The Wall Street Journal-20080213-Earlier Subprime Rescue Falters- December Plan Has Done Little to Help Borrowers In Dire Circumstances

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Earlier Subprime Rescue Falters; December Plan Has Done Little to Help Borrowers In Dire Circumstances

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As the Bush administration announced a fresh plan to aid homeowners overburdened by their mortgages, initial figures suggest much-touted earlier efforts have done little to help most troubled borrowers.

An earlier plan, brokered in December by the Treasury Department, called for the mortgage industry to freeze interest rates or expedite refinancing for potentially hundreds of thousands of subprime borrowers, so long as they were current on their payments. In a companion move, the administration announced a toll-free number for homeowners, but the hotline has provided counseling to just 36,000 borrowers in the past two months, and representatives have suggested loan workouts for fewer than 10,000 of them -- a small fraction of borrowers in need.

Other callers were looking for money, which the hotline doesn't have available, or had only general questions, executives running the project say. It's not clear how many borrowers were able to stay in their homes because of the hotline's help.

The preliminary numbers throw into sharp relief the difficulty of finding a workable solution to the housing crisis, with hundreds of billions of dollars in potentially troubled loans flowing through the financial system and foreclosures hitting recent highs. Adjustable rates on some two million subprime mortgages are expected to rise in the next two years, raising the specter of further delinquencies and more financial turmoil.

Continuing concerns about the impact on the U.S. economy and society prompted six major mortgage companies and the Bush administration yesterday to renew their efforts. They announced "Project Lifeline," a new program to help deeply troubled borrowers who are more than 90 days behind in their mortgage payments and face the imminent loss of their homes.

The companies say they will send letters to homeowners alerting them that if they make a call to their loan servicer and provide financial information, they might get a 30-day halt in foreclosure proceedings and a chance to negotiate friendlier mortgage terms.

The companies -- Bank of America Corp., J.P. Morgan Chase & Co., Citigroup Inc., Countrywide Financial Corp., Washington Mutual Inc. and Wells Fargo & Co. -- service about 50% of all mortgages. They estimate that the number eligible for the new program might reach into the hundreds of thousands. Treasury Secretary Henry Paulson called it "an important new initiative."

Some mortgage executives are skeptical whether the new program will make a difference. "What they are proposing is nothing new," says William Ashmore, president of Impac Mortgage Holdings Inc., a real- estate investment trust that owns about $18 billion of mortgage loans. He added that his firm began offering to postpone foreclosures by as much as 90 days last year. Mr. Ashmore says his biggest problem is reaching borrowers who are behind on their payments.

The Massachusetts Division of Banks has had a similar plan in place since April. Roughly 600 foreclosure actions have been paused since the program started, the division says.

"Let's be clear and honest: One action alone will not solve every problem in the housing market," Housing and Urban Development Secretary Alphonso Jackson said at the industry announcement in Washington. "Rather, a series of incremental steps provides the best chance."

But even the initial steps dating from December appear to be having a limited impact on the growing mortgage crisis.

In the past two months, the 1-888-995-HOPE hotline received roughly 176,000 calls, according to the nonprofit Homeownership Preservation Foundation, which operates the hotline. During that time, hotline counselors recommended a workout for 9,975 borrowers -- and told an additional 4,410 people to "seriously consider selling their home," the group says. Another 12,113 borrowers were referred for in-person counseling and services such as job-placement help.

Yesterday, Mr. Paulson pressed the industry to say how many subprime borrowers have actually received help from the rate-freeze program. The industry hasn't released any numbers yet but says it will soon. In his State of the Union address, President Bush credited the Hope Now alliance with "helping many struggling homeowners avoid foreclosure."

Faith Schwartz, executive director of the Hope Now Alliance, a coalition of mortgage companies, investors and credit counselors, said she expects the number of borrowers benefiting from the rate freeze to "inch up." She said yesterday's announcement reflects "a natural progression" and isn't a sign that the industry's previous efforts aren't working.

The hotline is just one of many alternatives available to homeowners in financial distress. Borrowers can also call their mortgage company directly. Organizations such as Acorn Housing, the Neighborhood Assistance Corp. of America and local groups provide housing counseling. State and local government offices also may be able to help.

Demetria Rhinehart, 33 years old, called the Hope Now hotline and got help, although it's only temporary. She and her husband bought a North Sacramento, Calif., ranch in 2005 with two mortgages totaling $245,000. Last year, the interest rate on the first mortgage of $200,000 reset to a higher level and their monthly payment surged to $1,700 from $1,100. They were unable to refinance because an appraisal found their house worth less than they owed.

The hotline counselor referred Ms. Rhinehart to a local affiliate of NeighborWorks America, a congressionally chartered housing group, which says it asked the lender, HSBC Holdings PLC, to fix the loan at the initial rate of 7%. HSBC agreed to lower the rate to 4.68% for six months, reducing the monthly payment to $765.

Ms. Rhinehart said she is grateful but remains worried about what will happen in six months. HSBC declined to discuss her case but said it is "strongly committed to homeownership preservation" and offers "a range of solutions including temporary and permanent relief."

Affiliates of the NeighborWorks organization are eligible to receive $1,500 if they help a borrower referred by the hotline avoid foreclosure.

Solutions aren't always easy to come by. Lou Tisler, executive director of Neighborhood Housing Services of Greater Cleveland, says his group receives as many as 15 referrals a day from the hotline, but can help just 10% to 20% of the callers.

The hotline's backers say the program's function is to connect borrowers with their mortgage servicer -- not work on behalf of the borrower. "We facilitate a conversation," says Colleen Hernandez, executive director of the Homeownership Preservation Foundation. "We wouldn't characterize ourselves as advocates where we are trying aggressively to convince the lender to do something."

The foundation was created in 2003 with $20 million in seed money from GMAC ResCap, a unit of GMAC LLC that services 3.4 million mortgages and until recently made subprime loans. Ms. Hernandez says the foundation's financial ties to the mortgage industry don't influence the services it provides borrowers. "The center of our life is what is good for the homeowner," she says.

Ms. Schwartz, Hope Now's executive director and a former executive with subprime lender Option One Mortgage, a unit of H&R Block Inc., says the main purpose of its hotline is to open lines of communication with as many troubled borrowers as possible. Mortgage companies don't hear from as many as half of the borrowers who wind up in foreclosure.

Foreclosure typically isn't an attractive option for either borrower or lender. For lenders, "if you have to go through with foreclosure, you're going to lose 50% of the loan amount," says Anthony Pennington- Cross, an associate finance professor at Marquette University. Beyond that, the interests of borrowers and mortgage companies can differ.

Hope hotline counselors typically they don't suggest specific actions to a loan servicer, such as an interest rate freeze or a repayment plan. However, says Brenda Grauer, housing policy adviser to the Illinois attorney general, "We've found the most effective approach is to actually come up with a concrete proposal that will work for the particular borrower."

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Damian Paletta and Michael M. Phillips contributed to this article.