Loan crisis hits home
Local woman finds obstacles abound in trying to work out new deal with lender • Nearly 15,000 borrowers across the state could see terms reset in the next 18 months
Susan Shell dreamed of buying into a nicer Portland neighborhood where she could enroll her son at Grant High.
But the single mom wound up stuck with a subprime mortgage loan she can't afford and can't refinance, on a home she cannot sell.
As recession grips other communities around the country, the health of Portland's economy rests partly on what happens to Shell and thousands like her, who hold shaky home loans poised to unravel in the coming months.
President Bush and mortgage industry professionals advise people like Shell to contact their lenders and negotiate 'workouts,' where both parties agree to restructure loans and payment plans.
Then people could remain in their homes. Lenders and investors could keep getting paid. And home foreclosures, which have propelled the nation's economy into a tailspin, could subside.
But in Shell's experience, that plan isn't working.
'It's all smoke-blowing,' said Shell, 45, who complains she's gotten the runaround for six months trying to arrange a workout with Countrywide Home Loans.
'It's like you're in this big pinball game,' Shell said of her travails. 'All the while you're losing your equity, and the market's getting worse.'
Shell works part time as a waitress at Jake's Famous Crawfish and as a massage therapist. Trying to arrange a workout with Countrywide has been like doing a third job, she said.
Countrywide, the nation's largest home lender, nearly went belly up because of risky mortgage loans. Bank of America rescued it with a $2 billion cash infusion last August, then struck a still-pending deal in January to buy the company.
When Shell phones Countrywide, she gets put on hold for up to half an hour, she said. They bounce her from one staff member to another, and from one department to another. They promise to call back and rarely do.
They won't divulge the investor that bought her loan, though the investor sets the policies for workouts. And they keep shifting the rules, terminology and policies for doing loan workouts.
'It's a waste of time, as far as I can see,' said Shell's lawyer, Carl Neil, a partner at Portland's Lindsay, Hart, Neil and Weigler law firm.
Neil helped Shell win a $30,000 settlement from her mortgage broker for misleading her about the original loan, because monthly payments turned out to be $700 more than she was promised.
But getting Countrywide to rework the loan - acquired from the original lender soon after the sale - is another matter.
Portland in better shape
Portland has escaped much of the subprime mortgage fallout that's crippling real estate markets in California, Florida, Michigan and elsewhere. That's partly because real estate prices here have flattened rather than fallen dramatically.
'We didn't get as drunk and we're not as hungover,' Portland economist Joe Cortright said.
But the housing market is starting to turn here, and there are thousands of Portlanders holding risky loans.
There's plenty of blame to go around for the home mortgage meltdown, Cortright said.
Some consumers should have known better, and took risky loans to get into homes during the housing bubble, he said. But, he also said: 'Clearly there were people who were predatory lenders, essentially mortgage brokers who pushed products on people that were not in their best financial interests.'
Loan not what promised
Back in September 2005, Shell sold her St. Johns house in a day, and snapped up one of the cheaper homes near Grant for $272,000. She put $27,000 down for the one-story bungalow on Northeast Prescott Street near bustling 33rd Avenue.
Shell, whose annual income hovers between $30,000 and $40,000, arranged an interest-only loan that would be fixed at $1,180 a month for three years, and then needed to be refinanced. Or so her loan officer told her.
'He had switched the loan, basically,' she said.
It turned out that Shell was put into a 'payment-option' or 'negative-amortization' loan. That gave her three options each month: pay the amount it takes to buy down the loan in 15 or 30 years; pay interest only, at a variable interest rate; or pay a smaller amount - akin to a minimum payment on a credit card - and tack money onto her loan principal.
Shell didn't realize something was amiss until, after a four-day delay, she was finally summoned to the title office at 4:45 p.m. Friday to sign a mound of closing documents.
Her bed and other belongings were packed in a U-Haul truck awaiting the move. Her loan officer didn't show up for loan-closing, but promised to fix the problem Monday, Shell said. He never did.
The real shocker came a few months after the purchase, when Countrywide finally began sending payment coupons. She learned she had been making the minimum payment, and the interest-only payment was far larger than promised.
'It would have been $1,900 a month if I was going to pay interest only, and it was supposed to be $1,180,' she said. 'My payment in St. Johns was $694.'
If Shell tried to refinance the loan during the first three years, she faced a 'prepayment penalty' of more than $11,000.
Unable to make the full interest-only payment, Shell is adding $600 a month to the original loan. As a result, the loan has grown by $17,000, and the resulting interest-only payment now is $2,116.
Effort promotes workouts
In October, the Bush administration announced the formation of Hope Now, a voluntary effort by lenders who agree to workouts with homeowners to prevent foreclosures. Later that month, Countrywide Financial Corp., based in upscale Calabasas, Calif., announced its own $16 billion 'comprehensive home preservation program.'
Countrywide's Web site boasts that it arranged 13,006 loan workouts in January, helping keep 12,000 people in their homes. Most of their loans were modified.
