Four major subprime lenders promised to give a break to California homeowners who cannot afford escalating mortgage payments, under a plan announced Tuesday by the lenders and Gov. Arnold Schwarzenegger.Countrywide, GMAC, Litton and HomeEq - which collectively service more than one quarter of subprime loans to people with poor credit - agreed to maintain the initial, lower interest rate for some subprime borrowers whose rates are scheduled to jump significantly higher. To qualify, borrowers must occupy their homes, have made their payments on time and prove they cannot afford payments with the higher interest rate.
The voluntary program is designed to stem a huge wave of foreclosures. Half a million homeowners in the state have subprime mortgages that are scheduled to jump higher within the next two years after their introductory period elapses. Such loan resets, in combination with a slumping real estate market, already have led to a record number of foreclosures across California and the nation.
"With this type of cooperation from loan servicers, we can save tens of thousands of people from being added to the foreclosure lists," the governor said in a statement. "This common-sense approach does not involve a government subsidy or bailout."
It was unclear for how long the loan servicers would freeze the interest rates.
"The word that was chosen is it's for a 'sustainable' period of time," said Mark Leyes, a spokesman for the California Department of Corporations, which oversees nondepository lending institutions. "What does that mean? The answer is, it depends. It could be two years, five years, even seven years. The idea is until the housing market recovers. At that point, housing values would be restored; equity is restored, refinancing becomes an option. But nobody knows how long that's going to be."
Larry Litton Jr., chief executive of Houston's Litton Loan Servicing, said his company plans to expand the initial interest-rate period for up to five years.
"That gives us an ability to go in five years later and if the market has recovered and the consumers can afford an increased payment, the payment can be increased at that time," he said.
Freezing the payment rate makes economic sense for the investors who own the mortgages as well as for the homeowners, Litton said. Studies have shown that each foreclosure costs lenders tens of thousands of dollars.
"Property values are falling dramatically, primarily because there are so many foreclosures already on the market in some areas," he said. "Clearly, it is not good for our investors to have the real estate back. It feels like a no-brainer for a loan servicer to keep the payment where it is, keep another piece of real estate off the market and keep the borrower in the house."
Many subprime loans have initial rates such as 8 percent or 9 percent - already a premium on the going rate for people with good credit. But what about loans with initial rates as low as 2 percent?
"I don't have any in my portfolio," Litton said.
The lenders also said they would streamline the process for determining who gets the loan modifications. Many borrowers have complained that requesting a loan modification required weeks or months of phone calls and ended in a rejection because the criteria for income and credit rating were too high. Others have said they were caught in a catch-22: They could not qualify for a loan modification until they missed some mortgage payments - which hurt their credit ratings. Studies have shown that major lenders have modified only a small percentage of mortgages.
The companies also agreed to provide regular reports to the Department of Corporations on their efforts to reach out to consumers and on how many loan modifications actually occur.
"Overall I am extremely pleased that the issue of foreclosures is squarely on the governor's radar screen and that he seems to have extracted some important commitments from some very significant loan servicers here in California," said Paul Leonard, California director for the Center for Responsible Lending, an advocacy group. "That said, the devil is in the details. The monitoring and reporting on the process is critically important."
-- A federal regulator proposes an incentive plan
for loan servicers who agree to modify lending terms to avoid default.
Who qualifies
If you have a mortgage through Countrywide, GMAC, Litton or HomeEq, you might qualify to have your introductory interest rate temporarily frozen. To get help, borrowers must occupy their homes, have made their payments on time and prove they cannot afford the loan's new rate. If this fits your situation, contact your loan servicer to apply.
