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Harold and Monica McKenzie were thrilled when they heard about a legal settlement requiring their mortgage lender, Countrywide Financial, to make its loans more affordable for hundreds of thousands of customers.
They thought the settlement might help them keep their Kannapolis house, where they live with their two daughters and pet Chihuahua. The couple had stopped making their $1,300 monthly mortgage payment in the spring, six months after Monica lost her machine operator job.
But the McKenzies don't qualify for the loan workouts announced in October by Countrywide's owner, Charlotte's Bank of America. That's because they have a mortgage with a fixed interest rate of 6.25 percent, insured by the Federal Housing Administration. The settlement is only for certain nontraditional loans: subprime and option adjustable-rate mortgages.
Loan workouts, or mortgage modifications, are generating buzz among lawmakers and in the financial industry, where proponents say they will help people avoid foreclosure and aid an economic recovery. The latest effort was a Senate bill last week that would let bankruptcy judges modify certain mortgages.
But the experience of the McKenzies shows that the modifications reach only a fraction of the borrowers who might need them. About 133,000 loans were modified in the third quarter, according to a government report in December that examined more than 60 percent of all U.S. mortgages outstanding. That was an 83 percent increase from the first quarter but represented only about 6 percent of delinquent loans.
Modifications are steps a lender takes to help struggling borrowers make their payments, such as extending the life of a loan or slashing the interest rate. They can be hard to implement, since most mortgages are entangled in a web of securities, investments and second liens, which can have competing interests. And homeowners who are current on their loans can resent the loan workouts, saying they unfairly bail out the financially irresponsible.
The McKenzies bought their house, at the end of a quiet cul-de-sac, for $146,000 at a foreclosure sale in 2004. They painted the kitchen green, filled the living room with puzzles and family photos, and hung outside a flag with the letter “M,” for “McKenzie.”
“It's not anybody's fault that we're behind but mine,” said Harold McKenzie, 56 and a supervisor for a transportation company. “But I'd like to get somebody to try to work with me.”
Countrywide says its hands are tied, and that it is simply following the government procedures for modifying FHA-insured loans.
Few takers for modifications
Banks have always been able to modify mortgages, but the practice is becoming more common as more homeowners fall into financial trouble. In addition to Bank of America, JPMorgan Chase, Citigroup and the FHA have also rolled out formal programs for modifying mortgages.
But some consumer advocates think the banks aren't modifying enough loans. They also criticize the limitations of the loan workouts, including that they come too late for the masses who've already lost their homes.
Lenders might be more willing to modify loans with the threat of so-called cram-down legislation on the horizon. On Thursday, Citigroup shocked the banking industry when it said it would support such legislation, which would let judges – not just banks – modify certain mortgage loans. Banks have long opposed the idea, saying it will make it difficult for them to accurately value their assets and lead to higher interest rates for future borrowers.
Last Tuesday, N.C. Attorney General Roy Cooper and his counterparts in 21 other states sent letters to Congress in support of such legislation. “Voluntary loan modification measures have failed,” the letter said, citing the small number who have signed up for the government's Hope for Homeowners modification program.
In its first three months, the federal program received 373 applications. It's meant to help 400,000.
Lawrence Summers, a top economic adviser to President-elect Obama, informed congressional leaders Monday the incoming administration will “implement smart, aggressive policies to reduce the number of preventable foreclosures.” He didn't give many specifics.
Guy Cecala, publisher of Inside Mortgage Finance, said he expects the government to introduce some kind of plan to help the newly unemployed make their mortgage payments.
“Why would you just come up with a way to help people who made bad financial decisions in the past?” he said. For example, the government could allow homeowners to take out government loans to pay their mortgages, and not require them to pay back the loans immediately.
“Unemployment as a major nationwide problem is only a recent phenomenon that the mortgage industry hasn't really had to come to grips with yet,” Cecala said. “They're still battling bad loans.”
Other critics of mortgage modifications say they are delaying the housing market's correction and keeping the economy from recovering. Fifty-five percent of homeowners who got their mortgages modified in the first quarter of 2008 had re-defaulted six months later, according to the December federal government report.
Michael Widner, an analyst at Stifel Nicolaus, says the modification programs don't address “the basic housing oversupply problem.” Instead, they “keep borrowers in homes they fundamentally can't afford rather than having them relocate into currently vacant homes they can.”
Most of the recent loan workout programs aim for borrowers to spend a maximum of anywhere from 31 percent to 40 percent of their before-tax income on mortgage and related costs. That might be an improvement for some families, but can still break budgets. Some lenders modify mortgages only for people who are already behind on payments, which can encourage borrowers to default. Others help only people who are current on payments, which leaves out those closest to foreclosure.
Still seeking a solution
The McKenzies attribute their mortgage problems to Monica losing her $24,000-a-year job at a company that makes light sockets, not to a pricey house or exotic loan. The average rate for a 30-year fixed mortgage is around 5.1 percent, but the McKenzies can't refinance into a lower rate because their mortgage defaults have damaged their credit score. Harold also has a bankruptcy from 1997, and both have had unpaid bills on their records. “Let he who is without sin throw the first stone,” Harold McKenzie said.
He said he makes about $24,000 a year in his transportation job, and also pulls in a $30,000 annual pension from the Navy, where he served 24 years.
The McKenzies say they started asking Countrywide about a loan modification early last spring, before they missed any payments. “It's like you're talking to a recorder. They're sitting there reading some words that say, ‘We can't do this because of this,'” he said. “You never talk to the same person twice.”
When the McKenzies first defaulted in May, Countrywide raised their monthly bill by a couple of hundred dollars to make up for the missed payments. They'd like Countrywide to reduce their interest rate while Monica is unemployed, or maybe tack the missed payments on to the end of the loan. Even that, they admit, would be difficult to pay, but at least it would be within reach. Monica has worked some temp jobs at warehouses but hasn't found anything permanent.
Countrywide spokeswoman Jumana Bauwens noted the company has to follow “specific processes” when modifying loans insured by the FHA, which provides insurance to lenders in case of default.
She added: “Countrywide has been working with the McKenzies to try to find a solution that meets their short- and long-term needs.”
The McKenzies could try to sell the house and rent somewhere cheaper, but they want to build equity. They say they held off on repairs for Monica's car and on getting their heat fixed. A couple of months ago, they asked their older daughter, who just turned 20, to pay the light bill.
“That killed me,” said Harold McKenzie. “I always told them they wouldn't have to pay anything as long as they were living with me.”
Last week, Ebony got laid off from her job answering phones at a car dealership.
The McKenzies say the missed mortgage payments have strained their marriage and health. They've tried to hide the problems from their 10-year-old, but she still asks if they'll have to move.
“I say, ‘No, baby, we're not,'” Monica McKenzie said. “All her friends are down the street.”
