Lenders Try Not To Foreclose in New Orleans
Most would prefer to work with owners

Linita McDonald hasn't made a payment on her mortgage since Hurricane Katrina hit.

"I call every month and they have kept granting extensions so far," said McDonald, a medical researcher whose home in eastern New Orleans flooded during the storm.

It's not that McDonald -- who received a payout from her insurance company -- doesn't have the money. It's just that she still doesn't know which route to go financially. Use the money to rebuild? Sell the home and buy a new one someplace else?

"Is it feasible to move back?" said McDonald, who worries about the potential for another flood. "I'm fearful we may go through this again. I may start over elsewhere."

McDonald was one of thousands of Louisiana storm victims to be offered grace periods, or forbearances, on their mortgages. But nearly six months after the storm hit, the breaks are coming to an end. And lenders are beginning to demand payment.

Lenders in Louisiana say 20 percent to 30 percent of their mortgages have not been paid on since Katrina, and several thousand borrowers remain unreachable.

Despite the potential for losses, lenders say they're pushing off plans for foreclosures on storm-impacted mortgages. In fact, foreclosure notices were filed on just 15 properties in January, and most of the properties were in trouble before Katrina struck. In January 2005, the Civil Sheriff's Office foreclosed on 261 properties, according to Lea Young, spokeswoman for Sheriff Paul Valteau Jr.

"It is hard to answer when -- and if -- there will be massive (hurricane-related) foreclosures," said John Kallenborn, New Orleans president for Chase Bank.

Most lenders, including Chase, say they're working with borrowers to develop individualized repayment plans.

"The basic policy from all major mortgage-holders is to continue forbearance," said Wade Rathke, chief organizer for Acorn, a community organization for low-income families. "Everything I hear from prime and subprime lenders . . . is they are fully committed to working with," borrowers as long as "there is a realistic chance of resolution."

Mortgage maze

But lenders are often limited in how long they can let borrowers go without paying. That's because mortgage companies don't always hold the actual mortgage on an individual's home. Mortgage companies and banks sell the bulk of their mortgages to government-sponsored agencies such as Fannie Mae, Freddie Mac and Ginnie Mae. These agencies then resell the mortgages to third-party investors.

The original lender simply services the loan: sending out notices, collecting payments, and ultimately forwarding the payments collected to the third-party investor who actually holds the mortgage. It's the federal agencies that have the ultimate say over how the loans are repaid and how much leniency is offered to borrowers.

It was those federal agencies that came up with the payment forbearances. Most borrowers were offered a three-month forbearance right after Katrina. The initial forbearances were then extended three months for borrowers needing extra time.

Lenders are staying in close contact with the government agencies in hopes that additional provisions will be offered to hurricane-impacted mortgages.

"I would be surprised if Fannie Mae and Freddie Mac don't come out with something to work with people," said Guy Williams, chairman and president of Gulf Coast Bank and Trust Co.

But Steve Bradshaw, senior vice president of Standard Mortgage, expects more restrictions to be applied to borrowers the longer they go without paying.

The first round of forbearances, which ended in November, applied to all borrowers, Bradshaw said. But the second round of forbearances is different.

"Now they ask you to contact the borrower and make an individual determination," said Richard Roniger, chief operating officer of First American Loss Mitigation, the firm Standard Mortgage pays to handle problem loans, but not foreclosures. "The challenge is a lot aren't contactable."

Standard Mortgage has turned 3,000 of the 28,000 mortgages it has in the hurricane-impacted area over to First American. All told, First American took in 8,000 delinquent loans from a variety of lenders last month.

At this point, the government agencies that buy mortgages are holding off on foreclosures.

This week Freddie Mac announced an extension of its foreclosure moratorium for the most affected areas through May 31.

Fannie Mae has instructed lenders to not report to credit agencies delinquent payments that are tied to the hurricane. The agency has also implemented special rules that require the agency's explicit approval before any mortgage is foreclosed on.

"Repayment plans may well be the most efficient way to assist borrowers who are now (or will soon be) ready to resume making mortgage payments," Pamela Johnson, senior vice president of Fannie Mae, wrote in a December letter to servicers.

