Banks Move Earlier
To Curb Foreclosures
By Ruth Simon
From The Wall Street Journal Online
As the number of borrowers falling behind on their
mortgage payments climbs to the highest level in five
years, the mortgage industry is trying new strategies
to help bail them out.
Much of the attention is on homeowners who in recent
years took out adjustable-rate mortgages, a popular
way to finance a home when interest rates were low.
Now, with rates having moved up, many of these
borrowers have recently seen, or soon will see, their
mortgage rates adjust higher for the first time.
To head off problems, mortgage companies are reaching
out to borrowers earlier. Bank of America Corp. is
allowing some borrowers with ARMs to refinance into a
different loan at no cost. Citigroup Inc.'s
CitiMortgage unit is focusing extra attention on parts
of California, Florida and New York where home prices
have moved up sharply. It is also contacting
delinquent borrowers within days after a missed
payment, if it doesn't fit their normal bill-paying
habits.
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New strategies lenders are using to prevent property
owners from defaulting.
The rise in bad loans also is leading to a pick up in
so-called short sales, in which a lender allows the
property to be sold for less than the total amount due
and often forgives the remaining debt. For the lender,
the process can be shorter and less costly than
foreclosing, especially in a declining market. For
borrowers, it is a way to avoid having a foreclosure
on their credit report.
Sheldon Klain, a manager in Dallas, wound up saddled
with loans on two homes last year and now is trying to
arrange a short sale of one of them. Mr. Klain got
into trouble after he moved to Dallas from Las Vegas
to take a new job. He bought a home in Dallas,
thinking he had found a buyer willing to pay $475,000
for his Las Vegas home. The sale fell through at the
last minute and Mr. Klain found himself stuck with two
homes and behind on payments on the Las Vegas house.
Mr. Klain says his Las Vegas house, which is in a
gated community and has a swimming pool, is valued at
$419,000, according to a recent bank appraisal, well
below the $440,000 he owes on the property. "The dump
in the market put us behind the eight ball," he says.
For some borrowers, efforts to work out bad loans can
be complicated by the fact that many mortgages no
longer are held by the banks that made the loans.
Instead, roughly two-thirds of mortgages are packaged
into mortgage-backed securities and sold to investors.
How much leeway a borrower is given can vary,
depending in part on the rules spelled out at the time
the securities are created. Some agreements, for
instance, don't permit loan modifications or limit the circumstances under which a loan can be modified. Others put a cap on how many loans can be restructured.
Some 2.51% of mortgages were delinquent in the fourth
quarter, according to new data from Equifax Inc. and
Moody's Economy.com Inc. That is up from 2.33% in the
third quarter and the highest level since a recent
peak of 2.53% in the first quarter of 2002.
The increase in bad loans is broad based, with
delinquencies rising in the past year in roughly 80%
of the 250 local areas analyzed by Moody's
Economy.com. Some of the biggest increases have come
in California, where high prices have made it hard to
afford a home, and in other once-hot markets such as
Las Vegas and Port St. Lucie, Fla. Among the handful
of major metropolitan areas where delinquencies have
fallen: Salt Lake City, San Antonio and Albuquerque,
N.M.
The rise in delinquencies is unusual because it comes
at a time when the economy is relatively strong. Even
though job growth remains healthy, "the total mortgage delinquency rate is the highest that it's been since the depths of the [2001] recession," says Mark Zandi, chief economist at Moody's Economy.com. He attributes the increase in part to the weaker housing market and the widespread use of adjustable-rate mortgages, many of which now are resetting at higher rates.
What is more, as demand for loans softened, mortgage
lenders loosened their standards and made riskier
loans, Mr. Zandi says. He expects that nationwide
delinquency rates could rise by as much as a full
percentage point from current levels in the next year,
but he doesn't expect the trend will have a
significant impact on the overall economy.
Until recently, mortgage delinquencies were low by
historical standards, which Mr. Zandi pegs at about
2%, based on the dollar value of loans that are at
least 30 days past due. One reason: Rising home prices
made it easy for borrowers who missed payments to
refinance or sell their home. That changed as home
prices flattened or fell in many areas.
