State mortgage program lags on modifying loans

Option to lower struggling borrowers' payments put in place only recently

December 21, 2010|By Jamie Smith Hopkins, The Baltimore Sun

Despite nationally recognized efforts to help residents avoid foreclosure, the state of Maryland has been slow to make mortgage payments more affordable for the struggling homeowners whose loans it owns.

Gov. Martin O'Malley and his administration have pressed national loan servicers in recent years to work with homeowners rather than foreclose. But it wasn't until four months ago that the state — which lends money to first-time homebuyers — designed a program to lower monthly mortgage payments to an amount that its borrowers in trouble could afford, The Baltimore Sun has learned.

Only three such modifications have been approved so far.

The state says several factors outside its control have made it difficult to modify loans to achieve significantly lower payments. For instance, the Maryland Mortgage Program has bondholders who must be paid back, as well as mortgage insurers to convince.

The same scenario has played out on the national level. The federal government, which has backed and financed millions of mortgages, has been criticized for not helping enough borrowers to obtain modifications even while it lectures the mortgage industry to modify more loans.

"It's one thing to blame it on the lenders, but the government — whether it's state or federal — hasn't really done any better," said Guy Cecala, publisher of Inside Mortgage Finance in Bethesda. "That's the irony of it."

About 1,600 borrowers in the state program are at least two payments behind. And about 275 borrower requests for help were pending at the end of October, the latest month data were available.

Some of the borrowers may be eligible for modifications through the Federal Housing Administration, which insures mortgages and has its own loan-modification initiative. But nearly half of the 16,000 state loans are backed by private insurers, and until recently those borrowers wouldn't have been able to request a lower payment if economic hardship struck.

State housing officials said they certainly want to avoid foreclosing on homeowners. It's not good for the borrowers or their neighborhoods, which means it's not good for the state, either. The state housing department "has always worked with its borrowers to help them stay in their homes," Housing Secretary Raymond A. Skinner said by e-mail. "It is a priority of this administration."

Maryland officials attacked soaring mortgage delinquencies from a variety of angles in 2008, as foreclosure problems grew into a full-blown crisis. Lawmakers lengthened the foreclosure process to give borrowers more time to try to avoid losing their homes. Housing officials launched a campaign to connect homeowners with housing counselors.

And O'Malley, after castigating loan servicers for not responding to borrowers' requests for assistance, elicited promises from several national firms that they would consider Marylanders for alternatives to foreclosure. The Democratic governor also championed a law passed this year requiring court-supervised foreclosure mediation if borrowers request it, after he criticized how "faceless giants" of the mortgage industry were handling loan modifications.

But the mortgage industry started giving some borrowers lower payments long before the state followed suit. Four in 10 loans modified at the end of 2008 saw monthly payments fall at least 10 percent, according to a U.S. Treasury Department analysis of mortgages serviced by national banks and federally regulated thrifts. That figure rose to more than seven in 10 modified this spring, the most recent statistics show.

Before August, the state offered only loan modifications that come with higher payments to enable borrowers to catch up with past-due amounts, or modifications that added years to mortgage terms to cover for those amounts — which sometimes had the effect of lowering monthly payments, though only slightly.

A spokesman for O'Malley referred questions to the state housing department.

Skinner, the agency head, said his department had been focused on improving foreclosure outcomes for all Marylanders, "as opposed to specifically trying to come up with a program to lower payments for [Maryland Mortgage Program] borrowers."

Mortgage experts said they are surprised that it took Maryland officials so much time to offer an option intended to lower payments in a substantive way.

"I would have thought they'd have had some organized program set in place long before now," said Kurt Eggert, a professor at the Chapman University School of Law in California, who has testified before Congress on mortgage problems. "It would seem odd to say, 'We want to encourage ownership' … on the one hand, and on the other hand say, 'If you run into problems, we're not going to do much for you.'"

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