Interest rate relief not a debt cure-all

McClatchy-Tribune Information Services Comments 0
Published: November 14, 2009

HACKENSACK, N.J. — Eager to get their three children into a well-regarded school system, Yomalis Hilario and Johnny Montero paid $468,000 for a house in Paramus, N.J., in 2006. But they soon found themselves struggling to make the $3,700 monthly payment on their two high-interest mortgages.

"I told them I needed a better interest rate,” Hilario recalled. The loan servicer cut the rate on the main mortgage from 8.25 to 7.125 percent, and on the second mortgage from 12 percent to 7 percent.

But because of job setbacks the couple still couldn’t keep up with payments and the home was sold in a sheriff’s auction in September.

As Hilario’s experience shows, mortgage modification is not a panacea for distressed homeowners and a troubled housing market. While the Obama administration is touting the progress lenders have made on modifying mortgages, critics say the process remains complicated and drawn out. And in some cases, loan modification doesn’t work, because the homeowners simply have too much debt and too little income to afford their homes.

It’s clear that more and more households are being affected. A record number of homeowners — about one in eight — were either in foreclosure or late on their mortgage payments in the second quarter, according to the Mortgage Bankers Association.

The loan modification programs announced by the Obama administration this year were mostly designed to help people who got into trouble because of loose lending standards in the first half of this decade.

During the housing boom, homeowners borrowed against the rising values of their homes, using the money for other expenses. At the same time, home buyers used no-down-payment, adjustable and other exotic loans to buy houses they couldn’t otherwise afford. Then, many found they couldn’t keep up with their monthly payments, especially in cases where their interest rates adjusted up from low initial rates.

And homeowners couldn’t just sell to get out from under their mortgages, because home values had dropped, and in many cases, the mortgages were for more than the property is now worth.

Many of these homeowners got in over their heads with loans they couldn’t really afford. But lenders deserve much of the blame for the mess, said Ronald LeVine, a Hackensack bankruptcy lawyer who represents Hilario and Montero. They "knew these loans were destined to fail,” he said.

Now there’s a new, growing category of distressed homeowners: those who can’t pay because they’ve lost their jobs. In fact, economists now consider unemployment a bigger cause of mortgage delinquency than subprime mortgages. Even if their mortgage terms are changed, these homeowners can’t make the monthly payments without a paycheck, the Mortgage Bankers Association said this month.

With national unemployment at 10.2 percent — and still rising — more homeowners are likely to find themselves in this situation.

LeVine argued that many homeowners who are trying to modify their loans would be better off checking to see if their mortgages violate the Truth in Lending Act, which could invalidate the loans. There’s a three-year statute of limitations on such claims, he said, and distressed homeowners who spend that time trying to have their loans modified instead could lose out on the ability to challenge them.