WASHINGTON -- The rolling tsunami of home loan delinquencies and foreclosures is exposing serious problems in the mortgage industry's capacity to quickly handle borrowers' requests for help -- whether loan modifications, short sales to ward off foreclosure, or much-ballyhooed rate freezes.
It is also bringing to light impediments to quick resolutions that may surprise some borrowers, such as the presence of home equity lines or second mortgages on the property. People with popular "piggyback" combinations of first and second mortgages, and hundreds of thousands of consumers with outstanding equity lines, could face complications they never imagined.
Listen to real estate attorney Nancy Gusman of Largo, Md., who represents financially distressed homeowners seeking ways to avoid foreclosure: "It's insane," she said in an interview. "(Mortgage) servicers tell everybody, 'Call us as soon as you have problems making the monthly payment.' But then the borrowers call and are told, 'Oh no, we can't talk to you about a loan modification. Your file is in the collections department (not the loss-mitigation department where loan modifications and short sales are handled) because you're only 30 days late.'"
Some loss-mitigation departments, according to Gusman, delay getting involved until borrowers are seriously delinquent, 45 to 90 days behind on their payments.
"So I find myself telling clients -- look, if they aren't working with you, maybe you shouldn't make any payments for a couple of months. Then they'll pay attention. That's a ridiculous situation."
Major mortgage market players concede that the sheer volume of requests from distressed borrowers -- stimulated in part by widely publicized industry and White House pledges of rate freezes and workouts -- is challenging the abilities of loan servicers to keep up.
Robert Padgett, director of nonperforming loan servicing for mortgage investor Freddie Mac, says mishandling of troubled accounts between collection departments and loss-mitigation and workout departments is "a problem. The collection folks are trained to recognize loss-mitigation (loan modification) opportunities early" in the process, and are supposed to push them through quickly to the specialists who can custom-craft workout solutions. But clearly that doesn't always happen.
Gusman complains that even when the loss-mitigation staffs get involved, "things can drag on for months because (the servicers) fail to negotiate with you in good faith." For example, she says, one of her clients is eager to participate in a short sale instead of going to foreclosure. In a short sale, the lender agrees to accept less than the principal balance owed by the defaulting borrower as an alternative to the higher losses associated with a foreclosure.
But in this case, according to Gusman, the servicer demanded a higher sale price than indicated by the would-be short-sale purchaser's appraisal. The servicer then referred the case to the owner of the mortgage -- Freddie Mac -- where contentious negotiations have continued over an acceptable final price to resolve the deal.
There is still another complication, said Gusman -- one that could potentially affect thousands of short sales in 2008 across the country: Besides first mortgages, many houses have large home equity lines. As junior liens, credit lines can be totally wiped out in foreclosures, leaving the bank that extended them empty-handed. However, for short sales to proceed, all lien holders generally must agree to the terms of the deal.
In a pending case involving a client of Gusman's, there is an $80,000 equity line debt on the property. The bank says it wants nothing less than 50 cents on the dollar -- $40,000 -- while the owner of the mortgage, Freddie Mac, generally limits its offers to 10 cents on the dollar.
Padgett agrees that the presence of home equity lines, second mortgages and other liens against a property can seriously gum up short sales -- even torpedo them -- if the junior lien holders won't cooperate and take only a fraction of what they are owed.
Some banks holding large equity lines -- $100,000, $200,000 and up -- "play hard ball to the bitter end," said Padgett, and can slow down what should be a quick short sale process by months.
Other issues that are bubbling up to complicate quick resolutions in distressed mortgage situations:
• Terrified about losing their houses, some homeowners stonewall mortgage servicers' attempts to get in touch. But if borrowers refuse to accept calls, mail or personal visits from the servicer's staff, the probability of avoiding foreclosure is severely reduced.
• Increasing involvement of what Padgett calls "third parties" -- people who represent or purport to represent the owners. Some, like Gusman, seek to guide owners through the process to a good result. Others are intent on fraud -- getting control of the property, refinancing and stripping out equity.
