Article

The Helping Hand Mirage

Andrew Jakabovics on why we need to hold lenders responsible, even if they claim that homeowners aren’t calling on them to help.

In his testimony before the House Financial Services Committee last week, Secretary Paulson repeated a favorite talking point of the lending community: “50 percent of those who lose their home to foreclosure never contacted their mortgage servicer or a mortgage counselor for help.”

This is remarkably similar in intent to the misguided rhetoric arguing that the subprime mortgage problem is contained since 85 percent of subprime loans are current. This, of course, ignores the pain caused by the 15 percent that are delinquent.

It’s true that half of those in foreclosure may not have contacted their lenders or another agent for help, but that is ultimately a red herring that diverts attention away from the half who sought help only to have their appeals fall on deaf ears.

How many times have we heard “everyone loses in a foreclosure”? The financial services community would like us to believe that it is doing all it can to help borrowers, but it is well aware of a 2005 Freddie Mac survey that found a majority of all borrowers (current and delinquent) were unaware of the modifications lenders can offer people who are having problems paying their mortgage.

A recently released Moody’s survey also found that most large mortgage servicers rely only on passive letter-based contact with at-risk borrowers rather than actively calling or reaching out through credit counseling agencies. Lenders and servicers could, without question, do far more to actively engage at-risk borrowers.

The harsh truth is that lenders and servicers are doing little for those who ask for help. The survey conducted by Moody’s of 16 subprime servicers who constitute 80 percent of the market found that servicers have only modified 1 percent of the loans that reset in January, April, and July 2007. On average, up to 15 percent of loans that were current prior to resetting and not modified became delinquent.

Moody’s also cautions that the reset loans covered in the survey are of higher quality (read: lower risk) than those issued since late 2005. We should be prepared for far higher delinquency rates over the next year as the riskier loans reset without a true effort by lenders and servicers to modify those loans.

The industry estimates that the average monthly payment on a subprime adjustable rate mortgage will jump 42 percent at the first reset. Of course, not all borrowers who contact their lenders or servicers will be able to avoid foreclosure, but a greater number of modifications will keep more borrowers in their homes, which would also relieve some of the downward pressure on local house prices. Ultimately, lenders also stand to lose significantly if house prices drop precipitously. That 1 percent modification rate is not going to stem the losses.

Lenders and servicers are happy to put the onus on borrowers by arguing that culpability for the subprime crisis lies with speculation, fraudulent applications, and troubled borrowers’ failure to seek help. But it is high time for Congress to ask about lenders and servicers’ miserable record regarding the 70 percent of borrowers who do the right thing by making contact.

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