AGs Say Too Few Get Forbearance

Washington-A new report says too many homeowners face foreclosure without receiving meaningful assistance from their mortgage servicer.

In its third "Analysis of Subprime Mortgage Servicing Performance," the State Foreclosure Prevention Working Group concluded things are getting worse as the number of delinquent loans, prime and subprime, increases. Industry measures to keep homeowners out of foreclosure have slipped, according to the group, which is made up of state attorneys general and state banking regulators.

Based on data collected from February through May, the report said eight out of 10 seriously delinquent homeowners are not on track for any loan workout or loss-mitigation assistance to enable them to avoid foreclosure, a higher percentage than the group found in its April report. Previously, seven out of 10 are not on track for any loss-mit outcome.

"Servicers appear to have reached the 'low-hanging fruit' of subprime loans facing interest rate resets, while not developing effective approaches to address the bulk of subprime loans which are in default before interest rate resets," the report said. "Based on the rising number of delinquent prime loans and project numbers of payment-option ARM loans facing reset over the next two years, we fear that continued reactive approaches will lead to another wave of unnecessary and preventable foreclosures."

While banks and Wall Street firms continue to report record writedowns of mortgage loan portfolios and securities, the losses do not appear to be flowing down to homeowners in the form of sustainable loan modifications, said Iowa attorney general Tim Miller, a founder and leader of the group. Since October 2007, the group has been collecting data from the largest subprime mortgage servicers. The group is led by representatives of the AGs of 11 states, including Arizona, California, Colorado, Iowa, Illinois, Massachusetts, Michigan, New York, North Carolina, Ohio and Texas; two state banking departments (New York and North Carolina); and the Conference of State Bank Supervisors.

New efforts to prevent foreclosures are on the decline, despite a temporary increase in loan modifications through the second quarter of 2008. The number of homeowners working toward a loan mod has fallen to a level not seen since late 2007.

One out of five loan modifications made in the past year is currently delinquent, the report said. "We are concerned that unrealistic or 'Band-Aid' modifications have only exacerbated and prolonged the current foreclosure crisis," the report said.

Three hundred thousand subprime loans are in the process of foreclosure as of the end of May. Thirty-eight percent of seriously delinquent subprime loans are in the process of foreclosure with over 131,000 foreclosures completed on subprime loans in May alone.

"The financial turmoil we see today is in part a result of a 'pennywise, pound-foolish' approach of the mortgage industry to prevent foreclosures," added Mark Pearce, North Carolina deputy commissioner of banks. "Instead of developing efficient approaches to reduce the payment burdens of large numbers of unaffordable loans, mortgage servicers have relied on the same approach used before the foreclosure crisis. The result has been record levels of unnecessary foreclosures that have accelerated declines in property values that have affected all of us."

The Working Group said it hopes that recently enacted federal legislation to provide a new federally guaranteed refinance program, Hope For Homeowners, will increase the level of refinancing for poorly performing subprime loans. However, the ultimate impact of the program has not yet been seen.

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