Treasury Secretary Henry Paulson urged large mortgage companies to help homeowners by refinancing their loans.
Many homeowners are struggling to keep up with steep increases in their adjustable-rate mortgage payments, putting them at risk of losing their homes.
Delinquencies, especially in the subprime market, set off shock waves in global financial markets earlier this year and forced many mortgage companies to declare bankruptcy.
Even the biggest lender, Countrywide Financial Corp., was crippled. It received a cash infusion from Bank of America to stay afloat, and recently said it would slash as much as 20 percent of its work force to lower costs and deal with defaults. It expects new mortgages to fall about 25 percent next year.
Some 2 million consumers are expected to face a hike in mortgage payments within the next two years as their adjustable rate mortgages, obtained with low introductory rates, reset higher.
Lenders' Benefit from Flexibility
The loan industry takes a $50,000 hit with each foreclosure. So helping the 2 million consumers in danger of losing their homes with refinancing is as much to the lenders' advantage as the borrower.
In fact, investors who own the loans are willing take a "haircut" on them. That means changing the terms, forgiving a portion of the debt, and perhaps lowering the interest rate. All of which can keep the homeowner in the house.
"You know, I've always worked. My wife has. We're hard working individuals, middle class," said Jose Pomales, standing in the living room of his ranch-style house in Boston's Hyde Park neighborhood.
He and his wife Diana bought the house eight years ago. It's modest, spotlessly clean and well cared for.
But back in July, Pomales received a foreclosure notice. Two-and-a-half years ago he refinanced his mortgage with a sub-prime lender named New Century, which has since gone out of business. He was able to make payments until spring when his loan adjusted up to 9 percent – and it's set to go up to 11 percent.
"We don't wan to lose the house but it looks like they want to take our house from us," he said.
Pomales is typical of millions of homeowners, according to advocates.
Bruce Marks, head of the Neighborhood Assistance Corp. of America, a non-profit organization that's been trying to help Pomales negotiate refinancing with Chase – the firm that servicing the loan since the previous lender, New Century, went out of business.
"No one can afford an interest rate of 10, 11, 12 percent over the long term," Marks said.
Marks and Pomales both say that Chase hasn't been willing to work with him to lower his payments until contacted by National Public Radio.
Chase spokesman Tom Kelly said the bank wants to help. "We reached out to him as the servicer of his loan to say: 'Tell us what you're looking for. Is there some way we can modify this loan so you can stay current on it over the long term and stay in your house over the long term?"
Lenders assert that they aren't going to be able to help people who were recklessly borrowing too much money against their house or speculating on properties they inherently couldn't afford.
Thus, Chase will want to determine whether Pomales can afford his $300,000 even at a lower interest rate.
"If we were to make a modification and lower the rate — or whatever the deal is – and six months later he's in the same boat and loses the house, he's really no further ahead," said Kelly. "We and the investor are certainly no further ahead."
The investor that Kelly speaks of (or morel likely, investors) is part of a big change in the mortgage industry.
Mortgage Investors Complicate Industry
There was a time when the bank that negotiated the loan also held onto it for the full term. Now, many loans get bundled together and turned into securities that are sold to investors on Wall Street, who also represent firms based overseas.
Some economists say there is a pitched battle going on between investors — some of whom benefit by giving homeowners a break.
"I've seen those successes," said Ray Neirincks of Rhode Island's Office of Home Ownership. "I had a homeowner who had a mortgage payment be reduced from a little over $2,700 a month to just under $1,700 a month, which was clearly affordable to them."
But there still aren't enough people within loan servicing companies with the authority to lower rates like that, he adds. The majority of borrowers who are in trouble get routed to low-level debt collectors.
"That's why we try to tell homeowners to get out of the collections department," Neirincks said.
Another problem, said Chase's Kelly, is that borrowers in trouble don't call or respond to calls from their lenders.
That's crucial for borrowers to do, along with staying current on their loans before they adjust.
If you want to keep your house, it definitely helps to show you can afford at least the lower initial interest rate, according to industry experts.
Rise in Mortgage Rejection Rates Higher for Minorities
Meanwhile, mortgage applicants were turned down for loans at a slightly higher rate in 2006 than the year before while significant disparities between white and minority applicants continued to exist.
The Federal Reserve, in its annual look at mortgage-lending practices, found the denial rate for all home loans was 29 percent in 2006, up from 27 percent in 2005.
The Fed' report found minorities get loans with higher interest rates or other increased charges in greater percentages than white applicants.
Some 30 percent of the loans for home purchases by African-Americans were higher-cost loans compared with 18 percent of loans for whites, according to the report.
The gap of 12 percentage points in the number of African-Americans getting such high-cost loans compared with whites was higher than a 10 percentage point gap found in the 2005 survey.
Advocacy groups said the new report, the most comprehensive look at mortgage practices done each year, showed discrimination was continuing and that these problems were contributing to the current crisis in subprime lending.
From NPR reports and The Associated Press