U.S. lenders cut deals to avoid foreclosure crisis

By Nick Carey

CHICAGO (Reuters) - In a relatively short space of time, Sharon Jackson lost her mother, her sister, and her job and came within a whisker of losing her home of 20 years as well.

"If anything bad could happen, it was happening to me," said Jackson, 55, while making a strong cup of coffee in the kitchen of her single-story home on Chicago's blue-collar South Side. "I was behind two months, but I didn't want to lose my home and see it boarded up."

Just four doors away, a house that went into foreclosure last year is boarded up. Jackson recalls watching as squatters moved in and stripped it of anything that could be sold.

Fearing her home was next, she approached her lender, Homecomings Financial, a unit of GMAC Financial Services. To her surprise, it cut the interest rate on her $80,000 mortgage, reducing her monthly payment to $713 from nearly $1,000. With two part-time jobs -- as a book keeper and as an "Avon Lady" selling cosmetics door-to-door -- Jackson says she can now afford her payments.

"I was long overdue for some good luck," she said, taking off her glasses and wiping tears from her eyes.

With so many houses in the United States facing foreclosure, mortgage lenders are starting to offer favorable deals for distressed borrowers like Jackson that they would not have agreed to just six months ago.

This is not altruism, but a case of lenders trying to avoid being stuck owning hundreds of thousands, or even millions, of homes, according to economists, academics and other experts.

"The smarter lenders are cutting deals in order to minimize their losses," said Peter Morici, a professor at the University of Maryland School of Business. "They don't have much choice."

In the third quarter of 2007, mortgage companies had modified the terms on 54,000 loans and had worked out new repayment plans for another 183,000, the Mortgage Bankers Association said on January 17.

The association did not give comparative figures for the third quarter of 2006. An official said the loan modification programs had likely expanded further during the fourth quarter of 2007.

James Leyba, a community relations specialist at Homecomings Financial who worked with Jackson on modifying her loan, said that as the housing crisis has grown, lender behavior toward borrowers has changed significantly in a short period of time.

"The lenders I work with are willing to talk about interest rate reductions or other loss mitigation options in a way that was inconceivable only six months ago," he said.

But Leyba and others in the industry say that for many subprime borrowers whose adjustable-rate mortgages (ARMs) have reset at a rate they can't afford, the only option is to sell, if they can.

DAMAGE CONTROL

According to research by the non-profit organization the Center for Responsible Lending, there are 7.2 million outstanding subprime mortgages in the United States. Subprime mortgages are those offered to people with weak credit histories at higher interest rates than those offered to prime borrowers -- those with good credit.