The home-loan industry, facing the worst housing downturn since the early 1990s, is ramping up efforts to help strapped borrowers stay in their homes.
The goal is to restrain a gathering wave of foreclosures that carries big costs for both lenders and borrowers.
This rescue effort isn't expected to save every at-risk homeowner. But it promises to reduce monthly payments for many who have fallen behind on mortgages. In the process, it could help to stabilize a struggling real estate market.
So far the housing slump, precipitated in part by overzealous borrowing and subprime lending, continues its downward slope. In discouraging news for homeowners and homesellers nationally, a report Tuesday showed "the deceleration and declines in home prices are showing no signs of turnaround." Citing February data, Standard & Poor's Case-Shiller index of housing prices in 10 cities posted a 1.5 percent drop from February 2006 – an annual decline not seen in 15 years.
That news follows hard on a revised 2007 price forecast by the National Association of Realtors. NAR said this month it no longer expects the median price of an existing home to rise this year, predicting instead a 0.7 percent decline. The slower recovery, it said, is a result of "tighter lending criteria and fallout from the subprime loan debacle."
Some lenders offer to refinance
Impelled by financial and political pressures to try to curtail foreclosures, lenders are taking action on several fronts:
• Fannie Mae, America's leading mortgage lender, says it plans to help as many as 1.5 million "subprime" borrowers – people with low credit ratings – refinance out of high-interest loans.
• Freddie Mac, which like Fannie Mae is a government-backed corporation, is creating new products to make homes more affordable to buyers with poor credit. Freddie Mac doesn't make loans directly but pledges to buy as much as $20 billion worth of these mortgages from participating lenders.
• Washington Mutual, another giant lender, says it will refinance $2 billion in subprime loans, helping borrowers avoid foreclosure. The new loans will come with below-market interest rates.
• Some finance companies are partnering with nonprofit organizations that act as advocates for at-risk borrowers.
• In addition to efforts by specific companies, the Mortgage Bankers Association announced a foreclosure-prevention campaign in partnership with the nonprofit group NeighborWorks America. They will link homeowners to a free counseling hotline (888-995-HOPE) provided by the Homeownership Preservation Foundation, boost the capacity for homeownership counseling within NeighborWorks, and conduct a national ad campaign for homeowners in financial distress.
All of this represents significant relief, but the magnitude of the problem is large and growing.
"We're struggling to provide help" to troubled borrowers, says Robert Pulster, who heads a Boston nonprofit group called Ensuring Stability through Action in our Community. "We're seeing double the problem that we were seeing last year."
The lenders themselves are careful not to overstate what the new projects can achieve. "While these efforts will help cushion the expected rise in foreclosures, we need to be clear that these offerings are not a panacea," said Richard Syron, chief executive of Freddie Mac, as he unveiled the new products at a congressional hearing April 17.
Even when the economy and the housing market are strong, some borrowers run into financial difficulty because of events such as job loss, divorce, or illness.
Over the past year, two other factors have driven the rise in past-due loans and foreclosure filings.
One is known as "payment shock," when adjustable-rate loans reset sharply upward. Lenders in recent years failed to consider whether the borrowers will be able to afford their loans once initial "teaser" rates adjust, critics charge.
The other is simply that a decade-long housing boom stalled out. Some who bought homes near the market peak – often with no down payment – owe more than the house is now worth. So selling it offers no sure escape route from foreclosure.
But foreclosure is costly for lenders, chewing up tens of thousands of dollars in missing loan payments, home-sale expenses, and property maintenance. If foreclosures are concentrated in a community and drag down home values, that's bad for lenders' business prospects.
Politicians have been prodding lenders to help at-risk homeowners. In congressional hearings, Democrats have bashed the mortgage industry for helping to create the problem. Nonprofit organizations have added to the pressure.
Rita Askew, safe at home
Rita Askew of Evanston, Ill., is one borrower who remains in her red-brick townhouse thanks to help from her lender and community groups.
Her husband, the family breadwinner, had to leave his school-maintenance job for several months last year because of an accident. "I probably would have been selling my house," Mrs. Askew says, if the National Training and Information Center (NTIC) hadn't stepped up for her.
NTIC helped win a loan-modification accord that cut the monthly payment from $1,668 to $1,117. The interest rate dropped from 10.6 percent to 6.0 percent.
Several major lenders, including Ocwen Financial Corp., CitiFinancial, and Select Portfolio Servicing Inc., have agreed to partner with NTIC to negotiate "workout" deals when possible for troubled loans.
But for people who face difficulty paying their mortgages, the choices can narrow quickly if the loans go unpaid for a month or more.
Borrowers can seek a traditional refinance deal with any lender. They can seek temporary forbearance or a loan modification deal. Some can successfully sue the lender, showing that the original loan process violated state or federal laws. Or they can try to sell the home, perhaps talking the lender into accepting proceeds that fall short of the loan balance due.
Housing advocates say to beware of "rescue" scams, outfits that charge big fees and then fail to help people stay in their homes.