Facing criticism over the slow progress of its foreclosure-prevention efforts, the Obama administration has struck deals with two giant banks that would extend mortgage relief to homeowners with second mortgages.
Wells Fargo & Co. said Wednesday that it has agreed to modify home-equity loans in cases where borrowers have already qualified for relief under the U.S. Treasury's mortgage-modification program. Wells Fargo joined Charlotte, N.C.-based Bank of America, which made a similar announcement in January. Together, the two banks account for 25 percent of the second-mortgage market in the United States, according to the U.S. Treasury.
Consumer advocates say a key weakness with the government's $50 billion foreclosure-prevention program is that mortgage modifications leave second loans unchanged. Borrowers qualifying for lower mortgage payments risk default because of large payments on a home equity loan. Some homeowners owe more on a second mortgage than the first.
The U.S. Treasury, recognizing the second-mortgage problem, last summer began urging large banks to modify those loans, too.
"Our goal is to provide another benefit to customers who may be in distress," said Kevin Moss, the executive vice president in charge of Wells Fargo's home equity group, which has a $124 billion home equity portfolio with 2.3 million customers. "The housing market is showing some positive signs of stabilizing in some markets, but there are still too many foreclosures, and too many people who are still struggling out there."
The move by two giant banks may compel other lenders to follow suit, said Celia Chen, a housing economist at Moody's Economy.com. Even so, she said, the modification program will do little to reduce foreclosures this year and may simply postpone them. In February, about 308,000 Americans lost their homes through foreclosures, up 6 percent from a year earlier, according to RealtyTrac.
The Obama administration is under pressure to improve its Home Affordable Modification Program, or HAMP, which aims to slow the surge in foreclosures. The goal of the program is to lower the payment on a first mortgage to about 31 percent of a borrower's gross income.
Borrowers have complained of disappearing paperwork and slow service by the banks, which have the final say over loan changes. So far, 168,708 mortgages have been permanently modified with lower payments or longer payoff periods, according to a Treasury Department report last week. That's just a small fraction of the 3.4 million people who qualify for the program.
Extending relief to second mortgages improves the odds that borrowers will avoid default, say consumer groups.
"This is a step in the right direction," said Tara Twomey, an attorney with the National Consumer Law Center, a nonprofit advocacy group that has tracked the federal government's mortgage-modification efforts. "It's a recognition that people with second mortgages are struggling, too, and that ignoring seconds was problematic."
As of Feb. 28, Wells Fargo, the nation's largest home lender, had permanently modified 24,975 loans under the program, the most of any lender, federal data say. The San Francisco-based bank had 114,090 borrowers still in trial repayment plans and has modified more than 365,000 mortgages outside of the federal program.
Chris Serres • 612-673-4308