A national housing advocacy group plans Wednesday to disclose a deal with Countrywide Financial, the nation's biggest home lender, providing relief for thousands of borrowers in danger of foreclosure.
The move follows another pledge by Countrywide to refinance or lower interest rates for borrowers — sparking fresh hope that the industry overall may be more willing to work with struggling homeowners.
Many homeowners are seeing interest rates on their subprime loans jump up to 10 percent or even 14 percent.
The mortgage industry plunged into distress this summer as more borrowers missed payments on their home loans and investors soured on risky mortgage debt. Some 2 million adjustable-rate mortgages, or ARMs, are due to reset to higher rates this year, making monthly payments unaffordable for many.
Chief among them are holders of subprime mortgages — home loans given to customers with poor credit history. Foreclosure and delinquency rates are at a record high this year.
Meanwhile, big mortgage companies have claimed that they are trying to avoid foreclosures and are willing to lower those rates to keep people in their homes. But so far, there has been little evidence that that is happening.
A recent report by credit ratings firm Moody's found that lenders had intervened to change loan terms for only 1 percent of the subprime loans that recently adjusted upward.
Bruce Marks, head of Neighborhood Assistance Corporation of America, organized protests at Calabasas, Calif.-based Countrywide just a couple of weeks ago. He said then that the company was needlessly pushing people into foreclosure. But now, he says, things are different.
"It is a huge sea change. They're working with the borrowers to keep them in their homes," Marks said.
For example, Countrywide announced plans to refinance or modify some $16 billion worth of loans for more than 80,000 borrowers who will soon hit an unaffordable rate reset, or those who have already fallen behind after their payments rose.
Further, Countrywide hired Marks' Neighborhood Assistance Corporation as a contractor to help thousands more people. The nonprofit group will contact homeowners and figure out how much they can afford to pay.
"We are re-underwriting the loan," Marks said. "We are getting all the documentation — 30-day pay stubs, bank statements — and saying, 'This is what the homeowner can afford.' And we say to the lender, 'You have to restructure the loan to get this payment.' "
Marks said Countrywide has cleared the first couple of dozen loan modifications that his group submitted, chopping hundreds of dollars off borrowers' payments — some of whom had interest rates as high as 13 percent.
"They were never going to get the 13 percent interest rate," he said.
Because foreclosures cost lenders upward of $50,000, on average, collecting less interest is better than taking a big loss.
The outcome wasn't so promising for investors who bought mortgages from banks. Some of them have had to layoff numerous workers or close their mortgage divisions as the credit crises squeezed profits.
On Wednesday, Merrill Lynch & Co., the world's biggest brokerage, said the summer's credit crisis triggered a bigger-than-expected $7.9 billion write down during the third quarter. Bad bets on mortgage securities and leveraged loans used for corporate takeovers caused the brokerage's first loss in six years. Its quarterly performance was the worst by far of the Wall Street firms, all of which were slammed by the market turmoil.
Such big hits to the bottom line could spell trouble for corporations, which may answer why they are so willing to team with consumer advocate groups.
"The biggest concern: Most servicers are scared to death that they're going to get sued if they modify too many current loans," said Larry Litton Jr., CEO of Litton Loan Servicing, which manages $55 billion in loans.
Ira Rheingold, executive director of the National Association of Consumer Advocates, is wary of Countrywide's move, saying the 80,000 loans it is committed to modifying is a small chunk of the 2 million people who face losing their homes.
"Call me pretty skeptical. Are they actually going to work these loans out? Are they going to be sustainable home loans? Are they simply putting off inevitable foreclosures for people?" Rheingold said.
Even if Countrywide keeps its commitment to help customers sustain homeownership, it loses support from critics who are opposed to lenders "bailing out" people who knowingly bought more house than they could afford.
From NPR reports and The Associated Press