Countrywide's media relations department declined to grant an interview. Instead, corporate spokesman Rick Simon sent a prepared statement via e-mail.
'Countrywide's home retention (program) has been working with Ms. Shell and continues to try to find a solution that meets her needs and the investor's criteria,' Simon wrote. 'Privacy restraints prevent us from commenting further on her particular case and any particular difficulties in addressing her concerns.'
Countrywide has completed more than 40,000 'home-retention solutions' the first three months of the year, he added, though a variety of factors can make workouts very complicated and time-consuming.
Neil said if Countrywide's treatment of his client is any indication, the mortgage crisis could get worse rather than subside.
'I think it means that a lot of foreclosures are going to continue,' he said, 'and a lot more are going to start.'
Process can be frustrating
A foreclosure workaround specialist who is working with Shell said her treatment is not atypical.
'Lots of clients get the runaround,' Kevin Sheehan said. 'Welcome to my world.'
Sheehan is Portland director of ACORN Housing, a nonprofit that is federally certified to assist people with foreclosure counseling and loan workouts. ACORN stands for Association of Community Organizations for Reform Now.
While negotiating on behalf of clients, Sheehan said, it's common for lenders to lose documents, take three weeks to acknowledge they received paperwork, or fail to return calls. He just got word from one lender that a proposed workout was rejected. 'I submitted it at the end of January,' he said.
Oregon mortgage industry lobbyists, who fended off lending reform bills during the 2007 legislative session and the February 2008 special session, often noted that half the borrowers going into foreclosure never contact their lenders to try and arrange workouts.
A state law passed in February will require lenders to notify borrowers about their options before initiating foreclosures. Official notices will urge customers to contact their lender or foreclosure counselors such as ACORN Housing.
Lenders are growing more receptive to workouts, Sheehan said. A typical foreclosure can cost the lender $45,000, so arranging alternate payment plans or reworking loans can save them time and money.
Sheehan estimated as many as 70 percent of the cases brought to his office get workouts, eventually. The lender may let the borrower pay the amount 'past due' in extra monthly payments or tack it onto the original mortgage.
The lender may lower the interest rate, orreset an adjustable-rate-mortgage back to its original interest rate. Sometimes, an adjustable rate is converted to a fixed rate. Sometimes the lender agrees to a 'short sale,' in which the home is sold for less than the loan value, and the lender accepts the proceeds of the sale as payback for the loan.
But lenders and loan servicers like Countrywide are overwhelmed, and their staffing levels aren't keeping pace with mushrooming demand for workouts, Sheehan said.In the past five months, requests for workouts by borrowers in his office have tripled, to about 15 per month, he said.
Lenders make it hard
'It's really easy to say that people are not calling their lender, but the lenders are not being responsive.' Sheehan said. 'They're making it hard to do workouts.'
Local mortgage experts said homeowners who got into bad loans need to take more responsibility for their actions, and not expect workouts to be a picnic.
'The workout division of Countrywide is in the business of getting paid their money,' said Todd Williams, principal at Evergreen Ohana Group, a Portland mortgage broker and banker. 'Part of their job is to be a little difficult.'
Lenders and loan servicing companies like Countrywide are in a tough bind, said Eric Wiley, chief operating officer of Pacific Residential Mortgage, which has offices in Portland and other local communities.
They are obligated to the investors who bought the loans they service, and taking heat from federal banking regulators to straighten out their finances, Wiley said.
'The Fed is really leaning on these banks to shore up their balance sheets, all the while they're supposed to work out their loans. Those are conflicting goals,' Wiley said.'They are stalling and don't want to have to write down a lot of their loans.'
Many Portlanders at risk
Subprime loans accounted for 10 percent of Portland-area mortgages at the beginning of the year, according to First American CoreLogic, which provides data on mortgages and other services.
Typically, such loans start with a teaser interest rate that spikes higher after two or three years. Adjustable-rate subprime mortgages are the major culprit behind record foreclosures nationally.
Statewide, it's estimated that somewhat less than 1,000 subprime loans per month will reset to higher interest rates over the next 18 months, Wiley said. But fears that most of those loans will end in foreclosure are overblown, Williams said.
The Federal Reserve's multiple interest-rate cuts could drive down interest rates by around 3 percentage points, he said, which - while not directly related - could mean subprime reset rates will be less than anticipated as well.
'That's one of the huge things that nobody's talking about,' Williams said.
In 2007, the Portland area had 5,162 foreclosures, the 73rd-highest foreclosure rate among the 100 largest metro areas, according to RealtyTrac. But the rate is climbing fast.
On Feb. 1, there were 2,464 Portland-area properties in foreclosure, double the number a year earlier, according to First American CoreLogic.
The Portland market also has a separate vulnerability, connected with its housing affordability problem. In one out of every six home loans issued in 2007 in the area, borrowers took out interest-only or negative-amortization loans.
