A top Treasury Department official told a Senate panel yesterday that the government is considering a proposal to allow homeowners to stay in their home as renters after a foreclosure. If enacted, the plan would attempt to address the glut of vacant properties in neighborhoods across the country, helping drag down home values. It would be yet another acknowledgment by the Obama administration that some borrowers cannot be saved from foreclosure despite government and industry efforts.

“It’s certainly an idea we’re thinking about,” Herbert M. Allison, assistant secretary for financial stability, told the Senate Banking Committee. A Treasury spokeswoman said that the proposal was being studied but that no decision had been made.

“This could make sense as a last resort for troubled homeowners who would otherwise lose their homes and find themselves with nowhere to live,” said Sen. Charles E. Schumer (D-N.Y.).
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Freddie Mac, the mortgage financing company, launched a similar program in March, allowing homeowners the choice to stay in their homes after foreclosures as renters. But the program has not attracted many participants, said Brad German, the company’s spokesman. Most former owners instead choose to accept money to voluntarily vacate under a program known as cash-for-keys, he said.


The new proposal comes as increasing numbers of borrowers are facing foreclosure as they lose their jobs and fall behind on payments. RealtyTrac reported that foreclosure filings, which can range from default notices to bank repossessions, were up 15 percent during the first half of the year compared with the corresponding period in 2008.

The administration is considering initiatives to help unemployed workers get help with their mortgages, said William Apgar, senior adviser for mortgage finance at the Department of Housing and Urban Development. “The current very high level of unemployment is making the already difficult task of helping families struggling to meet their mortgage payments even harder,” he said.

Under the federal program known as Making Home Affordable, lenders are paid to lower borrowers’ mortgage payments. About 160,000 loans have been modified into lower-cost loans so far. The administration has said the federal effort has already been more successful than previous programs. But officials are also prodding lenders to hire more staff and better train employees.

It is “disgraceful” that borrowers are still struggling to get help more than two years into the housing crisis, said Sen. Christopher J. Dodd (D-Conn.), chairman of the Senate Committee on Banking, Housing and Urban Affairs. “Why am I still reading about lost files, understaffed and undertrained servicers, and hours spent on hold?”

A key indicator of mortgage trouble hit an all-time high for the Bay Area in the second quarter, according to a real estate report released Wednesday.
Notices of default, sent to people who are delinquent on their home loans, totaled nearly 20,000 for the nine-county region in April, May and June, said MDA DataQuick, a San Diego real estate data company.

“This is one of the clearest signs of distress in a market and it’s at a record level,” said Andrew LePage, a DataQuick analyst.

A ZIP code analysis of Bay Area default notices showed that many of the biggest increases were in higher-cost areas. Foreclosure-ridden towns such as Antioch still had high concentrations of defaults but they decreased slightly from last year. Meanwhile, such affluent Contra Costa County towns as Walnut Creek, Lafayette and Danville saw significant rises in default notices, though the numbers still were relatively low.

“Distress is creeping into and intensifying in the more expensive neighborhoods,” LePage said.

The Bay Area’s 19,983 notices of default reflected a 7.3 percent increase from the same quarter last year. Such notices are the first formal step in the foreclosure process. DataQuick said about 62 percent of default notices result in bank repossessions of homes.

Notices of default also rose in California compared with a year ago. There were 124,562 in the second quarter, up 2.4 percent from last year. But the number of notices in California fell 8 percent compared with the first quarter of the year, when the state had a record 135,431 such notices.

Actual bank foreclosures declined locally and statewide, probably because lenders have been gearing up to handle a deluge of requests for loan modifications, DataQuick said.
Down from a year ago


The 6,929 Bay Area foreclosures reflected a 25.4 percent drop from the second quarter last year. Likewise, the state’s 45,667 foreclosures were a 27.9 percent drop from the year-ago period.

Foreclosures have slowed this year as lenders regrouped after various moratoriums and began implementing the Obama administration’s plan for loan modifications to help keep borrowers in their homes. Lawmakers have criticized their slowness. About 325,000 borrowers nationwide have received loan-modification offers since the plan started in March, but that’s just a fraction of the homeowners who are in foreclosure.

Many borrowers report intense frustration with the loan-modification process.

San Francisco resident Joe Dam and his brother and sister owe $770,000 on their Sunset District home. In early 2008, their adjustable-rate mortgage payment rose from $4,000 to $5,300. The family put the home on the market and received no offers.

After eight months of requests, the loan servicer modified the loan, but that lowered the monthly payment by only $200. Then Dam’s brother was laid off and his sister was transferred out of state, so Dam requested a further loan modification.

“I must have called at least 60 or 70 times,” he said. “Every time, they told me something different and asked for more papers, then they would say we don’t qualify.”

