A recent report in the Wall Street Journal discusses the creation of a task force comprised of state attorney generals and banking regulators who will attempt to work with loan servicers and investors to increase the frequency of loan modifications.

Task Force Will Seek More Loan Revisions

Attorneys general and banking regulators from 10 states have formed a task force hoping to persuade mortgage-servicing companies and investors in mortgage-backed securities to increase the number of troubled subprime loans they restructure, to stem the tide of foreclosures.

The task force, headed by Iowa Attorney General Thomas Miller, has invited a dozen of the nation's largest subprime-mortgage-servicing companies to meet later this month in Chicago. The group will ask servicers to find ways to modify more subprime loans instead of moving borrowers into foreclosure. The group also wants servicers to create more longer-term solutions for distressed borrowers, such as lowering the borrower's mortgage interest rate, rather that creating a repayment plan that offers a temporary fix.

Mortgage-servicing companies collect loan payments in return for a fee and are charged with resolving any problems. If a borrower falls behind, they may modify the payment plan, restructure the terms of the loan or initiate a foreclosure action. Loan modifications aren't offered to borrowers routinely, and government officials and housing counselors say it can be difficult for borrowers to arrange such plans, even when it makes sense.

"Modified loans not only serve the public interest and help distressed borrowers; they are often the better business decision," Mr. Miller said in a letter sent to servicers Aug. 31. But "because of the fractured and complex nature of today's mortgage market, resolution of these troubled loans can be difficult to achieve..."

That is partly because of changes in the mortgage industry that have made it more complicated to restructure troubled loans. Many of the loans are no longer held on the books of banks or other financial institutions that granted the loan, but instead are packaged into securities and sold to investors. In those cases, trust documents determine how problem loans are handled. The company servicing the loan may or may not be the lender that originated the mortgage.

The working group plans to meet separately in October with investors who hold mortgage-backed securities, Mr. Miller said in an interview. The group was formed after a meeting in July that was attended by officials from roughly three-dozen states.

The task force also includes the attorneys general of California, Arizona, Texas, Illinois, Ohio, North Carolina, Colorado and Massachusetts, banking regulators from North Carolina and New York, and a representative from the Conference of State Banking Supervisors.

A policy paper prepared as part of the effort by Iowa Assistant Attorney General Patrick Madigan suggests, among other things, that servicers boost their loan-modification staffs, create teams dedicated to handling loan modifications, increase training and provide front-line employees with financial incentives that would encourage them to save homes rather than moving borrowers toward foreclosure. It also suggests that investors remove provisions in trust agreements that limit modifications, and pay servicers an extra fee for loan modifications that make sense for both the borrower and the investor.

In an effort to keep costs down, servicers kept their workout staff down when delinquencies were low and are now staffing up in response to the rise in mortgage delinquencies, says Doug Duncan, chief economist for the Mortgage Bankers Association. But not every borrower who asks for a loan modification deserves one, he adds. Coming up with a workout that makes sense can be particularly difficult in places where home prices have fallen and borrowers owe more than the home is worth.

On Thursday, the Mortgage Bankers Association reported that 5.12% of mortgage loans were delinquent in the second quarter, on a seasonally adjusted basis, and the number of homes that entered the foreclosure process rose to a record.

Mortgage-industry executives have encouraged borrowers to contact their servicer at the first sign of trouble. But borrowers who follow this advice are often stymied when they seek help, government officials and housing counselors say.

"The leadership would say they are in favor of restructuring loans," says Mr. Miller, but for mortgage employees who take these calls "it's counterintuitive, when you are trying to collect money, to give [borrowers] a better deal. It's easier to foreclose." His office plans in the coming week to announce a pilot program that will use third-party mediators as intermediaries between Iowa borrowers and their lenders.

State officials say they want to learn more about how the industry is handling problem loans and look for ways to overcome obstacles. "This is not an enforcement action. This is not an investigation," says Mark Pearce, deputy banking commissioner for North Carolina. "We're trying to work collaboratively and cooperatively with servicers to deal with problems of today. It's not about assessing blame. It's about helping families avoid foreclosure."

In recent weeks, some lenders have become more willing to restructure troubled loans, housing counselors say. Servicers have become more willing to give borrowers time to make up missed payments without tacking on added fees, but still need to do more to refinance borrowers who are in loans that are unaffordable, says Lou Tisler, executive director of Neighborhood Housing Services of Greater Cleveland, a nonprofit that works with homeowners.

However, as delinquencies climb, servicers are feeling the strain. It now takes some companies as long as two months to respond to proposed loan modifications, which puts added stress on borrowers, says Eileen Anderson, senior vice president of Community Development Corp. of Long Island, a nonprofit housing organization.

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