The government's takeover of mortgage finance companies Fannie Mae and Freddie Mac should provide an opportunity to modify more home loans for troubled borrowers, government officials said yesterday.

Both companies are "looking at loan modification programs that can be done through mass solicitation programs with streamlined processing," James Lockhart, director of the federal agency that took over Fannie and Freddie earlier this month, said in an e-mail.

Such an effort could have a tremendous impact because Fannie and Freddie own or guarantee more than $5 trillion in loans, about half of the nation's total.

"There are still a lot of mortgages out there that need to be restructured and families that can still be helped," Sheila Bair, chairman of the Federal Deposit Insurance Corp., told lawmakers yesterday.

With 1.5 million foreclosures last year and 1.2 million already in the first six months of this year, the foreclosure crisis is accelerating, she noted.

The FDIC has rolled out a plan to help refinance more than 1,200 delinquent IndyMac Bank borrowers into 30- year mortgages with interest rates capped at 5.9 percent. The program is meant to be a loan-modification model for the industry.

U.S. foreclosure filings rose to a record in August, climbing 27 percent from a year earlier as falling prices made it more difficult to sell or refinance homes, RealtyTrac Inc., an Irvine, Calif.-based seller of foreclosure data, said last week.

Meanwhile, homeowners rushed to take advantage of last week's drop in interest rates, following the government's takeover of Fannie and Freddie. Data released yesterday by the Mortgage Bankers Association said refinance applications spiked 88 percent. Refinances accounted for nearly 52 percent of all application activity, up from 36 percent the previous week, the trade group said.

But approval rates will likely be low because many appraisals are coming in close to or below the amount of the existing mortgages. In many once-hot markets like Las Vegas, Los Angeles and Miami, prices have fallen 25 percent or more, making it nearly impossible to refinance into a more manageable home loan.

"A lot of applications won't end up in closing because the value is no longer there," said Ritch Workman of Workman Mortgage in Melbourne, Fla.

The House Financial Services Committee is holding hearings this week into mortgage lenders' efforts to help struggling homeowners avoid default. The testimony from one state official was less than encouraging.

"Based upon our experiences in Massachusetts, lenders, holders and servicers have not lived up to their very public promises of avoiding foreclosures by achieving loan modifications," said Massachusetts Attorney General Coakley, who testified today. "We have been very active at the state level in urging the mortgage industry to take meaningful action to decrease the number of foreclosures, but we need Congress' continued help in effectuating real change."

Today, Massachusetts Attorney General Martha Coakley submitted testimony to the U.S. House Financial Services Committee regarding her office's findings and observations with regard to the lack of progress in securing mortgage loan modifications for homeowners who are struggling to make payments and facing foreclosure.

The Committee, chaired by Rep. Barney Frank (D-MA), is holding a hearing regarding the implementation of new federal foreclosure mitigation legislation. Coakley was invited to testify regarding her office's role in investigating the practices of brokers selling auction rate securities to municipalities and other state entities.

She told the committee that loan modifications are not being achieved in significant numbers. When compared to the number of foreclosures in process, she said far too few borrowers are able to restructure their loans to generate a sustainable loan.

When so-called loan modifications do occur, she said they often do not result in a sustainable loan. Lenders and servicers routinely offer and complete so-called loan modifications that increase monthly payments and increase overall debt, she found. They do not meaningfully avoid foreclosure. At best, they temporarily delay the inevitable delinquency and eventual foreclosure.

In recent months, Coakley says her office has reviewed 144 loan modification documents, reflecting all loan modifications filed in 14 counties.

The office found that not one of the 144 loan modifications reduced the principal mortgage balance of Massachusetts, and virtually none of the 144 loan modifications reduced the monthly payments for Massachusetts homeowners, so the distressed loans are no more affordable after "modification".

Month after month, the foreclosures mount. One in every 483 U.S. households received a foreclosure filing last month, the highest monthly rate since the real estate tracking firm RealtyTrac began issuing reports.

"If you look at a map, the highest rates of foreclosure are in areas where subprime lending has been the heaviest," said David Petrovich, Executive Director of the Society for the Preservation Of Continued Homeownership , a New Jersey-based non-profit group that tries to help consumers avoid foreclosure.

Petrovich formed SPOCH 10 years ago after a long career in real estate finance, where he worked in everything from appraisals to the servicing of loans.

"During that time I personally saw the devastating effect foreclosure has on a family," he said.

Petrovich says his group works with distressed homeowners to help them avoid foreclosure and stay in their homes. Since his group receives no support from banks or lenders, he says he's free to present all the options available to the homeowner.

"We bring truth to the table," he told ConsumerAffairs.com.

A cornerstone of that advice is to communicate directly with the lender to see what can be worked out. Another key piece of advice is to act quickly.

"Foreclosure is a time-sensitive problem. There is very little time between the first missed payment and a foreclosure filing," he said.

Perfect Storm
Petrovich said he foresaw the "perfect storm" of the foreclosure crisis years ago, because of "ridiculous" loans and escalating prices that made real estate attractive to speculators. With foreclosures saturating the market with unsold houses, homeowners who need to sell can't find a buyer who will pay what they owe for the property. All too often, the unsellable house becomes another foreclosure statistic.

In years past a real estate agent might work out a "short sale," with the buyer paying less than what is owed the lender. The lender would get less than the full amount of the loan and the homeowner would avoid foreclosure, and the deal might be done in as little as 90 days, avoiding having a home sit empty for months, dragging down surrounding property values.

Petrovich says it's much harder to persuade lenders to agree to a short sale now, for a number of reasons. Many mortgages have been "securitized," meaning more parties have to agree to accept a loss. Because of lenders' huge financial losses, many people who service loans have been laid off. And the huge increase in the number of requested short sales, because of the foreclosure crisis, has led to big backlogs.

"Perhaps the most obvious obstacle is the lenders' reliance on historic comparable sale values which do not reflect current values," Petrovich said. "Lenders are fierce in their quest to maximize net recovery and seem to be willing to proceed to foreclosure auction in hopes of higher recovery, which ain't happening."

So the foreclosures continue, month after month.

Where does it end? Petrovich thinks we have a long way to go yet, with as many as three million more people losing their homes. However, he says lenders have become more proactive, seeking to help homeowners before their loans go bad. That, he says, will pay off in the future.

In the meantime, he says homeowners should educate themselves about foreclosure and their rights. Having an attorney look over your mortgage papers could be money well spent. Often legal aid services will do it at no charge, if you qualify.

And don't wait. Petrovich says time is of the essence for homeowners who want to fight foreclosure.