By: James R. Hagerty And Ruth Simon
May 8, 2010
Home-Loan Aid Brings Little Relief To Those With Other Big Bills Waiting
After months of negotiations, Wells Fargo & Co. agreed in February to reduce Cynthia Mason's mortgage payments by about $300 a month.
"I think the whole process is a sham," Ms. Mason said, angry that the San Francisco bank didn't do more to help reduce her debt load. A Wells Fargo spokeswoman declined to comment on her situation.
As the Obama administration prods banks to rev up mortgage modifications for millions of households, an obstacle is emerging: Many people's debt woes go far deeper than home loans. Rewriting their mortgages is little more than a bandage on a gaping financial wound.
Mike Thompson, director of the Iowa Mediation Service, which counsels borrowers facing foreclosure, said 25% to 30% of borrowers who got mortgage modifications last year are now coming back for more help because they are struggling with their remaining debt payments.
Debt counselors say some borrowers got into trouble because of overspending, while others are wallowing in debt because of such things as illness, divorce or unemployment.
At Citigroup Inc., borrowers who had mortgages restructured but are again falling behind on payments "have a much higher [overall debt burden] than those who don't," said Sanjiv Das, president of the New York bank's mortgage unit.
The slippage is the latest sign of trouble for the Obama administration's foreclosure-prevention program, which has been widely criticized for its slow pace since being launched in February 2009. Through March, roughly 228,000 borrowers had been granted reduced payments for the next five years, and an additional 781,000 were in "trials" to qualify for such relief. The Treasury Department's target is to help as many as four million borrowers by the end of 2012.
The Home Affordable Modification Program provides financial incentives for mortgage companies and investors to reduce mortgage-related payments, including taxes and insurance, to 31% of pretax income. The program doesn't mandate that total debt payments be cut to a certain level, though it does prescribe financial counseling for borrowers whose debt ratios are 55% or more.
Among households that have received a mortgage modification, the median ratio of total debt to pretax income was 61% as of March 31, according to the Treasury Department. That level "is ridiculously high," said Chris Krehmeyer, chief executive of Beyond Housing, a nonprofit counseling group in St. Louis. At ratios higher than about 50%, "if you have one bump in the road, the apple cart can turn upside down," he said.
A Treasury spokeswoman said HAMP and other loan-modification programs weren't intended to save all homeowners from foreclosure or bankruptcy. The U.S. government has taken several steps that address the need for "comprehensive affordability," she added, including new incentives for banks and other holders of junior-lien loans to cut payments on the loans when the first mortgage is eased.
LSS Financial Counseling Service, Duluth, Minn., said clients who sought foreclosure-prevention counseling in March were spending an average of 77% of their income on debt payments. At Consumer Credit Counseling Service of Greater Atlanta, clients seeking foreclosure-prevention help last year averaged $18,000 in unsecured debt and a monthly budget deficit of $1,247.
Some borrowers use credit cards to stay afloat after a job loss or income reduction. Cathleen Moran, a bankruptcy lawyer in Mountain View, Calif., said some clients used credit cards to make mortgage payments.
Ms. Mason's financial problems stem largely from unemployment, cancer and a post-divorce legal dispute with her former husband. She said Wells Fargo, the fourth-largest U.S. bank in assets, should have reduced her mortgage payments much more deeply to make her financial situation sustainable.
Mike Heid, co-president of Wells Fargo's home-mortgage division, said the bank strives to help borrowers save their homes but that borrowers who are overwhelmed with various forms of debt also should seek help from their other creditors.
Some housing counselors work on a borrower's entire financial situation. Others refer those with high debt loads to credit counselors or bankruptcy lawyers. "We are very good at talking to mortgage servicers, but we don't have any practical skills in talking to Honda Motor and credit-card companies," said Michael van Zalingen, director of homeownership services for Neighborhood Housing Services of Chicago.
With help, some borrowers shrink their debt burden to manageable levels. A mortgage modification in April from J.P. Morgan Chase & Co. reduced the debt payments of Zenaida and Arsenio Cartaya, but would have left their overall debt payments still eating up 70% of the couple's pretax income.
Springboard Inc., a nonprofit credit-counseling group in Riverside, Calif., negotiated with the Hialeah, Fla., couple's credit-card companies for lower interest rates, persuaded the Cartayas to give up one of their two cars to eliminate a car loan, and signed them up for food stamps. Their debt load now is about 41%.
Ms. Cartaya, who lost her child-care job in 2008, says she and her husband have had to give up vacations and eating out but are "extremely happy" that they can keep their house.