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Special section Subprime mortgage industry meltdown

As the federal government reviews ways to avoid future problems in subprime lending, one thing is clear: There's plenty of blame to go around for today's woes.

Federal debate

Congress sees few easy fixes for foreclosures

Congressional Democrats want to hold back a rising tide of foreclosures, but they're being told that there's not much they can do.

It wouldn't hurt to ask the right people. On April 17, the House Financial Services Committee held a hearing called, "Possible responses to rising mortgage foreclosures." Of a dozen witnesses, none were mortgage servicers -- the people whose companies collect mortgage payments, deal with delinquent debtors and initiate foreclosures. The committee didn't call any lenders, either.

Instead, the committee called a regulator, the federal housing commissioner, the heads of Fannie Mae and Freddie Mac, several nonprofits, and two banking and securities lobbyists. This broad array of people agreed on one thing: This ain't your grandfather's mortgage industry. The business is so extraordinarily complex now, so decentralized, that it's hard to reduce foreclosures, no matter how fervently you wish to do so.

foreclosures on the rise
According to the Mortgage Bankers Association, 119 out of every 10,000 home loans were at some step in the foreclosure process at the end of last year. That's an increase over previous quarters, but not a record. On the other hand, 54 out of every 10,000 home loans entered the foreclosure process during the last three months of 2006. That is a record -- the previous record, at the end of a recession in 2002, had been 50 new foreclosures for every 10,000 loans.

The high number of new foreclosures hints that the foreclosure problem will get worse, and members of Congress are looking for fixes.

"There are no easy market solutions," David Berenbaum, executive vice president of the National Community Reinvestment Coalition, told the committee. He suggested a government solution instead: a mandated temporary halt in foreclosures. Too many law firms and mortgage servicers rush consumers into foreclosure without assessing their ability refinance or catch up on their payments, he said.

Moratorium would raise questions
There were no servicers at the witness table to critique the notion of a national foreclosure freeze. A mortgage servicer might have asked who would pay the accumulated interest payments during a moratorium. For example, if a six-month halt to all foreclosures merely delayed a consumer's foreclosure for six months instead of preventing it, that homeowner would rack up seven months of unpaid interest charges instead of one month. Who would be responsible for paying the extra amount: the servicer, the investors who own the loan, the borrower? If it's the latter, is that fair? Or would the taxpayers pick up the tab?

Proponents of a foreclosure moratorium say it would give borrowers time to refinance if possible, and would give servicers time to modify loans. Mortgages can be modified in different ways: The interest rate can be reduced, payments can be suspended until the borrower finds a job, or missed payments can be caught up over time or tacked onto the end of the loan.

Sheila Bair, chairman of the Federal Deposit Insurance Corp., explained that in days of yore, "lenders often worked with troubled borrowers to restructure their loans or find other ways to avoid foreclosure. Today, the growth of securitization in the subprime mortgage market has complicated the ability of interested parties to apply flexibility and creativity to assist borrowers facing difficulty."

-- Posted: April 19, 2007
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Basics: Mortgage modification as last resort
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