Getting back on track

As part of their effort to get borrowers to resume their payments, a variety of individualized repayment options are being offered to those who took advantage of the grace periods.

"Most of the time (the borrowers) are making up payments incrementally, extending the maturity of the loan as long as 18 months to get caught up," said Darin Domingue, a deputy commissioner in the state Office of Financial Institutions, which regulates the banking and mortgage industry. So far the state has not received complaints from borrowers concerned that there are no options open to them.

Rathke, the Acorn organizer, has been talking with lenders on behalf of the low-income families he represents and pleading with them to both continue their forbearance policies and back off of foreclosures.

Those who had a solid credit history before the storm will have the easiest time getting back on track, he said.

"If you were in arrears, your number will come up first," Rathke said. People who first experienced payment problems as a result of the storm "will have many ways out."

Paul Peters, president of Hibernia Mortgage, a division of Hibernia National Bank, said his institution is nowhere near foreclosing on borrowers. Instead, he still focuses on tracking down borrowers he hasn't heard from and working out individualized plans.

"Foreclosure is not an option," Peters said. "Some people have not settled with the insurance company, some still have Small Business Administration residential loans pending that can help them get back on their feet."

In fact, Hibernia Mortgage recently began offering its own disaster relief loan that provides renovation money for damaged property. "We have this option for homeowners who are selling damaged property or for a qualified homeowner who wants to renovate," he said.

Williams, of Gulf Coast Bank, said borrowers still wrestling with insurance settlements are being allowed extra time to begin repayment plans. And like Hibernia, Gulf Coast is trying to find the right solution for each borrower. Sometimes this means tacking extra payments on to the end of the loan. In another case, the bank approved an interest-only repayment plan for a young couple, both of whom lost their jobs.

"We are not asking them to bring it up to date at once," he said.

At Chase Bank, where as many as 6,000 borrowers remain completely unreachable, customers have the option of repaying the delinquent amount in installments, typically over 12 months. Other borrowers may work out a plan in which the terms of the loan are modified, which could result in a lengthening of the terms or the loan or changing the monthly payment, Kallenborn said. Yet another option for Chase borrowers with Federal Housing Administration loans involves obtaining an interest-free loan from the U.S. Department of Housing and Urban Development to pay off their past-due amount.

Fear of foreclosure

Still, homeowners remain confused and worried, in part because of the mixed messages they're getting from some lenders.

Kimberly Lauer, who owns an Uptown coin laundry and has three mortgages with Washington Mutual, said the lender initially informed her by phone that she would be given time to make up the payments she missed during her 90-day forbearance. But she said follow-up letters from Washington Mutual demanded full payment and threatened to report her past-due payments to the credit bureaus.

The company denies that it has demanded full payment. And Nova Barnett, a spokeswoman for Washington Mutual, said the company has offered automatic suspension of payments for the first 90 days and subsequently for a second period.

This past week, Lauer was offered a loan modification, which suspends payments for another two months but allows her to keep the same interest rate and roll the payments into the existing loan.

City Councilwoman Jacquelyn Brechtel Clarkson, who organized a recent two-hour seminar on avoiding foreclosure, said the ramifications of delayed mortgage payments are very much on the minds of her constituents. Some borrowers have put themselves at financial risk by using all the money they have to pay off their mortgage to avoid foreclosure, she said.

"We hear about people who fear foreclosure," Clarkson said. "There are people who sell their property or use insurance money to pay off the mortgage and then have nothing to rebuild with. These are people who could work out something with mortgage companies."

Rep. Juan Lafonta, D-New Orleans, agrees.

"A lot of seniors were victimized because they were told unless they paid off their mortgages they wouldn't receive any (insurance) funds," said Lafonta whose district covers an area from the French Quarter to Gentilly. Lafonta's own parents were pressured by their bank to pay off their mortgage even though the amount of they actually owed on the loan was fairly insignificant.

To help resolve the problem, Lafonta introduced legislation requiring a mortgage company to distribute insurance proceeds in excess of the mortgage.