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Can lenders do more to halt foreclosures?

Banks have begun to modify loans for mortgage-holders, but experts say not nearly enough.

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"At this point, the lenders don't have the authority and the capacity to make loans more affordable," says David Petrovich, executive director of the Society for the Preservation of Continued Homeownership in Oakhurst, N.J.

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Still, mortgage lenders can do more, critics say. "Yes, there's good work going on. Yes, [lenders] are being innovative, but it's not at the kind of scale that perhaps needs to happen," says Marietta Rodriguez, director of national homeownership programs for NeighborWorks America, a nonprofit organization created by Congress to provide foreclosure counseling, among other services.

Lenders' current efforts take place on a superficial level, argues Bruce Marks, CEO of the Neighborhood Assistance Corporation of America (NACA) in Boston, who has worked with many banks to stop foreclosures by restructuring home loans on a case-by-case basis.

Although some banks offer refinance options, most of those plans were meant to address foreclosure situations before the mortgage meltdown, he says. "In this new scenario, they've got to change everything they've done in the past 25 years."

For example, banks in the past often helped troubled borrowers by giving them more time to pay off the loan amount. What's needed now is a full-fledged restructuring of faulty loans, which includes either a reduction in the value of the loan or in the interest rate associated with the loan. In his experience, he says, this happens only when groups like NACA apply pressure.

Even Bernanke has called on lenders to do more to help borrowers. "Reducing the rate of preventable foreclosures would promote economic stability for households, neighborhoods, and the nation as a whole," he said in a speech in Orlando, Fla., last month. "Although lenders and servicers have scaled up their efforts and adopted a wider variety of loss-mitigation techniques, more can, and should, be done."

The Senate last week scuttled a proposal that would have given bankruptcy judges the authority to reduce interest rates or the principal for troubled home loans.

In the meantime, companies like You Walk Away are flourishing. The three-month-old venture has helped more than 500 people in at least 10 states and plans to quadruple its staff within a month.

The website has drawn criticism that it advocates foreclosure, although cofounder Jon Maddux says the company turns away many people who haven't explored all their options.

"We thought this is definitely going to have some controversy to it," he says. "But we felt there were enough homeowners out there who could use the service that it was worthwhile."