Modified mortgages: Lenders talking, then balking

The San Francisco Chronicle reports:

Mortgage lenders have publicly embraced the concept, saying they care about "home ownership preservation" and will work to prevent foreclosures. A "loan mod" might involve freezing the interest of an adjustable-rate mortgage, for example - perhaps setting payments at 8 percent instead of letting them soar to 11 percent.

But consumer advocates say it appears that few modifications are actually occurring, and lenders refuse to provide any data to show how common the practice is.

Chase, Washington Mutual and Wells Fargo banks all declined to provide The Chronicle with statistics on how many mortgages they modify and who qualifies, although all have said publicly that they want to help troubled homeowners. Countrywide Financial, which has also promoted its loan modification efforts, did not return calls.

"There definitely is a disconnect between what the lenders are saying and what borrowers and counseling agencies are experiencing," said Kevin Stein, associate director of the California Reinvestment Coalition, a statewide advocacy alliance that promotes access to credit. "It is disheartening to hear from counseling agencies that things are not working out the way they should. There is no accountability. There is no way for anyone to know if what the banks say is coming to pass."

Around the Bay Area, workers at housing counseling agencies said they have seen few, if any, loan modifications offered to their clients.

Lenders are uniformly unwilling to make loan modifications for homeowners whose interest rates are resetting higher, said Rick Harper, director of housing at Consumer Credit Counseling Services of San Francisco, which talks to about 1,000 delinquent borrowers a month.

On the other hand, he said, for people with short-term financial crunches - from job loss, illness or divorce, for instance - lenders today are more amenable to modifications and forbearance. That allows homeowners to make reduced or no payments temporarily, then the extra amount is tacked onto the loan at the end.

The catch-22 is that the homeowners who most need loan modifications are not those with temporary problems. They are people who signed up for adjustable-rate mortgages and now cannot make the escalating payments.

The problem is certain to get more acute. About 2 million ARMs are due to reset sharply higher in the next 18 months. Because most of those homeowners cannot afford the higher rates - and the softening housing market means they cannot refinance or sell for enough money to repay the loan - those resets are likely to trigger a huge wave of foreclosures unless the loans are modified.

"Lenders are not modifying these (adjustable-rate) loans," said Martin Eichner, director of dispute resolution at Sunnyvale's Project Sentinel, a nonprofit agency that helps consumers with housing problems. "A lot of these loans are so hopeless and irrational that lenders won't even talk to us."

Imagine that.