits and housing advocacy groups.
The investor in securitized loans often dictates how much a loan can be modified, and Litton said his company has demanded more flexible terms from securitizers, which lets it modify problem loans with lower interest rates or extended terms. For instance, a home owner whose adjustable rate mortgage "resets" to a higher interest rate on May 1, 2007 might get a 24-month extension, putting the adjustment off until May 1, 2009.
"That may give the borrower breathing room," Litton said.
"It's really up to servicers in this climate, he said. "If the servicers aren't flexible, then we're going to see credit losses like we've never seen before."