According to Secretary of Housing and Urban Development Alphonso Jackson, 500,000 borrowers with sub-prime loans -- higher-cost mortgages for people with weak credit or heavy debt loads -- could lose their homes in the next 18 months because interest rates will be resetting at higher levels.
Jackson and Treasury Secretary Henry M. Paulson Jr. met with major lenders last month and said they wanted to identify troubled borrowers and get them in touch with cost-free counselors from nonprofits such as NeighborWorks, ACORN and the Homeownership Preservation Foundation. They encouraged the lenders to refinance loans or modify current mortgages.
Lenders say they try to prevent foreclosures because seizing and selling a home typically costs them $30,000 to $50,000. Foreclosure sales also depress the value of nearby homes. And a Chicago study backed by the Homeownership Preservation Foundation found that costs to local governments exceeded $30,000 per foreclosure in some cases, owing to the loss of tax revenue, increased policing and higher demand for social services.
The Mortgage Bankers Assn. said there were no official statistics on workouts at individual lenders or industrywide. But Moody's Investors Service said it surveyed 16 firms handling customer service on 80% of existing sub-prime loans. Just 1% of the surveyed borrowers facing an interest rate reset had had their loans modified, the study found.
Many large servicers relied on "passive letter-based contact" to reach customers facing loan adjustments, Moody's said, instead of phone calls and other more thorough attempts to assess potential problems. Nonprofit groups say many troubled borrowers shrink from their growing debt problems and often throw such letters away unopened.
