Banks Offering Loan Mods Struggle to Get Borrowers' Attention

The five largest mortgage servicers are eager to modify loans and offer principal reductions to distressed homeowners to comply with the terms of the national mortgage settlement.

But after years of dragging their feet on loan mods, they are concerned that borrowers will ignore their solicitations. Though data on response rates is scarce, some say that borrowers are so worn out from being solicited not just by their servicer but by loan modification and law firms — some of them scam artists — that many are simply not opening letters or returning phone calls.

"There is a great deal of fatigue among borrowers looking to resolve their mortgage situation," said Eric Schuppenhauer, senior vice president and head of mortgage servicing at JPMorgan Chase (JPM).

Chase, Bank of America (BAC), Citigroup (NYSE: C), Wells Fargo (WFC) and Ally Financial have been sending mass mailings this year to thousands of distressed homeowners offering refinances, principal reductions, and other forms of relief to comply with the national mortgage settlement signed in March with federal and state regulators.

Banks should know soon how they are faring in their efforts to reach out to borrowers. Joseph A. Smith Jr., the independent monitor appointed to oversee the settlement, said last week that he was "thoroughly reviewing" preliminary data on consumer relief conducted by each servicer between March 1 and June 30. He expects to issue a report in the next several weeks.

Chase is so concerned about borrower response rates that it has been sending letters by FedEx to tens of thousands of borrowers saying they are preapproved for a lower interest rate or loan modification that may include a principal reduction.

Those borrowers who take the time to open the packages might find that they do not have to respond at all. Because the loans are held in Chase's own portfolio, the bank already has data on the borrower and has determined that no further documentation is required. Only if the terms of the loan change or the borrower moves to a fixed rate from an adjustable-rate mortgage do they have to sign and return paperwork.

The letters are a "creative approach," one that often requires "little to no action from homeowners," Schuppenhauer says.

Chase says it has an 80% response rate on its refinance offers and a 50% response rate on loan modification officers.

To be eligible to refinance, underwater borrowers must not have missed a payment in the past year, have no bankruptcies or previous modifications in the past two years and have an interest rate higher than 5.25%. For a modification with principal reduction, the borrowers much be delinquent by at least 90 days and not have qualified for previous assistance.

Banks are focused on refinances because that is the low-hanging fruit that will allow them to receive a 25% discount in the first year of the mortgage settlement. The discounts mean the banks are not required to pay out as much in cash toward the settlement.

"It makes a lot of sense," says Bob Caruso an executive vice president of strategy at Lender Processing Services, and a former head of servicing at B of A. "Banks can lower the interest rate easily and if it falls under the settlement, they can get credit for that and do it quickly."

Wells, however, is less inclined to make refinancing any easier. The company has a direct mail outreach campaign to solicit borrowers to refinance, but it is re-underwriting all of the loans, looking at credit scores, payment histories, debt-to-income ratios and verifying income and employment.

"One of our responsible-lending commitments is certifying the ability to repay," says Tom Goyda, a Wells spokesman. "We are continuously sending out letters and making phone calls to borrowers that are behind on their payments."

The San Francisco bank expects to complete 30,000 to 40,000 refinances to comply with the settlement, Goyda says.

B of A expects to complete 20,000 to 25,000 refinances of underwater borrowers by lowering interest rates by an average of 2%, the Charlotte, N.C., bank said in a securities filing on Aug. 2.

Achieving that target could be a challenge; B of A executives have admitted that distressed homeowners are skeptical of solicitations.

"Due to the time required to underwrite the modified loans, a significant number of modifications have not yet been completed," B of A said in the filing, adding that it could be required to make additional payments if it fails to meet its two- and three-year commitment targets.

Dan Frahm, a B of A spokesman, says the company will meet its goals for the settlement this year, but he would not speculate on future years.

Since May, Citi has been sending mass mailings and making outbound calls offering to refinance loans and so far has helped over 12,000 customers reduce principal payments by $850 million, says Mark Rodgers, a Citi spokesman.

The company declined to discuss response rates.

GMAC Mortgage, a unit of Ally Financial, has solicited more than 50% of its borrowers and spokeswoman Susan Fitzpatrick says response rates have been "high." She declined to be more specific.

Keith Gumbinger, a vice president at HSH.com, a financial publisher in Riverdale, N.Y., credits servicers for finally providing relief to borrowers, though he calls the settlement itself a "misapplication." The settlement also ought to help those who were victims of bad servicing practices and have already lost their homes, he says.

"People being offered these refinances and loan modifications were not aggrieved by any portion of the servicing abuse, and yet are receiving a benefit from it," Gumbinger says. "I would rather see people who had claims of wrongful foreclosure or malfeasance stand up and say they deserve some recourse for this."