Plan aims to help homeowners threatened with foreclosure

Millions of Americans burdened with negative home equity are losing faith in the talk they hear coming from Washington, D.C., about loan modification. They just don't see it happening.

Having lenders rework mortgage terms -- lowering interest rates, deferring payments and possibly reducing principal -- is an integral part of President Barack Obama's $75 billion Homeowner Affordability and Stability Plan to help people avoid foreclosure.

Some 2.3 million homes went into foreclosure in 2008, an 80 percent increase from 2007. Another 2 million foreclosures are estimated for this year.

Getting a loan modification can be like wrestling with sharks, observers say; it takes persistence, patience and gamesmanship.

Kevin Child of Las Vegas said he called his lender, American Servicing Co., about modifying his loan and got the "runaround." The whole thing is a farce, he said.

"Do this, do that, fill out the paperwork and then they never get back to you," said Child, whose home has lost more than $200,000 in value. "You've got to keep calling and doing certain things. It's like pulling teeth with these guys."

That's how painful it is for banks, too, said Spencer Judd, a lawyer who handles loan modifications with the Albright, Stoddard, Warnick & Albright law firm. Banks are reluctant to touch the loan if it's current and people are paying.

"The first thing is you have to be delinquent, which is counterintuitive in and of itself," Judd said. "You let your credit go and let your account go into delinquency."

For consumers to get a loan modification, they must first write a "hardship" letter to their bank, explaining their circumstances and why the bank should work with them, Judd said. The second part is pounding the bank's loss mitigation department.

"The only way to get it done is through pushing and pushing and pushing with the lender," he said. "They don't do it unless you force their hand, if they know this is going to turn into bad debt unless you do a loan modification."

Daniel Penrod, industry analyst for Nevada Credit Union League, said member institutions are doing as much as they can to help people modify loans. Last year, Nevada credit unions modified $14 million in loans, or about 35 percent of the $41 million in delinquency.

Penrod said he knows from his experience as branch manager that credit unions have been modifying loans for decades, either changing the rate or principal. Others were modifying loan lengths.

"They look at the numbers and say, 'We'll give you a two-month deferment and put those two payments on the end of the loan,'" he said. "It keeps the loan current so their credit rating is not negative and the member is able to get caught up with other things, to catch their financial breath."

Not everyone will qualify for a loan modification. Borrowers must be "upside down" on the mortgage, or owe more than the home is worth, but still have a job to show they can make payments.

The lender reviews household income and expenses to determine whether income is sufficient to meet the modified mortgage payment but insufficient to pay the arrearage.

Modifying a loan may not solve a homeowner's problems. Data compiled by Loan Processing Services show that around 25 percent of people with renegotiated loans fell into default again after making just one payment on the new loan. As many as 50 percent managed to make more than one payment, but then fell behind again.

Rick Simon, spokesman for Countrywide Home Loans, said the banking industry has been "fairly supportive" of Obama's loan modification plan. However, lenders cannot be expected to modify loans for borrowers who won't be able to sustain home ownership, he said.

"There are people who are underemployed today," Simon said. "For some of those people, keeping their monthly payment down may be enough to keep them in the home."

Countrywide has modified thousands of loans since starting a program in November, Simon said, but very few loan modifications have involved lowering the principal balance.

"We found that we can modify the bottom-line figure (monthly payment) by adjusting interest rates and other terms of the loan without a principal reduction," Simon said.

Most loan modifications that banks are doing these days are meaningless, Alpha Capital Corp. Chief Executive Officer Jack Ferm said. They may lower the interest rate, but they won't reduce principal.

He has a client who owes $460,000 on a property that's worth $190,000. The bank offered to lower the interest rate to bring payments from $3,000 to $1,500 a month, but that wasn't enough.

"Her position is she's not interested. Let them take the house because it's not worth what she owes," Ferm said.

When banks modify loans, they put in a caveat that waives the borrower's rights to sue the bank for anything, he added.

"Banks committed fraud in violation of (Nevada law)," said Ferm, whose company buys foreclosed homes before the owners are evicted and rents them back to them. "They made loans to people without even considering if they could make payments. Borrowers had debt-to-income ratios of 70 percent to 200 percent. That's where 97 percent of the population in Vegas falls."

Many attorneys are jumping into the business, offering to get loans modified and stave off foreclosure. But people should first go directly to their financial institution and talk to the branch manager, Penrod of the credit union league said.

That can be a problem if the original lender has sold off the loan.

"How many phone calls will it take to get to a decision-maker? If they didn't originate it, there's no incentive for them to assist you," Penrod said. "Their goal is to get you into a new loan because that's what they get paid on."

Foreclosure specialist Tim Kelly Kiernan of the Brodkin Group at Re/Max said he's an optimist who usually "sees the glass as half-full." However, he doesn't have a good feeling about loan modifications. Homes have lost too much equity, he said.

"The other concern should be these 'loan-mod' companies that are popping up all over town," Kiernan said. "I got a call and the bottom line was $995 now and $2,495 when they complete my loan mod. I don't think so.

"What the consumer doesn't realize is they can, in most cases, work with the lender directly to modify their loan as opposed to spending several thousand (dollars) letting an unknown company do it."

Contact reporter Hubble Smith at hsmith@reviewjournal.com or 702-383-0491.