Mortgage bailouts: Who qualifies?
It’s difficult to get approval for a loan workout, even if your need is genuine. We walk through the process with a couple who unexpectedly lost their financial footing.
Bob and Mary Keenan need a break on their mortgage. A series of reversals has left them strapped and incapable of paying all their bills, the largest of which is the loan on their newly built home.
Mortgage workout programs are all over the news and sound like nirvana to financially troubled homeowners like the Keenans. But they’re often not what they seem.
We’ll lead Bob and Mary through the home loan “modification” gantlet. In the process, we’ll help illustrate who qualifies for mortgage help, what it consists of and how to boost your chance of qualifying.
The big mortgage problem
As the mortgage market has soured and left millions of Americans in — or at risk of — foreclosure, banks have launched increasingly aggressive programs to work with troubled borrowers. A group of banks represented by the Hope Now Alliance, for example, brags that it has helped keep more than 2 million troubled borrowers in their homes by changing the terms of their loans.
To hear the banks tell it, the modification programs can slash payments by reducing interest rates to zero — or by even wiping out a portion of the borrower’s principal balance. (That’s a big change from the earliest loan-workout efforts, which usually just moved payments to the end of the loan. Half of borrowers with those early modifications are defaulting again six months later, bank regulators said in early December.)
But it’s not easy to qualify for these more aggressive programs, and borrowers can battle paperwork for months before they know whether they’ll get help. The reason the process is so difficult? The lenders who made the loans often don’t call the shots, said Evan Wagner, a spokesman for IndyMac Bank, which wrote the Keenans’ mortgage.
Why? Once written, most mortgage loans are sold to investors. The banks simply “service” the loans — collecting the payments and answering borrowers’ questions. IndyMac, for example, services 650,000 loans but owns only about 7% of them. The rest are owned by investors, ranging from individuals to pension funds.
Complicated contracts spell out what the bank can and cannot do to accommodate borrowers without getting sued by the investors who bought their loans. As a result, workouts traditionally are laborious processes. The bank examines a borrower’s situation, reviews the contract to see whether modifications are possible and then approaches the investors to make sure the specific change requested would be tolerated.
This creates real headaches for people such as the Keenans, who started calling IndyMac weeks ago but couldn’t get a straight answer about whether they qualified for help until they contacted MSN Money.
“As a consumer, you rarely know who is calling the shots and why,” Wagner acknowledged. “The customer deals with us; we deal with a company that bought the loans and resold them to other investors; they deal with all the other owners. It can be fairly painful.”
The big mortgage solution
That said, over the past year, lenders have come up with something of a formula to speed up loan workouts. People who fit the standards in the formula can get relatively quick help; those who don’t must go through the traditional case-by-case process.
Conveniently, IndyMac has become the industry standard-bearer, setting guidelines for expedited loan workouts under the aegis of the Federal Deposit Insurance Corp., which took control of the Pasadena lender earlier this year.
What are the rules?
- Your loan must be at least 60 days past due. (A few banks require that payments be at least 90 days late.)
- You must establish that you can’t afford your current payment. In other words, your expenses exceed your income.
- The workout options that the bank has available must make your payment affordable on a long-term basis. That means the modified payment cannot exceed 38% of your monthly income, and that lowered monthly payment must make your expenses and income balance.
- You cannot be in bankruptcy or a party to a lawsuit against the bank.
- The bank must be convinced that a workout is preferable (to investors, not you) to other options, such as a sale of the home.
- The bank must have a reasonable expectation that you won’t default again.
Workout options
For those who qualify, the modification options generally boil down to three, Wagner said. The bank could:
- Permanently reduce the interest rate on your loan to the going market rate — roughly 5.1%, on average, at midweek.
- Temporarily reduce the interest to below-market rate, as low as 3%, for three to five years.
- Stretch payments out over a longer period, such as 40 years, to reduce the current monthly cost of the loan.
Meet the Keenans
Many people think the consumers who get loan workouts were irresponsible and borrowed way more than they could afford, Wagner said. But, he contended, most are like the Keenans: generally reasonable people whose financial lives were upended by some catastrophe, such as a job loss, divorce or major illness.
The Keenans have had a series of upsets over the past year.
“There’s no simple explanation of what happened with us without turning this into a novel,” Bob said.
They were in the middle of building their dream home — a 3,200-square-foot house on the bank of a river — when Bob, 63, lost his job.
