Group seeks solutions on rise in delinquent loans

A group of powerful state officials from across the nation working on the mortgage foreclosure crisis is recommending that loan services suspend foreclosure proceedings on any loan involved in loss mitigation efforts.

The State Foreclosure Prevention Working Group issued its fourth report Wednesday. It said the share of loans seriously delinquent across the nation rose by 34 percent in the last year, to

442,000 newly delinquent loans. By October 2009, over 1.7 million loans were classified seriously delinquent, to 12 percent of the total. That represented an increase from 9 percent in October 2008 and 6 percent in October 2007.

“This is much more difficult than any of us ever thought it would be when we got involved,” Iowa Attorney General Tom Miller said.

One of the unexpected challenges was the “culture” of loan servicers, which Miller said is a culture oriented toward collecting money from borrowers and not modifying loans. Another problem Miller did not anticipate was the reluctance of mortgage borrowers to step forward and seek loan modifications due to distrust in the mortgage system.

The working group's No. 1 recommendation was that the U.S. Treasury Department amend its Home Affordable Modification Program to ensure that the foreclosure process, and not just the final sale, stops for any loan eligible for consideration. They said stopping the foreclosure is particularly critical in states with non-judicial foreclosure processes that move quickly.

“You may be having loan modification conversations with one group of people at a mortgage servicing company while another group of people at the same company are proceeding with a foreclosure against you,” said Mark Pearce, North Carolina chief deputy commissioner of banks, in a conference call with reporters. “This can confuse and distress homeowners.”

The group also recommends that such loan modification programs be improved to make reducing the principal amount of loans a priority in areas that have experienced significant home price declines.

In about 70 percent of the loan modifications, the principal the homeowner owes is increased by rolling in late payments, penalties and other fees, working group officials said.

The mortgage foreclosure crisis has now become significant for prime mortgage borrowers, extending beyond the “exploding” adjustable rate mortgages that began the crisis, the group's report said. It recommended servicers pay particular attention to reforming one class of adjustable rate mortgages called payment-option ARMs.

“Over the next two years, two-thirds of the $200 billion worth of

payment option ARM mortgages will face payment shock,” the group's report said, as they automatically switch from artificially low minimum payments to fully amortizing payments that are 60 percent to 70 percent higher.