'Workouts' on U.S. prime mortgages rise - Hope Now

NEW YORK (Reuters) - New payment plans on mortgages to the most credit-worthy homeowners jumped nearly 20 percent in the first quarter of 2008, while "workouts" for subprime borrowers leveled off, an industry alliance said on Monday.

Changes to repayment schedules or contractual terms of loans to prime borrowers helped push total mortgage workouts to 502,520 in the first quarter.

That marked a 6 percent increase over the fourth quarter and a 26 percent leap from the third quarter of last year, according to Hope Now, the alliance of mortgage servicing and counseling companies formed in October.

Mortgage companies negotiated new terms on 206,495 prime loans last quarter, Hope Now said, a 19 percent gain from the fourth quarter's 173,499.

That increase may be a result of prices falling much more quickly on more expensive homes, often financed with jumbo loans to prime borrowers, said Michael Youngblood, a managing director with Friedman Billings Ramsey in Arlington, Virginia. The rising need of workouts for prime mortgages also reflects the U.S. economic slowdown, he said.

"We've moved past the period where borrowers were defaulting (only) as a function of poor underwriting," Youngblood said. "They are now due to more fundamental reasons such as job loss, or reduction in income."

The Standard & Poor's Case-Shiller Home Price Index, which includes jumbo loan-financed properties, has declined 10.6 percent through January. The house price index that follows loans eligible for financing offered by Fannie Mae (FNM.N) and Freddie Mac (FRE.N) fell 2.7 percent in the period.

Workouts on subprime loans, whose soaring defaults led to the U.S. foreclosure crisis and sparked the global credit crunch, totaled 296,025, off slightly from the 301,244 in the previous three-month period.

The Hope Now group, which includes big mortgage companies like Wells Fargo & Co (WFC.N), was created under the guidance of the U.S. Treasury to share information and help curb the crisis in foreclosures. Member institutions have helped nearly 1.4 million homeowners since July, but the results have failed to stem expectations that foreclosures will continue to climb as house prices continue to fall.

Foreclosure sales rose to 121,212 last quarter from 91,653 in the fourth quarter, according to Hope Now. More foreclosures can be averted if borrowers speak with their mortgage company, said Faith Schwartz, executive director of Hope Now.

Falling house prices and a lack of available credit may result in foreclosures on 6.5 million loans by the end of 2012, according to Credit Suisse, an investment bank that packaged some mortgage assets into bonds. That includes 1.2 million loans already in or through foreclosure, the bank said.

Bank of America Corp (BAC.N) said on Monday that it aims to modify at least $40 billion in troubled mortgages over the next two years. The bank is acquiring Countrywide Financial Corp CFC.N, the largest U.S. mortgage lender.

Lower interest rates since December reduced the need last quarter for an industry plan to encourages lenders to freeze interest rates on some subprime loans, Hope Now said. However, mortgage rates have risen since March.

Analysts say the largest cause of foreclosures is that home values are declining to a point where prices are below the balance on borrowers' loans, erasing their equity. Lawmakers, including House Financial Services Committee Chairman Barney Frank of Massachusetts, have proposed plans that would ask lenders to address loans that are "underwater" by refinancing at newly appraised values and taking losses.

Robert Steel, Treasury undersecretary for domestic finance, said on Monday that falling house values do not necessarily change one's ability to afford a monthly mortgage payment.

"We strongly believe people should and will continue paying their mortgages regardless of short-term price fluctuations," Steel said in remarks at a business journalists conference.

(Reporting by Al Yoon; Editing by Jonathan Oatis)