Shortly after the new year, John and Mona Breidenstein became anxious about their $427,000 adjustable-rate mortgage. The interest rate would reset this year, and the Santa Maria, Calif., couple feared they would not be able to afford the higher payments.
When they got the loan in 2005, a broker had assured them they would be able to refinance before their payments jumped. But that was before home prices in much of the country fell, loans became harder to get, foreclosure-sale signs appeared down their block and John had to take five months off work to battle cancer.
For eight months, they say, they pleaded with their lender, Countrywide Financial of Calabasas, Calif., to modify their loan — to no avail.
"Our loan adjusted this month — $800 more a month we are hit with," Mona, who works in a church office, said last month. "Why won't they work with the homeowner? All we wanted was a fixed-rate loan."
In recent years, lenders have been reluctant to do "workouts": lowering the interest rate or changing other terms so that financially stressed borrowers can pay less and avert foreclosure.
Countrywide, for example, says it modified the terms of 14,000 loans in 2006 — about 1 in every 585 of the 8.2 million mortgages for which it was the servicer, or bill collector, at the end of the year. Housing activists say lenders usually make only temporary changes if they make changes at all. But with foreclosures skyrocketing and many government officials joining housing-advocacy groups in pressing lenders to be flexible, it's easier for borrowers to get a hearing these days.
Countrywide agreed late last month to ease the Breidensteins' loan terms, a change Mona attributed to the Los Angeles Times' asking the company to discuss the mortgage. Countrywide, the largest U.S. mortgage lender, said it was hard to modify loans when borrowers are unemployed and suggested that John's return to work as an alarm installer was the deciding factor.
Workouts are controversial because they potentially let speculators off the hook for their bad decisions. They also are complicated by the fact that lenders like Countrywide sell many of their loans and can't modify them without permission from the investors.
Nevertheless, Marietta Rodriguez, national director for housing programs at the nonprofit counseling group NeighborWorks, thinks the industry is at a "turning point" on workouts.
"We're getting calls from high-level federal agencies saying, 'We hear you folks know the most about this.' "
According to Secretary of Housing and Urban Development Alphonso Jackson, 500,000 borrowers with subprime loans — higher-cost mortgages for people with weak credit or heavy debt loads — could lose their homes in the next 18 months because interest rates will be resetting at higher levels.
Jackson and Treasury Secretary Henry Paulson met with major lenders last month and said they wanted to identify troubled borrowers and get them in touch with cost-free counselors from nonprofits such as NeighborWorks, ACORN and the Homeownership Preservation Foundation. They encouraged the lenders to refinance loans or modify current mortgages.
Lenders say they try to prevent foreclosures because seizing and selling a home typically costs them $30,000 to $50,000. Foreclosure sales also depress the value of nearby homes. And a Chicago study backed by the Homeownership Preservation Foundation found costs to local governments exceeded $30,000 per foreclosure in some cases, owing to the loss of tax revenue, increased policing and higher demand for social services.
No official statistics
The Mortgage Bankers Association said there were no official statistics on workouts at individual lenders or industrywide. But Moody's Investors Service said it surveyed 16 firms handling customer service on 80 percent of existing subprime home loans. Just 1 percent of the surveyed borrowers facing an interest-rate reset had had their loans modified, the study found.
Many large servicers relied on "passive letter-based contact" to reach customers facing loan adjustments, Moody's said, instead of phone calls to assess potential problems. Nonprofit groups say many troubled borrowers shrink from debt problems and often throw such letters away unopened.
Big commercial banks with subprime operations generally get higher marks.
London-based HSBC Holdings has been reaching out to borrowers well before their loans adjust to determine if they are under stress, said Bruce Dorpalen, director of housing counseling for ACORN, the Association of Community Organizations for Reform Now.
Dorpalen praised an HSBC program that resets interest rates by calculating how much money borrowers need to buy food, clothing and other basics and then seeing what income remains to pay the mortgage. On a few occasions, HSBC has cut the interest to 0 percent — which Tom Detelich, who oversees HSBC North America's consumer lending, said was possible because the company didn't sell the loans it serviced.
Countrywide — which generally has sold its loans while handling bill collection for a fee — has a reputation for being inflexible, advocacy groups said, "although there are signs that's starting to change," Dorpalen said.
Working with loan servicers to reach troubled borrowers has become "much easier than it was just six months ago," said Tracy Morgan, spokeswoman for the Homeownership Preservation Foundation, which has counseling agreements with 37 lenders.
Morgan said adjustable-rate loans account for the greatest number of problems that the foundation addresses, but it also works with borrowers who have fixed-rate loans and prime loans — mortgages for people with good credit.
The mortgage crisis "is spread among different loan types, varying income levels," she said. Still, lenders and counselors said borrowers who are overextended on subprime loans have the worst problems, especially those whose incomes suddenly drop.
An example is the Breidensteins, who bought their house four years ago from Mona's parents for $270,000, then refinanced twice, each time adding to their loan balance.
The couple, who have two children, used the funds from refinancing to add on to the home, buy out her mother's interest in the property and pay off a child-support claim from a previous marriage.
The final mortgage, for 95 percent of the home's appraised value, required them to pay only interest for the first two years at 6.25 percent, with the rate rising every six months. To discourage refinancing was a $10,000 penalty for early payoff. But the couple said their broker assured them he would waive the penalty when they refinanced.
The Breidensteins, who together earned about $80,000 in 2006, kept making monthly mortgage payments of about $2,300 this year, even after John learned he had prostate cancer and took five months off for treatment and recuperation. But they fell behind on other bills, and their credit scores tumbled. Their home, appraised at $450,000 in 2005, is now worth $380,000.
John called Countrywide's workout division long before he was diagnosed with cancer and quit work, but the company wouldn't modify the loan.
Instead, Countrywide suggested the couple consider a "short sale," in which they sell their home for less than the loan balance and the lender would accept the proceeds to satisfy the debt.
"John spoke to them several times a week and to many, many different people in the Countrywide group," Mona said. "We had to ask them to stop giving our number out to other companies who began calling us to refi at an even worse rate."
Countrywide said that through August, it had modified about 17,000 loans, up from the 14,000 for all of 2006. Steve Bailey, a Countrywide loan executive, also reported an significant increase in repayment plans allowing delinquent borrowers to make up the difference over time.
Countrywide declined to discuss the Breidensteins' situation.
Late last month, Countrywide proposed raising their $2,300 monthly payment by $400 a month instead of $800 and keeping it level for three years by having them pay interest only during that period. Then it would rise another $400, but could go no higher. "Even though it went up $400, that is a little easier to handle," Mona said. "And we have three years to get our credit back on track."