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Mortgage aid helps more hold off default

Under US pressure, lenders are offering rate cuts, extensions

By Jenifer B. McKim
Globe Staff / April 16, 2012
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More financially stressed homeowners in Massachusetts and across the country are getting mortgage loan modifications that cut their payments enough to keep them from falling into foreclosure, according to federal data and local housing specialists.

About 70 percent of the nearly 448,000 US homeowners who received mortgage help from lenders during the first nine months of 2011 are still up to date on their mortgages, according to the report by the federal Office of the Comptroller of the Currency. That compares with an on-time payment rate of 37 percent for homeowners who received loan modifications in 2009, according to the report.

The improving success rate for modifications comes as banks are under mounting pressure from federal and state officials to offer real relief to borrowers in danger of losing their homes. Although lenders prefer not to make any loan concessions, they also are increasingly interested in avoiding more foreclosures, which have hurt their profits in recent years.

John Rao, staff attorney with the National Consumer Law Center, a nonprofit based in Boston, said the better numbers show that people who owe more than their homes are worth do not necessarily walk away from obligations.

‘‘It proves the point if you can provide homeowners with an affordable payment, they will pay it,’’ Rao said.

Modifications typically incorporate interest rate cuts, term extensions, principal deferral, and — less frequently — debt reductions.

Bryan Hubbard, spokesman for the Office of the Comptroller, said the rate of on-time payments has steadily improved as banks, pushed by regulators, have become agreeable to providing assistance that is more substantive than symbolic. Today, Hubbard said many modifications ‘‘significantly reduce monthly principal and payments.’’

Some local nonprofits say lenders have become even more willing to rework loans since a $25 billion multistate settlement was reached earlier this year between attorneys general and five major US banks over accusations of sloppy and fraudulent mortgage practices. As part of the settlement, Massachusetts will receive more than $300 million from the settlement.

Borrowers who already have benefited from loan modifications include Norma and Isaac Morales, who obtained one for their Lynn home in 2010. The couple sought aid when their adjustable interest rate rose to 8.5 percent and Isaac lost his job as a plumber. They kept up with payments by skimping on household necessities, but time was running out, Norma Morales said.

With the aid of their lender, Wells Fargo & Co., the couple reduced their interest rate to 3 percent and shaved $1,500 off a $3,500 monthly mortgage bill.

‘‘I’m so grateful,’’ Morales said.

James Jones, a musician and sound engineer, worked with Bank of America Corp. to trim about $450 from his monthly mortgage payment, reducing it to about $1,860. NowJones is confident that he and his wife, Rene, can afford their Dorchester home, even though she is unemployed. ‘‘It is really helping us stay afloat right now,’’ Jones said.

Paul Willen, senior economist for the Federal Reserve Bank of Boston, said the growing success of loan modifications is a sign of an improving economy. ‘‘The good news is that the foreclosure crisis is ebbing,’’ he said.

A few years ago, with the US unemployment rate at 10 percent, loan modifications often proved to be a temporary fix, he said. The modest payment reductions offered by lenders then were not enough to keep out-of-work property owners from ultimately defaulting.

‘‘There was a time when helping out borrowers was a hopeless job,’’ Willen said.

But the report emphasizes that the success rate of loan modifications improves in tandem with heftier financial help. Homeowners who received loan modifications in the last quarter of 2011 received an average payment reduction of $430 — a 26 percent cut in their monthly payment — compared with $379 during the same quarter in 2010, according to the federal study. Of 2,168 Massachusetts homeowners who received mortgage assistance during the last quarter of 2011, almost 60 percent have payments that are at least 20 percent lower, the study said.

Diana Franco, director of home ownership for the nonprofit Neighborhood of Affordable Housing in East Boston, said two clients recently saved $800 or more on monthly mortgage payments while another obtained a below-market interest rate of 2 percent for the life of a loan.

‘‘We are seeing better results in the last couple of months,’’ Franco said.

Modifications under the federal Home Affordable Modification Program — established in 2009 by the US Department of Housing and Urban Development and the Treasury Department — performed better than other loans and generally provided more financial help, the study found. Homeowners under HAMP won an average payment reduction of $593, or 36 percent. More than 18,000 Massachusetts homeowners have received permanent loan modifications through the program, according to federal officials.

Despite the progress in making loans more affordable, there are still myriad complaints about lenders’ efforts. For instance, some borrowers say companies ask for the same documents over and over, delaying loan decisions for months. Gary Klein, a Boston attorney who has filed many cases against major banks over foreclosure practices, said lenders too often steer borrowers away from HAMP deals. According to the Office of the Comptroller, HAMP loan rewrites account for only about 30 percent of loan modifications.

‘‘What [lenders] have been trying to do is push people away from the HAMP program into higher cost modifications,’’ Klein said.

But Eliza Parad, an organizer with the nonprofit activist group Chelsea Collaborative, which helps troubled homeowners, said even borrowers with HAMP loans are wary because those modifications can add years to loan terms and require a large payment at the end.

Housing advocates and public officials — including Attorney General Martha Coakley of Massachusetts — are urging lenders to forgive more loan debt. Mortgage giants Fannie Mae and Freddie Mac currently prohibit reducing financially-troubled borrowers’ principal because they fear it could encourage others to default on their loans.

Jones, the Dorchester homeowner, said it took him more than year to get his HAMP loan. He completed three months of trial payments, but was still denied a permanent loan modification. Frustrated, he reached out to Ecumenical Social Action Committee Inc., a Jamaica Plain nonprofit, which helped him win a $250 reduction on his first mortgage last year and, more recently, about a $200 monthly savings on his second loan.

Otherwise, Jones said, he probably would have gone into foreclosure.

‘‘My whole goal is to keep my home,’’ he said. ‘‘We are here. There is a lot of sweat and blood I put into this house.’’

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