By Christopher Palmeri and Dawn Kopecki
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First comes the reminder notice that a borrower is late on the mortgage payment. Then the phone calls start. Later a brochure arrives, maybe even a DVD, explaining the homeowner's options. Around month four, there will be a knock on the door.
Don't call them bill collectors. Today, the industry has a softer term, "debt counselors," for the swelling ranks of people who are pounding the pavement trying to stem the tide of mortgage foreclosures. Says Steve Bailey, senior managing director at mortgage giant Countrywide Financial Corp. (CFC), who oversees the company's $1.4 trillion portfolio: "You need to keep the revenue stream flowing and keep hope alive."
As the housing downturn grinds on, that has become the mantra for everyone from homeowners and lenders to agents and investors. There have been previous busts, but this one is markedly different. Never before have home prices fallen so broadly: Median national home prices slipped 0.3% in March from a year earlier, and the National Association of Realtors predicts a fall of 0.7% for 2007, which would mark the first annual drop since the Great Depression era. And foreclosure filings are increasingly common, jumping 42% in 2006 to 1.2 million, calculates RealtyTrac. There's little relief in sight; in the first quarter, 2 million homeowners were at least 30 days late on their payments, an increase of 26% from last year, according to Moody's Economy.com Inc.
Foreclosure is never an attractive option, but now it's even less appealing. With prices falling nationwide, lenders are wary of holding on to properties whose values could sink further. And unlike in previous cycles, a big chunk of the loans made recently are held not by federally insured thrifts or banks but by hard-charging hedge funds and other big investors that are aggressively pushing lenders to stop the bleeding. What's more, the steep rise in second mortgages that accompanied the boom means lenders in foreclosure proceedings are increasingly fighting one another for the scraps. Such pressures are inspiring some to dream up creative alternatives to foreclosure, from tinkering with loan terms to subsidizing sellers.
Many of the homeowners in trouble are first-timers who bought recently or investors who got in over their heads. Vikki Kuick, a real estate agent in San Diego, has a listing on a three-bedroom condo that the owners bought as an investment property three years ago for $447,000. Payments on their adjustable-rate loans have since gone from about $2,000 a month to $3,800, while their tenant pays just $1,800. Kuick says she has an offer for $370,000, which she has taken to the couple's lenders. If the lenders agree, the holder of the second mortgage would receive a token amount—as little as $1,000. "If it goes to foreclosure, [the second lender] may get zero," she says.
For the first time in years, houses are hitting the market with asking prices below the value of their mortgages. Stretched owners are hoping for a so-called short sale, in which the lenders forgive the difference. National statistics are scarce, but according to a study performed for BusinessWeek by the online agency ZipRealty, there are 1,100 such listings in Miami, nearly 1,000 in Atlanta, and 700 in the Washington area. In Sacramento, real estate agent Patrick Hake counts 1,079, more than 10% of the total homes on the market. "If home values are falling, short sales are better because they can be done cheaper and quicker [than foreclosures]," says Kevin J. Kanouff, head of the bond group at mortgage consulting firm Clayton Holdings Inc.
Quick is good, given the unprecedented pressures lenders are facing. In previous downturns, most loans were owned by federally insured lenders. Now roughly 56% of all loans outstanding, $5.7 trillion worth, have been pooled into mortgage-backed securities, vs. just 12% in 1980. "Wall Street has been very tough, and it's encouraging lenders to act rapidly," says Douglas G. Duncan, chief economist for the Mortgage Bankers Assn. "The faster you act, the lower your losses."
With so much at stake, lenders are scrambling to cut delinquencies and avoid foreclosures. In Dallas, EMC Mortgage Corp. (BSC), a unit of Wall Street investment bank Bear, Stearns & Co. (BSC), recently set up a "Mod Squad" team—short for loan modification—of 50 workout specialists who travel the country helping homeowners renegotiate. Citigroup Inc. and Bank of America Corp. (BAC) have pledged to make a total of $1 billion in new, below-market loans to homeowners in trouble through the nonprofit Neighborhood Assistance Corp. of America. Ocwen Financial Corp. (OCN), which collects payments on $50 billion in mortgages for other lenders, has recently doubled the size of its loan-mitigation department and has put people on the ground for face-to-face meetings with borrowers before there is a problem. It even pays its staff bonuses if they can avoid foreclosure. Says John Vella, president of EMC: "We want to protect the loan from going all the way south."
EVERYONE TAKES A HIT
That's good for everybody. Each foreclosure costs lenders, the government, and homeowners an estimated $80,000. Even neighbors take a hit, since foreclosure can have a ripple effect on property values. One foreclosure can cut the price on nearby homes by 1.4%.
Still, with so many loans packaged and sold as pools, the industry has tied its hands to some extent. To take advantage of the accounting and tax benefits, many lenders wrote restrictions on the mortgage-backed securities; generally just 5% of loans in such investments can be renegotiated. Some pools containing subprime loans already have delinquency rates of 8% or more. It's possible to change the deal, but it's time-consuming and costly. "What was once a simple, often personal relationship between a borrower and lenders is now a complex structure involving many parties, including services, investors, trustees, and rating agencies," said Federal Deposit Insurance Corp. Chair Sheila C. Bair in testimony to Congress.
By keeping borrowers in houses they never should have bought, lenders could simply be setting everyone up for a steeper fall down the road. But for now the focus is on working out some alternative to foreclosure. With the housing market being buffeted by the harshest storm it has seen in memory, everybody's just trying to hold on.
With Mara Der Hovanesian