Foreclosures and the economy
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Foreclosures and the economy
By Greg Griffin
The Denver Post
Article Last Updated: 10/01/2008
Politicians trying to prop up the banking industry and stabilize the U.S. economy might learn from the example of Sherry Herrington of Lakewood.
The single mother of two and former flight attendant recently saved her modest ranch home from foreclosure with help from a community organization and her lender. In the process, she bolstered property values in her neighborhood and kept one more troubled mortgage from going bad.
Amid the frenzy to pass a $700 billion plan for the government to buy distressed assets, primarily battered mortgage securities, struggling homeowners like Herrington are wondering why more isn't being done to help keep them in their homes. Lenders foreclosed on 22,500 Colorado homes during the first six months of the year, up 16 percent from last year.
"Why not have me in my home . . . making the payment, which I want to do anyway, instead of letting it go into foreclosure? That way, everyone wins," Herrington said. "It would benefit the banking industry if they would reach out to their customers and say, 'It's not just about the dollar. What can we do to help you?' "
To be sure, Congress in July approved a program to federally insure as much as $300 billion in refinanced mortgages for 400,000 borrowers at risk of losing their homes.
The $700 billion bailout plan that failed in the House on Monday called for the federal government to "encourage the servicers of the underlying mortgages" to minimize foreclosures on loan assets the government acquired and "to improve the loan-modification and restructuring process."
In a broader sense, the plan could restore confidence to credit markets and spur new home lending that could steady falling home prices.
But many observers say a more direct solution could be more effective.
"We have got to find a way to stabilize the real estate market and the value of real estate," said Colorado Division of Housing director Kathi Williams, who has pushed lenders to negotiate new loans with troubled homeowners in the state. "The way to do that is to keep these people who are struggling in their houses.
"If we could solve that problem, we would solve a lot of problems" by increasing the value of the mortgage securities that are at the heart of the crisis, she said.
Fears over rising foreclosures have pushed market values for mortgage securities to as low as 20 cents on the dollar, causing banks to write off massive losses and clamp down on lending. Many experts say the securities, which are bundles of mortgages sold as investments, are actually worth far more than that, even at current foreclosure levels.
Chris Holbert, president of the Colorado Mortgage Lenders Association, said it's over-simplistic to make a connection between the bailout plan and the plight of individual homeowners. "Congress appears to be dealing with a macro issue of encouraging confidence in the credit markets and encouraging credit to flow," he said. "It's difficult, if not impossible, to bring it down to the individual homeowner or borrower. . . . It's difficult to tie those two together."
Others are quick to point out that borrowers should face the consequences of taking on too big a loan.
Many homeowners struggling with their mortgage payments complain that lenders are loath to renegotiate mortgage terms, even though doing so could be less expensive for them than foreclosing.
"They stick you in a loan that's got a higher rate than you expect, and you can't get out of it," said Tom Kanan, a Denver attorney who tried to refinance out of an adjustable-rate mortgage from Countrywide Home Loans. "We were stuck with a $15,000 penalty if we tried to refinance, and it was unwaivable."
He and his wife were able to stay current on their payments.
Roughly 80 percent of homeowners who get counseling through the Colorado Foreclosure Hotline avoid foreclosure, said Ryan McMaken, a spokesman with the Division of Housing. But fewer than half of those who call get counseling, he said. Those who avoid foreclosure obtain a loan modification from their lender, short-sell their home for less than the loan amount with the lender's approval or reach some other agreement with the bank, McMaken said.
This year, the hotline is having more trouble getting banks to negotiate loan modifications, apparently because their loss-mitigation divisions are being overwhelmed by foreclosures nationwide, McMaken said.
Herrington, 46, said she tried in vain for months this spring to get her lender, Chase Mortgage, to modify her loan.
She had fallen behind two months in payments on her adjustable-rate mortgage on her $185,000 loan as the monthly bill rose from $1,200 to $2,100 and a series of personal setbacks reduced her income.
She attended counseling at Brothers Redevelopment, and Chase eventually agreed to favorable new terms: She now pays $1,100 a month on a 30-year loan with an interest rate that can go as high as 6.2 percent. A $3,000 fee and two months' payment were added to the principal she owed.
"Maybe some of us shouldn't have had these loans and couldn't afford them at the time. But the thing is, we're in here now," she said. "The profit they lose in the short term will come back to them in the long run."