US mortgage companies are being overwhelmed by the large numbers of homebuyers who need to renegotiate their loans to avoid default, creating a “subprime traffic jam” that could frustrate efforts by regulators to prevent foreclosures, experts say.
Mortgage servicers, the operations that collect loans, say they are having trouble making profits because of record levels of late payments and delinquencies. Litton Loan Servicing estimates that costs have increased 20 per cent in the last year for mortgage servicers, who even in good times depend on razor-thin profit margins.
The result is that few subprime mortgages are being renegotiated. Moody’s, the ratings agency, found that lenders had eased terms on just 1 per cent of subprime loans resetting at higher interest rates in January, April and July this year.
“Servicers have failed because there’s a huge resourcing issue,” said Barefoot Bankhead, managing director at Navigant Consulting. “As lenders have gone out of business, the servicing arms have been in transition without the resources to handle the enormous number of requests for loan modifications and restructuring.”
The problem could grow more severe as more than $350bn in adjustable-rate mortgages reset at higher rates in the next 18 months.
“Servicer inactivity could turn the subprime traffic jam into a monumental pile-up, because the longer people wait to make decisions, the worse the situation gets,” said Don Brownstein, chief executive of Structured Portfolio Management, a hedge fund.
Moody’s found that few servicers made telephone calls to borrowers facing interest-rate resets in the near future. It said the majority of large servicers continued to rely on letters to contact borrowers.
Moody’s said this was of “particular concern” given the potential size of the problem. Moody’s said servicer data showed that borrowers who were making payments before the reset and did not have their loans modified fell into arrears at a rate of up to 10 per cent. Analysts estimate that resets could boost payments for borrowers by between 30 and 50 per cent.
Another complication in renegotiating mortgages is that most loans have been packaged into securities and sold to investors. Some modifications are being held up by disputes between investors with differing interests in the same pool of loans.