At the servicer’s direction, they are working on a short sale for about two-thirds of what they owe. If the lender doesn’t approve the sale, they will do a deed in lieu of foreclosure.
Following guidelines

Wells Fargo, which owns Dam’s loan servicer, American Service Co., said in an e-mail, “We must follow the guidelines established by the loan’s investors. Our goal is to help every struggling homeowner. … Regrettably, we are not able to help everyone.”

Dam said documents list HSBC Bank as the lender, but it said in an e-mail that it “has only a nominal role” as a trustee for a loan securitization trust.

“We always hope for the modification,” Dam said. The lender was “not willing to look for a realistic solution, but rather (willing to) take a $250,000 loss on a short sale.”

Mortgage lenders don’t try to rework most home loans held by borrowers facing foreclosure because it would probably mean losing money, a study released yesterday by the Federal Reserve Bank of Boston concludes.The Boston Fed’s findings suggest the Obama administration’s major effort to solve the foreclosure crisis by giving the lending industry $75 billion to rewrite delinquent loans to more affordable levels is not likely to work.

One of the study’s coauthors, Boston Fed senior economist Paul S. Willen, said the government would be better off giving the money directly to struggling borrowers to help them with their payments, rather than to lenders that are averse to working out the troubled loans.

“Loan modification is not profitable for lenders,’’ Willen said. “If it were profitable, they would go out and hire staff.’’

US Representative Barney Frank, head of the House Financial Services Committee, said the study results may provide answers about why so few struggling homeowners have been able to get help.

Frank, a Newton Democrat, said he is holding a hearing Thursday on his proposal to provide government loans to homeowners who have lost their jobs and can’t qualify for loan modifications and other help because they don’t have income.

“The problem is worse than we thought,’’ Frank said. “The failure to do these modifications means the whole situation stays bad longer.’’

The Fed’s study found that only 3 percent of seriously delinquent borrowers – those more than 60 days behind – had their loans modified to lower monthly payments; about 5.5 percent received loan modifications that did not result in lower payments.

The study focused on 665,410 loans that were originated between 2005 and 2007 and subsequently became seriously delinquent. It also followed about 150,000 borrowers for six months after they received help, through the end of 2008.

The lenders may have compelling reasons not to find new borrowers to help, according to the study. For example, up to 45 percent of borrowers who did receive some kind of help on their loans ended up in arrears again, the study found. Conversely, about 30 percent of delinquent borrowers are able to fix their problems without help from their lenders.

“A lot of people you give assistance to would default either way or won’t default either way,’’ Willen said. “They are trying to maximize profits, and at this point maximizing profits does not mean modifying loans.’’

Officials from Hope Now, the private-sector alliance of mortgage servicers and investors, were unavailable for comment yesterday.


US Treasury officials declined to comment on the Fed study, but noted in a statement that more than 240,000 homeowners have received loan modifications this year under the president’s program. Moreover, federal regulators said the pace of loan modifications has been increasing steadily since Given the findings, Dean Baker, codirector of the Center for Economic and Policy Research in Washington, D.C., said Willen’s suggestion to give money to borrowers rather than lenders makes sense.

The number of foreclosure proceedings increased to 844,389 during the first quarter of 2009, up 73 percent from the first quarter of 2008, according to the Office of the Comptroller of the Currency.

“You have more money going to the banks and the servicers than you do to the homeowners,’’ he said. “It would make more sense to just give money to the borrowers.’’

The $75 billion Obama administration plan, announced in February, provides incentives to motivate companies that service mortgages to make loans more affordable, including $1,000 bonuses for each modified loan and an additional “pay for success’’ fee of $1,000 a year for three years if borrowers stay current on their new terms.

Willen said the success bonus could have the unintended effect of steering loan servicers away from those who need help the most, and toward only those borrowers most likely to recover on their own anyway. He said that if modifications increase, it won’t be by much. “My guess is they are going to help people who are OK, and they are not going to help people who are deep trouble,’’ he said.

Alan White, a professor at Valparaiso University School of Law in Indiana, said lenders could cut down on the number of borrowers who end up defaulting again by giving them more help in the first place. He said too many modified loans don’t result in low enough payments. Also, he said, there may be fewer borrowers who can get out of trouble on their own because of continuing difficulties in the economy.

“The servicers are making assumptions that are much too anti-modification,’’ White said. “The servicers have the authority’’ to help borrowers, “they just don’t want to use it.’’

The study, coauthored by Manuel Adelino and Kristopher Gerardi, also rebuts a widely held suspicion that the holdup in modifying loans is because of investors who control them through mortgage-backed securities. The Fed found no difference in the rate of aid between investor-controlled loans and those that lenders own directly.