Refinancing programs omit many borrowers

Mass., other states limit their focus

Eight states including Massachusetts have pledged almost $900 million this year to help borrowers replace unaffordable mortgages, but the states collectively have refinanced fewer than 100 people, a Globe survey found.

In Massachusetts, where the Patrick administration introduced a $250 million program in July as a "big piece" of its efforts to limit foreclosures, not a single loan has been refinanced.

In Maryland, the first state to create a refinancing program, officials have found it so ineffective that they are considering shutting it down. The program has made just nine loans in about a year.

A leading advocacy group said the programs simply aren't able to help most borrowers. "They're very well intentioned," said David Berenbaum of the National Community Reinvestment Coalition, "but these new products aren't fitting the needs of the consumers we see."

The vast majority of the applicants aren't eligible for refinancing. They have either fallen too far behind on their payments, have badly damaged credit, or simply owe more on their loans than the value of their homes, making refinancing effectively impossible.

In Massachusetts, more than 3,500 people have called seeking help, but only about 30 passed two stages of screening and were referred to lenders to begin the actual refinancing process. None have received a loan as yet. Ohio initially expected to serve one of every three applicants; officials say they have so far helped one in 15.

The state programs, which work in similar fashion, do not lend money directly to homeowners and are not funded with tax dollars. Instead, qualified applicants are referred to traditional lenders, who can resell the mortgages they make to state housing finance agencies. Because the agencies are assuming the lenders' risk, borrowers are able to qualify for lower rates and payments than they otherwise would receive.

But the programs primarily were designed to help only a portion of the population with problem mortgages: those who can make their payments now, but are facing unaffordable rate increases.

"It was a great program for somebody who was thinking ahead," said Tonna Phelps, director of Single Family Housing at the Maryland Department of Housing and Community Development. "The problem is that people aren't thinking ahead, so now we have to go back to the drawing board."

While the programs struggle, new states keep jumping in. Connecticut, New Jersey, and Pennsylvania all announced refinancing programs within the last month, totalling almost $300 million.

The stalled state efforts highlight the general difficulty of helping homeowners avoid foreclosure: Officials have only a short time frame to act before borrowers fall too far behind to be helped. Yet the circumstances of each loan are unique and complex - "Like snowflakes," said one official - making it is impossible to process cases routinely. Moreover, lenders often must be persuaded to accept a financial loss to make the refinancing possible.

Berenbaum said his group has helped several thousand borrowers across the country by getting lenders to modify existing loans by lowering monthly payments. That allows the group to help people without subjecting them to the increasingly difficult process of qualifying for a new loan.

More than 6,200 properties were foreclosed in Massachusetts during the first 10 months of this year, according to data released yesterday by Warren Group. That is more than three times the number of foreclosures during the same period last year.

The $250 million Massachusetts program is the largest by any state. Governor Deval Patrick introduced it with great fanfare in July, as part of a series of measures to limit foreclosures.

Officials at the Massachusetts Housing Finance Agency, the quasi-public entity administering the program, said it is too early to judge the results. They said they spent months building infrastructure to help large numbers of applicants, and that the first people who applied for help, in August, are only now approaching the end of the refinancing process.

The Patrick administration said it was committed to making sure the program succeeds.

"If we see as the months go on that this MassHousing product needs a second look, we will work with MassHousing to give it a second look," said Kofi Jones, a spokeswoman for the Massachusetts Executive Office of Housing and Economic Development. "It's only as effective as the numbers prove it to be in time."

Its success will depend on the state's ability to persuade lenders to swallow losses in connection with the refinancings, officials say. Declining property values have left many borrowers with mortgage balances greater than the current value of their homes. Those loans must be replaced with loans that do not exceed the homes' values.

The Patrick administration has said it would urge the holders of the mortgages to accept partial repayments. For example, a borrower who owed $350,000 and lived in a house that is now worth $300,000 would receive a new $300,000 loan through the state program. The original mortgage company would agree to accept a repayment of $300,000 and swallow a $50,000 loss.

Patrick officials hoped lenders would be willing to do so because a foreclosure could result in the loss of a larger sum.

So far, that hasn't happened. But MassHousing director Tom Gleason said he has seen encouraging signs in recent weeks that some mortgage companies are willing to work with the agency.

"Six weeks ago, we were not getting the kind of response from our servicers that would lead to success," Gleason said. "I don't feel that way anymore. We are getting phone calls returned."

Bruce Marks, head of the Neighborhood Assistance Corporation of America and a critic of the Patrick administration's efforts, said he doesn't think the state is putting enough pressure on lenders to accept losses.

He noted that his organization successfully pressured the nation's largest lender, Countrywide Home Loans, to allow NACA to restructure some of its loans to create payments borrowers could afford. In the month since that deal was reached, Marks said his group has restructured loans for 40 Massachusetts borrowers.

Binyamin Appelbaum can be reached at appelbaum@globe.com.