November 25, 2008: Survey Reveals Loan Modifications Still Uncommon, Government and Lenders Doing Little to Help Borrowers

Hundreds of thousands of Californians are “underwater” on their home loans, yet neither loan servicers nor the government have done enough to offer effective loan modifications that would keep families in their homes.

In a survey of 44 California mortgage counseling agencies, who served 11,630 struggling homeowners statewide in September 2008, the California Reinvestment Coalition (CRC) found that despite a plethora of government initiatives and lenders’ promises to help mortgage borrowers, foreclosure is still the most common outcome for homeowners now facing deep economic challenges.

This survey is the fourth in a series that examines the extent to which home servicers are modifying loans, and since the first survey in August 2007, the results have been the same: loan servicers are not modifying loans to any significant degree, not conducting early outreach to borrowers at risk of default, and are most likely to foreclose on homes instead. Meanwhile, federal and state initiatives suffer from a lack of ambition, oversight and transparency, leaving borrowers and counselors to navigate a chaotic industry on their own.

"We’ve seen a bevy of voluntary commitments and best practices recommendations, but not much will change without accountability, obligation, or oversight,” said CRC Associate Director Kevin Stein, who analyzed the survey results. “Many borrowers have been doubly victimized by predatory lending practices on the front end and by unresponsive loan servicers on the back end and now are falling even farther behind as the economy worsens. More of the same from government and industry is simply unacceptable."

CRC released the results of the fourth survey in the report “The Widening Chasm Between Words and Deeds IV,” at a press conference today in front of the State Capitol. The report demonstrates that while there have been some minor improvements, loan servicers continue to fail to meaningfully address a deepening crisis. California mortgage counseling agencies reported:

•    Most borrowers are experiencing devastating outcomes and profound economic challenges. A majority of counseling agencies, 52.5%, reported that foreclosure is still a “very common” outcome for their clients seeking assistance, compared to only 26.3% observing that loan modifications are very common. A large majority of agencies reported they are working with borrowers who are “underwater”, experiencing a loss in family income, stuck with unaffordable loans, and/or dealing with fraudulent and predatory practices.

•    Huge numbers of Californians are “underwater” and need principal reductions, but that relief is rarely offered. Inflated appraisals, option ARM loans, and an overheated housing market that abruptly tanked have left many families owing much more than their homes are worth. Not one counseling agency reported that principal reductions—the key remedy for such borrowers—are very common.

•    Lenders are not responsive. 93.6% of respondents said the industry as a whole is not consistently modifying loans for long-term affordability, subjecting borrowers to future difficulties as payments rise once more. When servicers were willing to modify loans, they were only willing to fix interest rates for one or two years at a time.

•    Outreach to borrowers in trouble is generally poor. Despite lenders’ assertions about reaching out to borrowers BEFORE they face problems from rising interest rates and higher monthly payments, most counseling and legal service agencies do not see this happening. Only one agency reported that the industry as a whole was working with borrowers before default.

•    Industry fraud and abuse of immigrants are substantial concerns. 64.3% of responding groups reported that non-English speakers were sold loans in their native language, but provided English-only documents. This is a recipe for abuse, and flies in the face of California state law requiring translation of certain documents in certain transactions. Similarly, 56.1% of groups surveyed cited lender/broker abuse as a very common problem.

•    Tenants are harmed. 31% of agencies reported that tenants living in foreclosed homes are very common, and another 28.6% reported this situation as somewhat common. Tenants are the most unwitting victims of this crisis. Often they are the last to know about a foreclosure and have been subjected to illegal eviction attempts, utility shut-offs, and loss of security deposits.

•    Federal and state initiatives are not working. Counselors reported that the HOPE NOW alliance, a coalition of mortgage servicing companies, trade groups and counseling agencies, has not met any of its benchmarks set five months ago. Progress in California is also hampered by a lack of enforcement and public data reporting. Counseling agencies report starkly longer wait times to reach a servicer than data reported by the Department of Corporations.


In light of these findings, the California Reinvestment Coalition recommends the California Legislature and Governor: impose a 180-day moratorium on foreclosures to allow enough time for loan workouts; mandate all loan servicers adopt FDIC-like loan modification programs that include principal reduction and allow borrowers to opt for mediation; require loan servicers to submit detailed data to regulators for public review; reform the lending system to prevent abusive and predatory lending practices.

The California Reinvestment Coalition released the report at a press conference and rally today in Sacramento, where borrowers, counselors, community leaders from statewide organizations, and Assemblymember Ted Lieu were all present to demand the state government do more to protect families, neighborhoods and the economy from the devastating impacts of foreclosure.

CRC and all the groups present at the press conference are calling on lenders to work harder to help borrowers avoid foreclosure. They are also demanding legislative reform to encourage loan modifications, and ensure the bad lending practices that led to the state’s foreclosure crisis don’t reoccur in the future. They are asking Governor Schwarzenegger to hold loan servicers accountable to their promises to help California homeowners and communities.

For more information and a full copy of the report please visit www.calreinvest.org or call Tram Nguyen at (510) 213-3680.