With large numbers of homeowners falling behind on mortgage payments, lenders across the country are seeking creative ways to keep delinquent customers out of foreclosure.
One of the newest approaches: the "Mod Squad," a roving 50-person team of problem-solvers who work for Texas-based EMC Mortgage Corp., a subsidiary of Wall Street investment bank Bear Stearns. EMC services about 500,000 loans nationwide, with $78 billion in outstanding balances.
Named after a hit TV series from the late 1960s and early 1970s, the Mod Squad consists of experts in loan modifications - custom-crafted solutions for borrowers who no longer can afford their mortgages at current rates and terms. The object is to search for changes in the loan requirements that will permit the borrowers to remain in their houses, pay down their loans and avoid foreclosure.
"Foreclosing doesn't benefit anyone - not the borrower, not the lender, not the bond holder," EMC President and Chief Executive Officer John Vella said in an interview. On the other hand, recasting certain terms of the mortgage - lowering monthly payments for a period, deferring unpaid principal and interest, or changing the rate - may allow delinquent borrowers to get past whatever financial issues caused them to fall behind.
What's unusual about the Mod Squad is that rather than waiting for homeowners to contact EMC when they get in a jam, the team is proactively reaching out to individual borrowers, working with local consumer and credit counseling organizations, and holding loan modification educational meetings for borrowers in cities where delinquencies are rising.
Loan modification represents just one approach that mortgage servicers can use to stem the tide of foreclosures.
Other techniques include:
Repayment plans where unpaid balances are reduced over time through small, regular add-ons to borrowers' monthly payments.
Forbearance agreements whereby principal and interest payments are reduced or suspended for a period of time, enabling the borrowers to get their finances under control. Then the regular payments resume, along with gradual reimbursements of balances in arrears.
Remedies such as these are more commonly available than many credit-strapped homeowners may be aware. In fact, major mortgage institutions such as Freddie Mac, Fannie Mae and the Federal Housing Administration require loan servicing companies to offer one or more plans to delinquent customers who have a reasonable chance of avoiding foreclosure.
FHA even allows money to be advanced interest-free on behalf of delinquent homeowners to bring their loans current, up to a maximum of 12 months worth of principal, interest, taxes and insurance. The mortgage company files a "partial claim" with FHA to obtain the funds needed to pay off all arrears. The borrowers are expected to repay everything they owe at the end of the loan term or from the proceeds when they sell their home.
Variations on that approach may be the next big development on the horizon in foreclosure-prevention. Many buyers during the past several years made no down payments and bought costlier properties than they could afford. Some now face massive monthly payment boosts and negative equity situations. They can't afford their mortgages, nor can they afford to refinance because they owe more on the loan than their house is worth.
Congressional leaders in the House and the Senate have urged private lenders, Wall Street, Fannie Mae, Freddie Mac and the federal government to devise programs to help thousands of boom-era buyers who face foreclosure this year or next.
One option that is gaining significant attention has been advanced by a Virginia-based loss-mitigation firm, Lyons McCloskey LLC. The plan would work like this: Borrowers in serious default would be refinanced into government-insured or guaranteed fixed-rate programs such as FHA, VA or rural housing. If their loan balances exceed FHA statutory limits, the refinancings could be provided through Fannie Mae or Freddie Mac.
The initial balances on the new mortgages would be what the borrowers could afford to pay using their current incomes at market rates. Any shortfall between the amount of the new loan and the balances owed on the unaffordable previous loan would be recast into a "soft" second lien - a second mortgage or deed of trust carrying a minimal or zero interest rate and no monthly payments. The second lien would be due and payable in a lump sum at any subsequent sale of the property, or whenever the borrowers could afford to retire the debt.
Credit risks on the soft second mortgage would be shared by Wall Street bond investors, the federal government or other mortgage market players.
The concept wouldn't keep everybody out of foreclosure, nor would it be extended to people who inflated their incomes or recklessly bought properties they could never afford. But it could be one answer for payment-shocked subprime borrowers who simply got in over their heads and mistimed the end of the boom.