Home Loan Modifications Draw Interest

Loan modification programs should help the Southland housing market, but for how long and how much?
By: RICHARD CLOUGH: Los Angeles Business Journal Online
Changes could bring stability.

As many as 30,000 Los Angeles County homeowners could renegotiate the terms of their mortgages in the coming months as several high-profile loan modification programs come on line.

That’s roughly twice the number of homes in the county that received default notices in the third quarter, so the loan workouts could help a significant number of at-risk borrowers and bring some stability to troubled neighborhoods. But some experts are skeptical that the programs will have more than a limited, short-term impact.

Despite billions of dollars being pumped into programs by Bank of America Corp. and the Federal Deposit Insurance Corp., the efforts face a wide range of challenges, including strapped borrowers and difficulty in implementation.

“It will help in cases to stabilize neighborhoods and prevent a rash of foreclosures,” said Stuart Gabriel, a professor of finance and director of the Richard S. Ziman Center for Real Estate at UCLA. “(But) we’re expecting continued downward adjustment in house prices and with that ongoing weakness in house prices, we will have mounting defaults and foreclosures.”


The Los Angeles housing market has been beset by increasing foreclosures and plummeting home prices. Just last week, data released by MDA DataQuick showed that there were 17,073 default notices in L.A. County in the third quarter, a 25 percent jump from the same period last year. At the same time, the median local home price fell below $400,000 in September for the first time in almost five years.

Bank of America, which acquired Calabasas-based subprime lender Countrywide Financial Corp. in July, is set to kick off an $8.7 billion loan modification program in December. And the FDIC, as receiver of IndyMac Bank in Pasadena, began in August attempting to renegotiate as many as 40,000 of the failed institution’s loans. The two programs combined will rewrite nearly half a million loans nationwide and similar efforts are gaining traction as well.

IndyMac Federal Bank, which is now run by the government while regulators seek a buyer, has already offered new terms on about 4,000 mortgages under its plan. Specializing in Alt-A loans for borrowers with less-than-perfect credit, IndyMac became one of the large early casualties of the mortgage mess and was among the first to attempt a bulk modification program.

Evan Wagner, director of corporate communications for IndyMac, said about 75 percent of the initial 7,500 offers were accepted by borrowers. Those offers were extended to customers who had stayed in close contact with the bank, but other troubled borrowers more difficult to contact may not be able to afford even a modified mortgage.

Wagner also warned that the program will not stop many foreclosures, since its primary purpose is to save the FDIC money and make IndyMac more attractive to potential buyers – not to fix everything that is wrong with the market.

“If it’s in our interest to foreclose on somebody, that’s what we’re going to do,” he said. “Foreclosures are still going to happen.”

Limited success

A recent report by Credit Suisse Group on loan modification programs in 2007 found that nearly a quarter of participants were at least 60 days delinquent on their mortgage payments within eight months. By 10 months, about a third had defaulted.
“It’s very possible that they could wind up in the same trouble six months or a year down the line,” said Dennis Santiago, chief executive of consulting firm Institutional Risk Analytics in Torrance. “These programs may or may not change the fundamentals for these people.”

Still, foreclosures have increased so rapidly around Los Angeles that the programs could relieve some of the pressure. That could create conditions that would allow for an earlier housing market recovery, said Delores Conway, director of the USC Casden Real Estate Economics Forecast.

“What you’re doing is taking a huge number of defaults and foreclosures out of the market,” she said. “I think it will buy time. All of this has happened so quickly.”

What is still unclear, however, is the extent to which these loan modification programs will specifically impact Los Angeles.

Wagner indicated that in the latest round of IndyMac’s loan modification offers about 8 percent of the eligible customers live in the county. That implies about 3,000 local homeowners could modify their loans under IndyMac’s whole program.

Bank of America’s plan is expected to provide about $3.5 billion in relief to California homeowners through reduced payments and waived fees. The intention of the program is to bring each borrower’s first-year mortgage payments, including principal, interest, property tax and property insurance, to 34 percent of the household’s total gross income.

“This program goes beyond anything that we know of out there today,” said Rick Simon, a spokesman for Bank of America.

About 104,000 California homeowners could qualify, though the company said it does not break out its data by county. And if it is proportionally similar to IndyMac’s plan, about 30,000 L.A. County homeowners would qualify for a modified loan.

Los Angeles is home to nearly 30 percent of the state’s subprime loans, and as of September, the area had more than 74,000 mortgage loans more than 90 days past due.

“Clearly these types of renegotiations will have an impact in those areas where the real estate bubbles were largest and Southern California certainly was one of those areas where the rise in real estate prices had ballooned,” Santiago said.

Efforts to aid struggling homeowners also seem to be gaining traction nationwide.

The notion has become a major element of both presidential campaigns. And last week FDIC Chairwoman Sheila Bair called upon the government to do more to help homeowners. Late last week, the White House was mulling plans to spend $40 billion to give banks incentives to renegotiate loans.