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Efforts are under way to head off foreclosure

Plans include modifying loans, extending payments, and cutting interest rates.

Estela Jimenz, right, and other supporters of the Association of Community Organizations for Reform Now, protest outside a home under foreclosure in South San Francisco. (AP)
Estela Jimenz, right, and other supporters of the Association of Community Organizations for Reform Now, protest outside a home under foreclosure in South San Francisco. (AP)Read more

At least four huge U.S. mortgage companies and two federal agencies are trumpeting programs to combat the home-foreclosure epidemic that is crippling the economy.

But will they work?

They are among a slew of efforts, but "none of them have really gotten any traction," said Alan S. Kaplinsky, who heads the consumer financial-services group at Philadelphia law firm Ballard, Spahr, Andrews & Ingersoll L.L.P. "There's a lot of floundering."

Experts said the biggest stumbling blocks to rapid progress in making delinquent loans affordable to borrowers include:

Lack of staff and technology at mortgage companies that were set up to open envelopes and process checks, not to deal with a flood of delinquencies.

A balky process of getting approval of meaningful new loan terms from people who ultimately own the debt, including investors who bought bonds pooled from many problem loans.

The reluctance of average borrowers, perhaps understandably, to even pick up the phone when the mortgage company calls.

Mortgage companies - technically known as mortgage servicers that collect payments for owners of the debt - are tackling the problems, starting with beefing up staffs to handle the hands-on work.

JPMorgan Chase & Co., for example, said it was boosting its ranks of housing counselors 14 percent to 2,500 and dedicating 150 people to review each of its mortgages before foreclosure.

Citigroup Inc. this month shifted 600 people who normally deal with new customers to a loan-modification department.

Residential Capital L.L.C., of Fort Washington, a subsidiary of GMAC L.L.C., is cross-training its call-center employees so all can handle loan modifications. As it is, Residential Capital said it worked out loans for four times as many borrowers in October as it did a year ago.

The most common aid to delinquent borrowers is a repayment plan that allows them to catch up through installment payments.

Beyond that, servicers may fix rates on adjustable-rate mortgages, drop interest rates, extend the duration of loans, or tack the arrears on to the end of the loans - meaning some borrowers end up owning more after the loan modification than before.

That worries consumer activists.

"We're getting loan modifications, but the first instinct of the servicer is to provide the family with so little money to meet other expenses," said Bruce Dorpalen, the Philadelphia-based director of housing counseling for Acorn Housing Corp. "People at the end of the month can probably pay for groceries, but if the kids need shoes, or the car needs a tire, that is a big problem."

Principal forgiveness is needed sometimes to make loans affordable long term, especially for borrowers who were allowed to pay so little each month that total balance owed actually grew, Dorpalen said.

That gets into the knotty issue of mortgage investors, who have to approve any reduction in principal.

It makes a difference, said Joe Pensabene, executive vice president and chief servicing officer at Residential Capital. "We see higher redefault rates on some of our investors that don't allow any type of principal forgiveness," he said.

Loan modifications also should adjust the debt-to-value of the property when borrowers - perhaps 12 million of them - owe more than their house is worth. Ideally, the servicer makes sure the borrower "can afford it, and they want to afford it," Pensabene said.

Other programs include one from the U.S. Department of Housing and Urban Development, a New Jersey state program planned to start in January, and a five-month-old Philadelphia effort.

Some programs, such as one proposed by the Federal Deposit Insurance Corp., call for the deferral of principal with no interest payments. But the money has to be repaid when the house is sold. That means many homeowners will never build any equity, leaving them less motivated, perhaps, to keep up with payments.

Chase has adopted an FDIC-like approach for certain mortgages that it owns. If a borrower owes $300,000 on a house worth $250,000, Chase will defer $62,500 of principal, and payments will be based on 95 percent of market value, or $237,500. When the house is sold, Chase will collect as much of the $62,500 as possible.

"We think it's fair for us to have a chance to recoup that later," Chase spokesman Thomas A. Kelly said.

A widespread principal-forgiveness program is in the settlement that Countrywide Financial Corp. reached last month with 11 state attorneys general and since expanded to 19 states, including Pennsylvania (but not New Jersey).

Countrywide, which was bought by Bank of America Corp. in July, is required to forgive principal for borrowers with so-called Pay Option ARM loans, which often led to increasing balances because borrowers could choose to pay less than the interest owed and none of the principal.

Consumer advocates praised that settlement for bringing the principal on those loans down to 95 percent. But some investors have raised a stink, complaining that they should not have to take a hit because of Countrywide's misconduct.

All the efforts by mortgage servicers to modify the loans they control can have little overall effect because most of the nation's bad loans are in mortgage pools controlled by investors, said Guy Cecala, publisher of trade journal Inside Mortgage Finance.

Mortgage-servicing agreements give services some leeway to modify loans, but most principal reductions require investor approval. To get that, the servicer must first contact the trustee managing the pool of mortgages. The trustee then contacts investors for permission.

Complicating matters is the fact that different investors in the same mortgage pool have different interests. For some it is more advantageous to foreclose, while others want to strike any deal possible. Plus, millions of borrowers have second mortgages, which complicates matters even further.

Despite the difficulties, Sanjiv Das, chief executive officer of CitiMortgage, said there was reason for hope.

"The catalyst will probably be the FDIC," with its plan to share in the losses from principal write-downs, Das said.

The projected cost of the FDIC program would be $25 billion - a drop in the bucket compared with the hundreds of billions the Federal Reserve and the U.S. Treasury are throwing around.

"It's going to be necessary," Kaplinsky, the Ballard Spahr lawyer said, "for the Treasury to bite the bullet."