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Spiraling mortgages could become morphed

| Sunday, Dec. 28, 2008

Linda and Frank Russitano faced a potential foreclosure after the rate on their adjustable-rate mortgage ballooned from 8 percent to 15 percent.

Their monthly payments -- including taxes -- jumped from about $1,000 to $1,500, so they went to court and successfully fought to modify the terms of their loan.

"We would have had trouble paying that amount," said Frank Russitano, 57, who works for ServiceMaster.

They now have a 28-year fixed-rate mortgage at a much more manageable 4 percent, which has allowed them to remain in their Trafford home.

Yet the Russitanos are in the minority.

About 55 percent of mortgages modified during the first quarter of 2008 were 30 or more days delinquent after six months, according to Comptroller of the Currency John Dugan.

"Re-default rates increased each month and showed no signs of leveling off after six months," Dugan said recently. "This trend of increasing delinquencies underscores the need to understand why these modifications have not been more sustainable."

Easy credit and exotic mortgages with low introductory rates helped fuel the 2001-05 housing boom. But as home values plunged, borrowers found themselves saddled with loan balances that eclipsed the value of their homes. Then many were hammered when their loans reset at much higher interest rates.

With delinquencies continuing unabated, the federal government is speeding up the modification of hundreds of thousands of loans held by the housing finance giants it now owns, Fannie Mae and Freddie Mac.

On Dec. 8, Fannie Mae announced that effective immediately, struggling homeowners who pay mortgages on time will be eligible for loan modifications. Previously, such a remedy was available only to homeowners already in default.

The new rules allow servicers to modify interest rates and payment schedules, but don't allow them to reduce mortgage balances to be more in line with home values, said Gibran Nicholas, chairman of Michigan-based CMPS Institute, which certifies mortgage bankers and brokers.

Sheila Bair, chairwoman of the Federal Deposit Insurance Corp., said she wants payments on modified loans to be as low as 31 percent of a borrower's gross monthly income and that this could be done by reducing the interest rate to 3 percent or extending the loan terms to 40 years.

"The quality of the modifications are not what they should be," she said.

The government would guarantee that mortgage holders would be compensated for a portion of the losses if a homeowner defaults on a modified loan.

Modifying a mortgage is normally cheaper than refinancing, according to Jane Flaherty of Standard Bank in Monroeville, president of the local chapter of the Mortgage Bankers Association.

"We, like other lenders, charge about 1 percent of the new mortgage amount to modify," she said. When refinancing a loan, the lender requires all fees associated with a new loan to be paid.

These include appraisal fee, title search fee, application fee, and credit checks.

Diane Rice-Smith, 50, who is on disability, risked losing her childhood home in Braddock Hills. Her $634 monthly mortgage payment was set to increase every six months under the terms of her former adjustable-rate mortgage. The loan, modified in February to a term of 30 years with a fixed rate of 7.9 percent, was purchased by the Pennsylvania Housing Finance Agency through its Homeowner's Equity Recovery Opportunity program.

Smith now pays $611 a month.

Some local homeowners are struggling to modify their mortgages.

Dawn Williams, an attorney with the Urban League of Pittsburgh, said she has sent 15 to 20 requests for mortgage modifications to lenders.

"They have not been responsive," she said. Two requests were denied and the rest went unanswered.

"We want to be sure that a 30-year fixed-rate loan is affordable, that the borrower will be able to make the payments the entire loan period, not just for a two- or five-year period," she said.

Otherwise, the borrower will probably go into foreclosure, she said.

Most of her clients are single-parent households where the homeowner has been laid off and is living on unemployment.

Some lenders and loan-servicing companies have been modifying mortgages by lowering interest rates or creating repayment plans through the voluntary Hope Now Alliance, which includes Citigroup, JPMorgan Chase & Co. and Bank of America.

Hope Now said it plans to double the number of borrowers getting help next year. The group projects 950,000 loan modifications for 2008, including 208,000 for November. Including repayment plans and other assistance, Hope Now estimates that about 2.2 million foreclosures will have been prevented this year, bringing to 3 million the total averted since the program began in 2007.

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