Workout efforts have been too little and too late to stem the surge of foreclosures that continues to roil housing and financial markets.

The number of homes entering some stage of foreclosure jumped almost 100% in the third quarter from the same time a year ago and 30% from last quarter, according to RealtyTrac, of Irvine, Calif., with a sizable jump in the number of homes completing the foreclosure process and being taken back by the bank (referred to as real-estate owned, or REO).

“We saw a fairly big spike in REO activity” in September, says Rick Sharga, vice president of marketing for RealtyTrac. “We’re not done with this mess yet.”
Indeed, despite all the hype about hot lines and special loan-modification programs, analysts say little has been done to help a significant number of borrowers stave off foreclosure.

“There’s a lot of movement in the right direction,” says Amy Schur, national campaign director for the Association of Community Organizations for Reform Now (ACORN), which has campaigned against predatory lending. “But that doesn’t mean we’re seeing it yet on the front lines with borrowers.”

Significant risk to economy

A recent survey from Moody’s Investors Service of the top 16 subprime loan servicers – which handle $950 billion in loans, or 80% of the market – found that they had modified only 1% of their loans that had reset to higher interest rates during January, April and July 2007.

Getting some traction on these troubled loans will be critical, analysts say, because the foreclosure crisis is likely to get a lot messier. A huge wave of subprime loans made in 2005 and 2006 – many under looser lending criteria with a greater risk of default – will reset between now and next summer. Rates on 2 million mortgages will rise by the end of 2008, and one-fourth of those affected homes will face foreclosure, estimates the U.S. Department of Housing and Urban Development.

This surge in foreclosures and the resulting drain on the economy is “the most significant current risk” to the economy, according to Treasury Secretary Henry Paulson, who in a recent speech warned of the “immediate need” for lenders to modify and refinance more loans.

Lenders changing their tune

Until recently, however, some investment groups and lenders had refused to do any loan modifications, Schur says. But, with such a large number of loans going into default, many are now changing their tune.

Countrywide Financial, one of the nation’s largest lenders, recently announced that it will refinance or modify up to $16 billion of adjustable-rate mortgages through the end of 2008, to help as many as 82,000 borrowers stay in their homes. Countrywide also says the same loan-modification approvals and paperwork that used to take more than a month can now be accomplished for delinquent borrowers in five to 10 days. “Any kind of foreclosure action will get delayed or stopped while we are working on the paperwork,” says Countrywide Senior Managing Director Steve Bailey.

Why more lenders weren’t willing to offer these fast-track solutions earlier is puzzling to many, even those inside the industry.

Lenders and investors have real incentive to work with borrowers, because the foreclosure process causes them to lose an average of 50% of their investment, says Ron Morgan, a managing director at ISGN Technology’s third-party servicing company, MortgageHub. “The best thing investors can do is to try and keep them in their homes until the housing turnaround.”

Quick action is critical

Countrywide and other lenders have come under fire for making loans that borrowers could not afford and, in today’s market, cannot refinance. Of the $468.2 billion in loans that Countrywide made in 2006, $40.6 billion were nonprime.

Lenders say they are taking steps to contact troubled borrowers and work with them. But often, by the time they get approval for a loan modification, it’s too late and borrowers have already lost their home.

At least two of the top five loan servicers have been telling borrowers that it will take two to three months to find out if their loan even qualifies for a workout, says Morgan.

Quantum Servicing, Countrywide and others say they are starting to call borrowers months in advance of loan resets, warning them that their payments will go up and advising them of their options. At that point, the borrowers are in good standing and their loans are easier to refinance.

“We are trying to coach homeowners,” says Countrywide’s Bailey, “so they can get quicker answers and solutions.”

But some of the top U.S. loan servicers “do not have the staff or the technology to meet the demands of borrowers meeting resets on adjustable-rate mortgages,” Morgan says.

Thousands of new jobs have opened up at financial companies to deal with this influx of delinquent borrowers, but with so many positions open, Morgan says, employers have struggled with a revolving door.

Some borrowers avoid lenders’ calls

Lenders also complain about the trouble they have had getting borrowers on the phone.

Sue Byrd, loss-mitigation team leader at Quantum Servicing, says they put out about eight to 10 calls on average to each delinquent borrower, and as many as 50 calls if they are having trouble reaching a borrower.

To get more of their calls returned, the company recently began offering Starbucks Coffee gift cards and prepaid cell phones with 30 days of service, as lures to speak with one of its representatives.

Many of those who answer the phone will hang up, or say the borrower is busy or not at home, Byrd says. Borrowers, she says, are afraid of speaking to debt collectors for fear they will lose their home. “A lot of times, they are substantially behind and they think they have to come up with all of it to rectify the situation,” she says. “They hear the word foreclosure and they just shut the door.”

But, in most cases, she says, borrowers can work out something to prevent foreclosure. Most who show that they can make at least three months of payments at the lower tier (before rates bumped up) can qualify for a modification or refinance. That excludes the unemployed, however, such as the large number of autoworkers who have lost their jobs in Michigan, Ohio and Indiana. Many of these borrowers aren’t eligible for refinancing or other modifications.

States step in to help

But to date, analysts say, even the lenders who have gotten borrowers on the line haven’t offered much relief, despite all the hot lines and hype. Indeed, some are just pushing back the reset on loans or forgiving one or two payments, says Brian Hudson, executive director of the Pennsylvania Housing Finance Agency. “I don’t think that’s sufficient,” he says. “For us, (a loan modification) means truly restructuring the loan so (borrowers) are in the best place for the long term, rather than the short term.”

Many state housing groups have stepped in to bail out troubled homeowners, before the problem does significant damage to their communities.

Hudson’s agency, which launched its program last week, is negotiating with lenders to reduce the payoff on some loans that are over market value. It also plans to sell state bonds to help underwrite the cost of making new 30-year fixed-rate loans to 500 to 1,000 distressed homeowners in the next 18 months.

At least a dozen other states have launched assistance programs. Some simply offer counseling hot lines, but a handful in Ohio, Delaware, Maryland, New York and Massachusetts help borrowers to refinance, and one in Michigan helps borrowers with mortgage payments when they become involuntarily unemployed. However, many of these programs – including Pennsylvania’s – are only just now taking applications or refinancing their first loans.

Meanwhile, lenders are forming partnerships with third-party debt counselors and other groups to try to get distressed homeowners talking about their options. “Many times a borrower would rather talk to a counselor first than go directly to their lender,” says John Mechem, a spokesman for the Mortgage Bankers Association.

That’s understandable, Schur says, given the horrible predicament many borrowers have been put in by these financial institutions. “Many were ripped off from the get-go by brokers and lenders who got them into a really bad loan. It’s hard for them to know who to trust.Melinda Fulmer

Encompass Realty®, www.encompassrealty.com, arizona real estate