The Keenans were not worried. Mary, 69, earned a comfortable living selling advertising for a local newspaper. They could make their payments on one income if they needed to. Besides, Bob was confident that he’d quickly find a new job.
But he’d barely started looking when he started to experience shooting pains in his leg. It turned out to be a nerve disorder that took months of physical therapy to resolve. In the meantime, the economy continued to sour, making jobs in banking — Bob’s former profession — harder to find.
Last May, as Bob was recovering, Mary felt a lump in her breast. It turned out to be cancer. She was rushed through a double mastectomy and put on a heavy regimen of chemotherapy. After finishing chemotherapy, she faces several months of radiation treatments.
Though Mary still earns some residual commissions on long-term advertising contracts, she’s been able to work only sporadically for the past six months. Her income has been cut to roughly a quarter of what she earned before she got sick.
In less than a year, the Keenans went from earning a comfortable six-figure income to taking home roughly $4,600 a month in pensions, Social Security and unemployment checks. Their expenses, whittled down to the bare bones, are $6,750 a month, including the $2,800 they pay on the $470,000 mortgage on their home.
The devil in the details
It doesn’t take a genius to know that the Keenans can’t afford their mortgage. But they don’t qualify for an expedited loan workout either.
Why not?
Problem No. 1: Their payments aren’t late enough. Bob has been draining their retirement savings to keep their bills current, thinking this would ingratiate him to his lenders and keep his credit rating solid. Last month, when he couldn’t swing the full $2,800 mortgage payment, he sent $1,000, as much as he could afford.
He didn’t know that being current on his loan violates the first rule of loan workouts: The loan payments must be at least 60 days past due.
Why must payments be late? Because lenders are able to modify mortgages only if the loan is in default or if “default is reasonably foreseeable,” Wagner said. IndyMac says that if payments are more than 60 days past due, default is reasonably foreseeable.
Problem No. 2: Modifying the mortgage doesn’t make sense for investors. The Keenans have plenty of equity in their home, even given today’s bad market. They have a $470,000 first mortgage, but the house was appraised less than a year ago for more than $800,000.
IndyMac, which has to balance the interests of borrowers with those of the investors who bought their loans, has suggested that the Keenans list their home for sale. That’s the best option for the investors who bought the Keenans’ loan.
It’s a rotten option for Bob and Mary, though. That’s because they also took out an additional $110,000 in unsecured debts to finish the construction. If they sold the house for $650,000 or $700,000 they’d wipe out their debts but also wipe out their equity and have nowhere to live.
According to the comptroller of the currency, loan modifications only delay, rather than prevent, mortgages from going bad. Larry Kantor of Barclays Capital and Joseph Mason, a Louisiana State University professor, discuss the issue.
Problem No. 3: They can’t afford the new payment. Even if IndyMac could talk investors into taking a lower return on the Keenans’ mortgage, it might not cut their rate low enough to make a difference, given the couple’s circumstances. The Keenans’ mortgage is at 6.5%; IndyMac would reduce it to about 5.1% under the bank’s first workout option.
If IndyMac extended the loan term to 40 years, that would cut the Keenans’ payment by only about $200 a month, far shy of what they would need.
If the bank temporarily cut the rate to 3%, it would still leave the Keenans with a $1,900 monthly payment.
That, too, is unaffordable. Given their other bills, a $1,900 monthly mortgage would still leave them with expenses that exceeded their monthly income by more than $1,000. That would boost the chance that they would default again, causing them to fail the expedited mortgage modification test a third time.
“If they can reduce their expenses or Bob can bring in more income, things might change,” Wagner said. “But there’s no way we can get them to an affordable payment as things stand.”
Other options
What the bank did agree to do is buy the Keenans some time.
For the next three months, IndyMac will reduce the Keenans’ required mortgage payment to just $1,000 a month. The $1,800 difference between this temporary payment and their normal mortgage payment will be added to their loan balance.
It is far from the nirvana the Keenans had hoped for.
“We get a little breathing room, but it’s not a solution,” Bob said. “There’s no way Mary can work for a while, so it’s all on me. If I can get another job, we can get back on track. We’ll have to see what happens.
“What a bleak situation,” he added. “Everything was going so well for us, but in the blink of an eye, everything turned around. It was like a domino effect — and just bewildering. At some point you think, ‘How much more can happen to me?’”
Published Dec. 19, 2008
