EMC Mortgage Corp., which has a $78 billion loan portfolio that includes subprime loans made to homeowners with weak credit, this week launched a 50-person team it calls "the Mod Squad." Members will spend an unlimited time on the phone with troubled borrowers, sifting through their bills to compute a workable monthly payment. In an industry that often rewards workers for getting off the phone quickly, the team is preparing to speak to just three people a day.
"You can't just run this like a call center; it needs to be run like a counseling center," said John Vella, president and CEO of EMC. Right now, $2.14 billion in mortgages, 2.74 percent of EMC's portfolio, is in default, up from 1.93 percent a year ago.
Lenders have long modified loans for homeowners facing job loss, illness, divorce or a death in the family. But with many borrowers across the country struggling to keep up with mortgage payments, mortgage companies increasingly are prodding anyone who's having trouble making payments for any reason to give them a call.
Critics say lenders made loans to borrowers who weren't creditworthy with terms that would be impossible for them to meet. Whether the current wave of workouts will merely postpone foreclosures - and delay bad loans hitting lenders' books - is an open question.
Regulators will be watching to see how many are successful, said Susan Wachter, a professor of real estate and finance at the University of Pennsylvania's Wharton School of Business.
The scant public information on modifications makes evaluation tricky, said Thomas Lawler. The former chief economist at Fannie Mae now runs his own consulting business, Lawler Economic & Housing Consulting.
Loose lending standards followed by lax modifications can merely delay a problem, Lawler said. He pointed to the raft of modifications done in the manufactured housing business in the mid 1990's, when easy credit led to a wave of defaults.
"If people had known what the servicers were doing, red flags would have been raised; but by the time people knew what was going on, it was too late," he said.
Advocates say that half the people in foreclosure never talk to their banker before losing their house, and many could rework their loans.
"It's tragic," said Colleen Hernandez, president of the nonprofit Home Ownership Preservation Foundation. "We have the capacity to help a lot more people."
New foreclosures hit their highest ever level in the fourth quarter of 2006, according to the Mortgage Bankers Association. Home owners are the obvious losers, but all the financial services companies involved lose. The lender loses the steady stream of payments it counted on. If it sold the loan as part of a securitization, a package of mortgage-backed securities, that investor loses. Loan servicers, who are usually paid a fraction of the interest on a loan, lose too.