Loan work-outs now available before missing mortgage payments

Up until this point in the mortgage crisis, borrowers had to be behind on their payments before lenders would even consider re-working a loan. Now, however, more lenders are allowing 'early workouts' when a wage earner loses a job, thus imperiling a mortgage soon down the road. From Kenneth Harney's column via the L.A. Times:

Here's some good news for homeowners facing tough financial times: You no longer have to miss two to three months of payments before your mortgage firm can modify your unaffordable loan terms.

Fannie Mae, the mortgage giant with an estimated 18 million home loans in its portfolio or in mortgage bond pools it guarantees, now will allow borrowers who face financial difficulties to request "early workout" loan alterations, even if they've never been late.

Fannie's policy change has the potential to help thousands of people who are losing jobs or facing layoffs as the recession crunches onward. Most lenders and loan servicers traditionally have declined to intervene in mortgage problems until borrowers are 60 to 90 days late. So-called loss mitigation staffs may then try to work out solutions through techniques such as rescheduling back payments or extending the loan term.

Under Fannie Mae's revised approach, servicers of the company's loans will be required to inform borrowers that if they are "reasonably" certain that changes in their income will cause them to miss mortgage payments, they might qualify for an advance loan modification -- before they fall behind.

Borrowers who qualify will enter into a trial period of reduced payments, usually for four months. If they make payments on time during the trial, the modified mortgage terms could be made permanent.

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How lenders sometimes force borrowers to walk away from homes

A major consequence of the complexity of today's mortgage business is the difficulty borrowers are having to renegotiate loans, in large part because it's not easy determining exactly who owns the mortgage, but also because loan servicers don't have the power to change loan terms. From a CNNMoney.com story:

...it's much harder for troubled borrowers to get a deal that permanently lowers their mortgage payments. The Hope Now Alliance of mortgage lenders and servicers, including Citigroup (C, Fortune 500), Bank of America (BOA) and J.P. Morgan (JPM, Fortune 500), says it has kept over one million borrowers out of foreclosure since July. But only about one quarter of them - 278,000 - have actually had the terms of their mortgages modified.

Faith Schwartz, Hope Now's Executive Director, says the number of loan modifications is increasing. But she admits the vast majority are not getting their payments reduced. "If it's appropriate, they are," she said. "The key here is that it's between the servicer and the borrower. Every circumstance is different."...

Working out a new loan has also been a struggle for Odelle Boykin, a Connecticut home health care worker who housing advocates claim is a victim of a predatory lending.

Boykin says her mortgage broker promised her when she refinanced two years ago at a teaser rate she could afford that she could refinance again when the payments went up. She says when the loan was about to reset in October, with payments shooting up from $1,431 to $1,702 a month, she contacted the servicer, Fremont Investment & Loan, but the company told her it no longer handled refinancing. The payment is set to go up again next month.

"She was basically deceived," said Karen Nigol of the Housing Education Resource Center in Hartford. According to Nigol, Boykin would not have been able to afford the loan without earning more income than she did at the time of the loan application. Nigol says the mortgage broker listed Boykin as his employee on the application, even though she was unemployed.

"In fact, he said to her, 'Congratulations, you now work for me,' and put down an additional amount of income that really wasn't true," Nigol said....

A spokesman for Fremont, which services Boykin's loan, did not address the specific allegation that the mortgage broker had falsely reported Boykin's income on the loan application. Boykin never received a full copy of the loan application. The spokesman told CNN the company has forwarded her a proposed modification program and "...will be following up on the efforts made to reach the borrower directly to discuss the problem."

Cruz's loan servicer, America's Servicing Company, is owned by Wells Fargo (WFG) and said in a statement it "...cannot share specific customer loan information with anyone other than the customer. For the past several months, we have attempted to reach out to Mr. and Mrs. Cruz in an effort to resolve their situation, but have not had success in making contact with them."

With an apparent stalemate between lenders and borrowers, will people be forced to go into foreclosure or even to just walk away?

"Yes," said Connecticut Fair Housing's Erin Kemple. "The simple answer is yes."

So even more stupidity will follow that which followed. The solution? Government intervention, like it or not, because sometimes the unregulated free market just doesn't work properly.