Waning Days of Grace for New Orleans Homeowners

As unpaid home-loan bills pile up, mortgage companies and owners of hurricane-ravaged property are still unsure what federal assistance they may get, and uncertain if they can salvage their investments.

After hurricanes Katrina and Rita struck, the mortgage industry granted victims a 90-day reprieve from payments, late fees and damaging reports to credit agencies. Most home lenders, including the two largest -- California-based Countrywide Financial Corp. and Wells Fargo & Co. -- have added another 90 days of forbearance for borrowers who need more time. But strains are showing in the fourth month since New Orleans’ levees gave way.

About 80,000 to 100,000 homeowners whose properties were inundated might have had no flood insurance, according to the Mortgage Bankers Assn. Thousands of borrowers haven’t contacted their lenders, increasing the odds of foreclosure, bankers and regulators said.

What’s more, Louisiana officials said they had received hundreds of complaints about lenders demanding lump-sum payments to bring loans current.

“This is a big, big deal,” Rep. William J. Jefferson (D-La.) said. “Many of the homeowners are not in their properties and cannot get back into them. Meanwhile, they are being required to make lump-sum payments for properties they can’t live in. The combination is not going to work.”

Major lenders say they are willing to stretch out payment schedules or renegotiate mortgages, and are not demanding missed payments in a lump sum. Even so, regulators have received “several hundred” complaints from people who say they received statements from their lenders demanding immediate payment of the equivalent of four mortgage payments, said Darin Domingue, deputy chief examiner at the Louisiana Office of Financial Institutions.

Domingue said the demands were coming from certain “sub-prime” lenders who specialize in mortgages for people with credit problems, and from other pockets of the market that are not underwritten with the prime lending standards used for traditional loans.

He declined to identify the lenders but said authorities would have grounds to intervene if lenders demanded a new payment schedule that diverted from the original terms. Domingue said state officials were monitoring the situation, but were urging borrowers to first contact their lenders to see whether they could resolve payment issues on their own.

Jay Brinkmann, vice president of research and economics for the Mortgage Bankers Assn., said he believed that any such demand statements had been generated mistakenly by computers after the end of the first 90-day grace period, and did not reflect any intent of lenders to begin mass foreclosures.

Brinkmann estimated that 5% to 10% of borrowers in the hardest hit areas had yet to contact their lenders, perhaps because of what he called unwarranted fears of triggering a foreclosure.

“They say, ‘What good is it going to do?’ ” to talk about it, Brinkmann said. “But realistically, there is nobody who wants to start talking foreclosure because of the destruction of property and the destruction of value.”

A borrower’s failure to contact a mortgage company would increase the chance of foreclosure, a spokesman for national bank regulators said. “If they don’t start talking about their options, they’ll wind up with just one option,” said Robert M. Garsson, deputy controller at the Office of the Comptroller of the Currency in Washington.

The magnitude of the problem was underscored this month in a Mortgage Bankers Assn. report on delinquent home loans. Across the nation, an average of 4.44% of all mortgages were behind by at least one payment; in Mississippi the figure was 17.44% and in Louisiana 24.63%.

With New Orleans’ viability depending on stabilizing and redeveloping flooded areas, lawmakers and civic leaders have floated several plans designed to bail out homeowners and, to some degree, banks and other lenders.

A bill introduced by Rep. Richard H. Baker (R-La.) passed 50 to 9 in the House Financial Services Committee but died this month amid fears that it would create too much liability for taxpayers.

Baker had proposed creating a corporation that would buy damaged property with federal funds generated through U.S. Treasury bonds. Homeowners who wished to take part would be written a check for at least 60% of their equity before the hurricanes. The corporation would be able to settle borrowers’ obligations to lenders by paying up to 60% of the loan balance.

The properties would then be cleaned up and sold in competitive bidding to private developers.

Although lenders would have to settle for less than the full loan amount, Baker said in an interview that they would nonetheless have a strong incentive to make a deal. The mortgage companies, he said, are in a jam: they are required by regulators to address delinquent accounts but are reluctant to foreclose and, in effect, become land developers in such a volatile market.

“Whatever we pay them as a corporation,” Baker said, “is far better than where they are today.”

Baker acknowledged that the “taxpayer will not be whole,” but said the bill would not create a giveaway program either. Most important, he said, the program would give New Orleans the framework it needed to rebuild and could not afford on its own. He hopes a version of his bill will pass next year.

“This action is to ensure that you have the longest possible period to be relieved from paying your mortgage obligation,” he said in a statement to displaced homeowners.

Emile Labat, however, said he believed that the smartest thing he could do was to use any insurance money he received to pay off mortgages on his two funeral homes and storm-damaged house in New Orleans’ Lakeview district.

Labat, 49, said he did not want to spend the money to repair his home, only to be required later to elevate the house in case of another flood. And he said he could not take a chance on repairing his businesses until he saw how many people returned to New Orleans.

“My clientele has been distributed around the country,” he said. “We have a dilemma. Even if we renovated the buildings in their entirety and got our licensing back in place, there is nobody to serve. Once folks start moving back into the city and the city is repopulated, then we’ll fix everything up.”

Given such uncertainty, industry experts said it was understandable that borrowers -- many of whom have lost jobs and have relocated to other states -- were too burdened even to talk to their lenders.

Like other mortgage companies, Irvine-based New Century Financial Corp. has been encouraging its borrowers to at least open discussions about their situations. The company is extending an automatic 90-day deferral to borrowers who haven’t called along with those still struggling to get reestablished, spokeswoman Erin Freeman said.

“Given how slow the relief has been in coming, if we haven’t heard from someone, it’s our assumption that they are in dire straits,” Freeman said.

Major banks and other lenders, meanwhile, have largely accounted for hurricane-related losses in their third-quarter financial reports.

Countrywide estimated after-tax losses at $115 million. Wells Fargo provided $100 million for losses, and Washington Mutual Inc., the third-largest lender, took a $37-million provision.

The losses are modest hits for these lenders, but regional banks and thrifts are in a more precarious position, said Peter Gwaltney, chief executive of the Louisiana Bankers Assn.

Local banks have seen their deposits and lending rise as funds from insurers and the Federal Emergency Management Agency flow in and local residents and businesses seek short-term loans to rebuild damaged property, Gwaltney noted. But their long-term prospects are uncertain, because their viability as businesses depends on New Orleans’ being rebuilt.

“On a business-by-business and a family-by-family basis, the banks are prepared to be the economic engine to rebuild New Orleans,” Gwaltney said. “But only so much can be done without federal help.”

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Gold reported from New Orleans and Reckard from Orange County.