Mortgage experts caution that negative-amortization loans often are misused, and wind up causing troubles akin to consumers with huge credit card debts.
The Portland market had the 42nd-highest use of such loans in 2007 among the nation's 333 metro areas, according to First American CoreLogic. That put Portland in league with many California and Florida cities.
The Portland area had the 33rd-highest incidence of interest-only loans among 333 metro areas in 2007. If home prices drop, those loans can leave people owing more than their properties are worth.
Shell, stuck in a negative-amortization loan that grows larger each month, figures she has about a year left on her current payment schedule.
After that, unless she arranges a loan workout, she fears it may be hard to hold onto her home and stay out of foreclosure.
'It's difficult to sell it because of the market,' Shell said. 'It's difficult to refinance it because the guidelines are a lot stricter. And somebody like me, I couldn't buy another house if I lost this house.'
Area residents who'd like foreclosure counseling or help with workouts can call ACORN Housing in Portland, 503-788-9989.
For resources on how to avoid foreclosure, visit the Web site of the state Department of Consumer and Business Services at www.cbs.state.or.us/dfcs/ml/foreclosure.html#save_house
Shaky loans and foreclosures in the metro area
• Total subprime loans outstanding, year-end 2007: 46,803 (roughly 1 in 10 of all loans)
• Share of those properties in foreclosure or seized by lender at year-end: 3.9 percent
• Share of those borrowers who were more than two months late on payments: 11.6 percent
• Share of home loans issued in fourth-quarter 2007 that were subprime: 10 percent
• Year earlier: 14 percent
Interest-only and negative amortization:
• Share of 2007 home loans where borrower pays interest only: 12.5 percent
• 33rd-highest rate among 333 metro areas
• Share of 2007 home loans that were 'negative amortization' or 'payment option,' where borrower may add to principal rather than paying off loan or interest: 3.4 percent
• 42nd-highest rate among 333 metro areas
• Total properties in foreclosure, Feb. 1: 2,465
• Year earlier: 1,247
• 188th-highest foreclosure rate among 209 largest metro areas (February 2008)
• Residential properties seized by lenders, as of Feb. 1: 4,205
• 60th-highest rate among 209 largest metro areas
Source: First American CoreLogic and LoanPerformance
Log details Susan Shell's quest to rework loan: 6 months and counting
Highlights taken from Shell's phone logs:
• Oct. 23, 2007: Phoned Countrywide to discuss loan modification. Spoke with Adrienne in customer service, who directed Shell to Richelle in refinance department, who directed her to Antwon in workout department.
• Early November: Case assigned to Brandon, then reassigned to Tina.
• Early December: Called Tina, who said she'd call back when she heard something.
• Mid-December: Called Tina, who said she should be hearing something soon.
• Late December '07/early January '08: Called Tina, who said the investor that bought Shell's mortgage doesn't do rate reductions for payment-option loans such as Shell's. (The loan allows her to pay interest only, to add onto the loan each month, or pay higher amounts to pay off the mortgage in 15 or 30 years.) Tina said she'd try another approach.
• Early January: Tried to reach Countrywide's workout department but couldn't get past customer service. They promised to e-mail Tina and have her call, but she doesn't.
• January: Contacted Dana at HOPE, a government-fostered program formed with lenders, to encourage them to do loan workouts. She said Shell's problem was that she wasn't behind on her payments. Dana said someone would get back within two weeks, but nobody did.
• Mid-January: Called Tina, who said there's no word from the investor. She promised to call back.
• Feb. 6: Called Countrywide workout department, which said case was transferred to Dennis, then closed Jan. 25. Said letter was sent notifying Shell the case was closed, but she never received it. Said Shell's loan modification was denied because her income wasn't high enough to justify higher payments, though she was seeking lower payments.
• Later on Feb. 6: After four hours on phone, got through to Michelle, Tina's supervisor, who said Shell had 30 days to reopen her case. Referred to Ana, another supervisor, who said the investor was Freddie Mac, which doesn't do rate reductions. Freddie Mac is a government-sponsored company that buys mortgages, bundles them and resells them to other investors.
• Later on Feb. 6: Spoke with Tomeka in payoff department, who said prepayment penalty could be waived if home is sold. But she couldn't put that promise in writing. Referred to Taurina in customer care.
• Feb. 7: Received call from Donald in special forbearance department, who said Bank of New York, not Freddie Mac, was the investor, and they do rate reductions. Referred Shell to workout department.
• Feb. 12: Got call from Takoya in customer care, now assigned the case. Said she'd call back the next day, but didn't.
• Feb. 14: Called Takoya, who said Countrywide isn't allowed to identify the investor that bought the loan.
• Feb. 19: Contacted ACORN Housing, nonprofit that helps people do loan workouts.
• Feb. 20: Called Takoya, who said Shell's case was never closed.
• April 16: Countrywide and ACORN Housing said they're still working on Shell's case.