Few delinquent home loans being modified: report

An auction sign hangs on the front door of a foreclosed home in Chicago, January 28, 2008.

NEW YORK (Reuters) - The overwhelming majority of borrowers who were seriously delinquent on their home loans in October were not receiving help to prevent the possibility of foreclosure, according to a report published Thursday.

Seven out of 10 seriously delinquent borrowers were not exploring ways to prevent foreclosure in October and the lack of interaction between mortgage servicers and homeowners was a major problem, according to the State Foreclosure Prevention Working Group.

A borrower is considered to be seriously delinquent if they are 60 days or more late on their mortgage payment.

"A huge amount of borrowers are not getting in contact with their servicers," Iowa Attorney General Tom Miller said on telephone press briefing hosted by the Conference of State Bank Supervisors on behalf of the State Foreclosure Prevention Working Group.

"Servicers cannot do a modification without the contact and that is obviously a huge challenge," he said.

Miller organized the working group last year, joining state attorneys general and regulators to work with subprime mortgage loan servicers to reduce foreclosures by encouraging loan modifications and other long-term solutions.

However, for those delinquent homeowners in contact with servicers, 45 percent were working toward modifying their home loan. Servicers are increasing their use of longer-term changes to mortgage loans and moving away from their earlier reliance on short-term repayment or forbearance agreements, the report said.

While servicers have developed creative outreach efforts and have increased staffing, the data indicates a large gap between the number of homeowners needing help and the number receiving assistance. This suggests that the rise in loan delinquencies was outpacing efforts to modify loans, said the report.

Thirteen of the top 20 servicers provided the data for October, representing approximately 58 percent of the total subprime servicing market.

The report is the group's first on mortgage servicers' loss mitigation performance and the data predates the full efforts of the Hope Now alliance that was formed with the government's blessing in mid-October.

The alliance brought together mortgage services, lenders and counselors to help struggling homeowners. Hope Now said on Wednesday that it had helped approximately 545,000 subprime mortgage holders last year.

Payment resets on hybrid adjustable-rate mortgages have not yet been a driving force in foreclosures, reflecting weak underwriting or fraud in the origination of the loan, the report said..

"They are struggling even before payments increase," Mark Pearce, North Carolina Deputy Commissioner of Banks, said on the telephone press briefing.

"If we do not get more of these loans modified before they reset, many homes will go into foreclosure," he said.

The report also said that as of October, actions by homeowners, not servicers, have prevented the most foreclosures.

Serial refinancing has historically been the primary way that the mortgage industry and homeowners managed delinquencies in subprime loans. However, despite recent interest rate cuts, the mortgage industry will not be able to refinance its way out of the crisis without dramatic changes in available loan products or a reversal in home price declines, the report said.

(Reporting by Julie Haviv; Editing by Tom Hals)