Adding to the pain are higher short-term interest
rates, which mean bigger monthly payments for
borrowers with adjustable-rate mortgages or
home-equity lines of credit. In addition, many
mortgages were taken out in the past few years and now
are approaching the point in their life when
delinquencies typically pick up. An increase in
mortgage fraud in parts of the country also has
contributed to bad loans, lenders say.
"Keep in mind that 2004 and 2005 were aberrations,"
with low delinquencies and rapid home-price growth,
says Michael Fratantoni, an economist with the
Mortgage Bankers Association. He says the biggest
increase in delinquencies has been among borrowers
with scuffed credit records who took out
adjustable-rate mortgages.
To head off potential problems, CitiMortgage contacts
borrowers with adjustable-rate mortgages by phone and
by mail monthly, beginning months before the rate on
their loan resets, to alert them to the upcoming
payment increase and explain their options, says
CitiMortgage President Bill Beckmann.
Bank of America is using computer models to predict
which borrowers may run into trouble -- even before
they miss a payment. "We're calling earlier and more
often" because it increases the chances that a
borrower's problems can be worked out, says Bob
Caruso, Bank of America's national servicing
executive.
Among the bank's options: Borrowers who miss a payment
because of illness or job loss may be allowed to add
the unpaid debt to their loan balance, Mr. Caruso
says. Other kinds of loan modifications also are
becoming more common. These include arrangements that
allow a troubled borrower to refinance into a less
costly loan or that lower the interest rate on the
mortgage for several years to make the payments more affordable.
Mortgage companies also are looking for additional
ways to reach financially stretched borrowers. In some
of the Midwestern markets where it has bank branch
offices, National City Corp. is working with local
clergy, United Way organizations, social workers and
housing counseling agencies to help borrowers
reluctant to talk with their lender. The bank's Web
site explains workout options and allows borrowers to
apply online for assistance. National City is one of a
dozen major lenders behind a national advertising
campaign that will, beginning this spring, promote a
toll-free number (888-995-HOPE) borrowers can call for homeownership counseling and referrals.
Bank of America says it has seen short sales of homes
increase 25% from last year, albeit coming off of
relatively low levels. And in San Diego, the number of
entries in the local multiple-listing service that
include the words "short sale" has climbed to 98 from
about 50 a year ago, according to Sandicor Inc., the
local multiple-listing service. A short sale can be
less of a black mark than a foreclosure on a
borrower's credit record, because it indicates the
borrower was working with the lender.
There can be downsides for borrowers to short sales.
Under certain circumstances, the debt forgiven by the
bank may be taxable to the borrower. What is more,
convincing a lender to go along with a short sale can
be difficult, and borrowers who have a mortgage and a home-equity loan may have to negotiate with two lenders or two departments of the same bank.
"There are all sorts of log jams," says John Izzo, the
agent handling the sale of Mr. Klain's Las Vegas
house. Mr. Izzo says he is currently working on 19
short sales, but figures just "one in five might be successful."
***
Where Homeowners Are Hurting Most
These 10 metro areas have seen the biggest increase in delinquencies since the end of 2005.
Metro Area Deliquency Rate* Change Since 2005**
Riverside-San Bernardino-Ontario, Calif. 4.1% 2
Port St. Lucie-Fort Pierce, Fla. 3.4% 1.8
Modesto, Calif. 3.5% 1.8
Stockton, Calif. 3.4% 1.6
Vallejo-Fairfield, Calif. 2.9% 1.6
Las Vegas-Paradise, N.V. 3.3% 1.5
Merced, Calif. 3.5% 1.5
Hawaii - Non-metro 2.2% 1.4
Visalia-Porterville, Calif. 3.2% 1.4
Deltona-Daytona Beach-Ormond Beach, Fla. 3.3% 1.3
U.S. 2.5% 0.5
*Rate as of December 31, 2006
**Change since December 31, 2005, in percentage points
Note: Mortgage deliquencies are defined as late
payments on mortgages and home equity loans and lines
of credit.
Sources: Equifax/Moody's Economy.com |
