Negotiating to Avoid Foreclosure
When home loans reset at higher interest rates, prepayment penalties leave little choice but to ask lenders for better terms.
Joseph Ripplinger is a man on the verge of losing his house.
A semi-retired handyman at 66, Ripplinger has turned several times to the equity in his stucco bungalow in south Minneapolis to pay medical and credit-card bills. He and his wife, Marlys, a newspaper carrier and part-time nursery clerk, bought the house in 1975 for $24,900 and raised their four children there.
But it was the refinance he did last December that got him in trouble.
Within days of signing the papers, Ripplinger began to realize he couldn’t afford the terms of the $186,500 loan. They include an adjustable-rate mortgage (ARM) that — as near as he can understand — started at 1.75 percent and climbed to 8.625 percent by last month.
He can’t afford to refinance again. A prepayment penalty likely would cost him $6,000.
So he has been trying for months to call his lender to ask for new terms. That seemingly simple act now has official-sounding names — “mortgage modification” or a “loan workout” — and is the single best hope housing counselors have to save homes.
The loans, often to people who wouldn’t have qualified for loans previously, and at onerous terms many states are trying to ban, helped fuel the housing boom — and as they’ve started to go sour, helped it sink. The Center for Responsible Lending in Durham, North Carolina, estimates that about 2 million U.S. households are headed to foreclosure over the next few years.
The group also estimates that refinancing is out for many of those loans. About 70 percent have prepayment penalties that can go above $10,000. It’s a penalty found in only found 2 percent of prime loans, according to the center.
Advocates say even simple interest-rate changes could prevent 60 percent of the expected foreclosures — one in five of all subprime mortgages over the past two years. They say the mortgage industry’s bad lending practices are mostly to blame and it’s the industry’s — not the government’s — mess to clean up.
“If you had a pulse, they would give you a loan,” said Mary Moore, center spokeswoman.
The industry acknowledged some lax lending standards over the past couple of years. And it is open to mortgage modifications, if only because foreclosures cost lenders 20 percent to 40 percent of the loan’s balance, said John Mechem, spokesman for the Mortgage Bankers Association in Washington, D.C. Its members include banks, insurers and loan servicers, companies that administer the accounts.
But borrowers and housing counselors said that in practice, lenders are not sold on the idea. They make themselves hard to reach — phone numbers with only recorded messages, for example — and long waits to talk to a person.
Loan servicers can be the toughest, because the mortgage investors they work for often limit their options, said Dana Snell, program director for the Minnesota Home Ownership Center, a homeownership support agency.
And they all insist they have to consider each case individually, which is too slow, haphazard and probably unfair, said Jordan Ash, national director of the ACORN Financial Justice Center in St. Paul.
From what he’s seen, lenders and servicers are still following “the old model of trying to do collections first, squeeze out everything they can, and only when that’s tapped out bring up loan modification,” Ash said.
Coming due
Minnesota’s new predatory-lending law took effect last month, and housing counselors say it’s one of the nation’s strictest. Subprime loans no longer can have prepayment penalties, and lenders can’t make mortgages a borrower can’t possibly repay, even figuring in rate increases. Closing costs cannot exceed 5 percent of the loan amount.
Behind the new law are the recent subprime mortgages that are largely blamed for nearly doubling foreclosures in the state, from 6,466 in 2005 to 11,207 last year, according to a tabulation by HouseLink, a housing research agency.
But the law is too late for some people, including Ripplinger. He turned to refinancing to pay bills after he was injured and developed diabetes. He was surprised recently to find the $186,500 principal on his December loan had — instead of shrinking — grown to $191,066 in the nine months since he refinanced.
He said that’s because he didn’t understand that what he’s been paying is the $540 “minimum payment option.” It is far below the loan’s real monthly cost of $1,421; the balance gets pushed back onto the principal for payment later, a procedure called “negative amortization.”
His mortgage broker, Eric Gartland at Pinewood Mortgage in Roseville, said the explanations were clear. “We made full disclosure with the details,” Gartland said.
Ripplinger’s lender, Countrywide Financial Corp. — the nation’s largest mortgage lender, and a key player in the nation subprime mess — did not return a call asking for comment. The California-based company is in the process of laying off 20 percent of its workforce.
Working it out
At ACORN Housing Corp., in St. Paul, Alexa Milton said counselors have succeeded at loan modifications, even for houses worth less than the original mortgage. Most often, the loans are converted to 30-year fixed, and the borrower repays the full, original mortgage amount over that time, Milton said. She recommends that borrowers work through housing counselors.
She said a previous workout program by ACORN found that individual borrowers had a 50 percent success rate, and ACORN counselors 90 percent.
ACORN is pushing lenders nationally to develop standards and applications in order to speed loan modifications.
Two lenders and loan servicers said they already are reaching out to mortgage holders potentially in trouble, to try to avoid foreclosures.
Citi Global Consumer Group calls or writes borrowers after they miss one payment “for early and appropriate intervention,” said public affairs vice president Mark Rodgers.
Chase’s home lending division now notifies borrowers two to five months before their interest rates will reset, projecting the likely new rate and monthly payment, said spokesman Tom Kelly in Chicago.
Both said they offer workouts, but neither would say how many it has given.
Meanwhile, Ripplinger got good news late last week from ACORN Housing, which has been counseling him: Countrywide has indicated it might negotiate his loan.