MIAMI GARDENS, Fla. — When her brother could no longer help support her, Luzetta Reeves asked her small mortgage company to cut her monthly payments. It did — by 11 percent — making it possible for her to afford her house here on her modest fixed income.
Luzetta Reeves was able to remain in her home by modifying her mortgage, which cut her interest rate to 5.6 percent from 8.9.
In Miami, Jeffrey Mitchell saw his family income drop just as real estate taxes and insurance premiums increased, making his monthly mortgage payments crushing. He got a lower interest rate, too. But with the added fees and penalties, his monthly payment remained the same. He is now back in foreclosure.
As the Obama administration steps up efforts to help troubled homeowners modify their mortgages, it might consider the experiences of these two South Florida borrowers and their mortgage companies, one small, one large.
National statistics on mortgage modifications suggest that what happened to Ms. Reeves, a disabled 54-year-old, and Mr. Mitchell, a 42-year-old union representative, is fairly typical.
The nation’s 14 largest banks reported that more than half of the loans they modified last year were delinquent again after just six months, according to the federal bank regulator, the comptroller of the currency. But several small mortgage companies like the one that helped Ms. Reeves, which have been pursuing modifications longer, say that less than 25 percent of their modified loans became delinquent again.
“It’s becoming more and more clear to us that if you do real modifications the default rate is significantly lower,” said Tom Miller, the attorney general of Iowa, who has led a group of state officials pushing the industry to modify more loans. “They shouldn’t be called modifications if people pay more or approximately the same.”
Two years into the foreclosure crisis, many borrowers say they still have trouble reaching anyone at their bank or mortgage company to discuss loan modifications.
Banks and investors absorb huge losses in foreclosures, but some mortgage companies may view foreclosure as more profitable and expedient than modifications because they can levy extra fees and they do not have to wait to see if a homeowner will continue to make payments.
Bankers counter that they pursue options that minimize losses, but add that it is often hard to reach delinquent borrowers because many hide from their creditors.
While both arguments appear to have merit, reports by analysts at Credit Suisse and a law professor, Alan M. White, show that when mortgages are renegotiated, borrowers often face higher monthly payments or balloon payments at the end of the term.
Rod Dubitsky, a mortgage analyst at Credit Suisse, found that modifications that result in lower payments tended to re-default at half the rate as plans under which payments were higher or remained roughly the same.
The performance of individual companies varies greatly. Some, like Wells Fargo, one of the nation’s largest servicers of home loans, have modified few loans as a percentage of their delinquent mortgages, said Mr. White, an assistant professor of law at Valparaiso University.
Other companies like Ocwen Financial and Litton Loan Servicing, a subsidiary of Goldman Sachs, have modified a big portion of their delinquent loans, according to Credit Suisse. (The studies cover only loans packaged into securities, not those held on the books of banks.)
In the case of Ms. Reeves, Ocwen cut the interest rate to 5.6 percent, from 8.9 percent, lowering her payments by $125, to $1,027. Officials at the company said the reduction would cost less than seizing and selling Ms. Reeves’s modest two-bedroom house near Dolphin Stadium.
“Ocwen was very patient with me, and they really worked with me,” said Ms. Reeves, who has back problems and breast cancer.
The company said its modifications were not acts of charity but were based on calculations of whether changing loan terms was in the best interests of investors. Using home price data, estimates of legal costs and the time it takes to foreclose, the company determines how much it will recover in foreclosure. It compares that with estimates of what borrowers can afford based on income, family size and expenses.
“Our biggest hurdle is reaching out and talking to people,” said Margery A. Rotundo, Ocwen’s senior vice president for residential loss mitigation. “If a borrower has a desire and the ability to stay in the home, we can help them.”
Ms. Rotundo said the company’s decades-long experience with borrowers with blemished credit histories informed its approach.
- 1
- 2
