An economic meltdown spawned by 30,000 Sacramento-area foreclosures, and hundreds of thousands more nationally, has finally cracked the lending industry's resistance to streamlined rapid-fire loan workouts.
The federal government and embattled bank Citigroup on Tuesday joined a growing list of financial giants publicly moving to quick, simple loan rewrites and foreclosure moratoriums instead of cumbersome case-by-case workouts.
A common denominator: cutting monthly payments to less than 38 percent of a borrower's income.
"It's a very inefficient system when you do loan modifications one at a time," said Alexis McGee, president of Foreclosures.com, a Fair Oaks Web site for real estate investors. "Each one has to go to a committee for approval, and most loan modification departments aren't staffed to do it."
In many cases, banks are taking cues from the Federal Deposit Insurance Corp., which initiated such streamlined modifications in September after it took over failed Pasadena thrift IndyMac.
Last week, Gov. Arnold Schwarzenegger proposed similar measures, including a 38 percent limit for income dedicated to house payments. The governor proposed that state lawmakers enact a 90-day foreclosure moratorium for many borrowers.
It's difficult to say how many borrowers will get modifications. Often, borrowers don't respond to efforts to contact them. Tuesday, federal officials said only that they believe their effort will help "thousands" of borrowers.
"I think it helps, but it's not going to be helpful enough," said Mark Zandi, chief economist at Moody's Economy.com. "These plans will help hundreds of thousands of homeowners, but it's not going to help the millions who are set to lose their homes the next three or four years."
The issue has taken a sudden urgency in recent weeks as accumulated damage of 3 million U.S. foreclosures keeps pushing down house values and spilling families out of homeownership. Many believe the worst foreclosure crisis in decades has set the stage for a prolonged national recession.
"I don't think there's anyone in the world that's been going through what we're going through now," San Diego home building industry consultant Tim Sullivan told struggling Sacramento-area home builders Tuesday. Many builders are focused on their survival in a capital-area market where bank repos rule.
Tuesday, the federal government said that starting Dec. 15 it will pay loan servicers $800 for each loan rewrite that brings payments under 38 percent of borrower incomes. The announcement by federal mortgage giants Fannie Mae and Freddie Mac marked the first time mortgage investors have opened the gates to widespread rewrites of their loans by servicers. The two entities own or guarantee nearly six in every 10 U.S. mortgages.
"We need to stop this downward spiral," said James Lockhart, director of the Federal Housing Finance Agency that oversees government-owned Freddie Mac and Fannie Mae.
The plans apply only to borrowers who live in their homes, not to investors. The federal proposal in particular targets owners who are at least three payments behind and have not filed for bankruptcy.
To bring down payments, borrowers will receive:
• Reduced interest rates.
• Extensions of their loans out to as much as 40 years.
• Deferred payments for a time. Missed payments can be added to the end of the loan.
"Servicers will have flexibility in the mix to get there," Lockhart said at a new conference in Washington, D.C., "but the goal is to create a more affordable payment."
Citigroup announced Tuesday it will avoid foreclosing on its portfolio while finding alternatives for borrowers. Some will be in El Dorado, Placer, Sacramento, Sutter, Yolo and Yuba counties. Citigroup made 11,679 home loans there from 2004 through 2007, reported researcher DataQuick Information Systems.
Citigroup announced it would devote 600 salespeople to adjust rates for borrowers, reduce amounts owed or extend the loan payoff period.
Citigroup's announcement came on the heels of similar moves by banking giants JPMorgan Chase and Bank of America.
Citigroup, Chase, BofA and IndyMac collectively made nearly 140,000 home loans in the capital region from 2004 through 2007, according to DataQuick. Many of those borrowers now owe more than their homes are worth and thousands have already lost them to foreclosure.
Tuesday, the NeighborWorks HomeOwnership Center of Sacramento said it had a contract with the FDIC to contact more than 1,000 eligible IndyMac borrowers with help.
Call The Bee's Jim Wasserman, (916) 321-1102. Read his blog on real estate, Home Front, at www.sacbee.com/blogs.
