Beyond Reach of Relief

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As the mortgage crises deepened, one mortgage-relief program after another popped up as fast as rooftops used to in the Inland Empire.

All those programs sure make Congress and everybody feel good, knowing that they’re helping distressed homeowners stay put.

But lately, articles have appeared saying that lots of those homeowners essentially are treating the programs like door-to-door salesmen, saying “no thank you” and slamming the door shut before they even hear the pitch.

Frustrated lenders are trying harder to entice stressed borrowers to take a good deal. IndyMac Federal Bank and the Federal Deposit Insurance Corp., which now runs it, recently held walk-in counseling sessions in Los Angeles County and the Inland Empire so they could hawk IndyMac’s aggressive loan modification program.

Why are the drowning homeowners so reluctant to grasp at the straw of the various mortgage-relief programs?

Well, some say, maybe all the offers from lenders get ignored because they look like junk mail and telemarketing calls. Or maybe the stressed borrowers are deep in denial and just don’t want to face up to the problem.

Perhaps. But I wonder how many of those underwater borrowers are perfectly aware of the new loan modification games but simply don’t want to play.

The grim reality is that during the housing boom, many folks got into houses that they couldn’t afford even in good times. Even if the loan payments were reduced, they figure the new loan terms may be less unaffordable, but they will remain unaffordable nonetheless.

I talked last week with Karen Garrett, a bank regulatory lawyer in Kansas City, Mo., who works with banks all over. She said that many loans, particularly in Southern California, are so bad the mismatch between what the true loan obligation should be and the borrower’s income is so great that a bank can’t mark the loan down enough to make it make any sense.

During the housing boom, she said, “we converted a lot of people into borrowers who should be renters.”

It may well be that many distressed borrowers know deep down that they are in a house they cannot afford under almost any terms, so they don’t bother with a loan modification. Some may simply conclude they may as well stop making payments and live for free as long as they can before they’re evicted.

There are other factors at work. More than a few borrowers probably are in fear of their jobs. So even if a loan modification makes their home affordable today, what happens next month when the household income is chopped in half?

And then there’s the factor of falling home prices. Even if a borrower can modify his loan terms to make his mortgage payment affordable, chances are his house’s value has fallen so much that it takes all the fun out of the exercise. Loan mod or no, why be saddled with a mortgage that’s greater than the home’s value?

In short, there are several sound reasons why a distressed homeowner would ignore the lender’s plea to modify the mortgage.

Sure, the loan mod programs could be a true gift to those on the bubble or who need a little help, and it makes perfect sense for them to take one of the offers. But the notion that we can somehow keep underwater homeowners bobbing above the water is kind of silly.

As Garrett put it: “I think it is na & #271;ve to think that we can modify out way out.”


Charles Crumpley is editor of the Business Journal. He can be reached at [email protected].

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