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Getting mortgage relief is an uphill battle

Our story last week on the slow pace of mortgage relief for millions of struggling homeowners generated a flood of mail from readers. Many reported lengthy, frustrating ordeals that went nowhere. Others were looking for tips on how to get lenders to let them out of a bad mortgage.

Do I have a better chance of getting a modification if I quit paying my mortgage? I have to take money out of my retirement every month in order to make it this year!
Colleen P., Address withheld

This question is one of the biggest sources of frustration for homeowners who are trying to get their lender to modify the terms of their mortgage. The reason is there are no hard and fast rules. Policies seem to vary from one loan servicer to the next. We’ve heard from readers who have gotten conflicting advice from different representatives of the same lender or loan servicer.

It’s true that lenders have less motivation to work out new loan terms with you if you haven’t missed a payment. But skipping payments to get their attention may make things worse. First, you may trigger a default, which will begin the process that puts you at risk of foreclosure. Stopping that process — even if you can get the lender to agree to modify your loan — can be a nightmare. And you’ll still owe the missed payments.

But you may have trouble getting your lender’s attention if you keep making payments. One reason the pace of loan modification has been abysmally slow is that lenders are hoping borrowers “self-cure.” As long as you can keep making the payments, this thinking goes, you don’t really need a new loan.

That’s not what the government had in mind when it set up the Making Home Affordable program spelling out guidelines for lenders to modify loans. To be eligible, your mortgage has to be: 1) on your primary residence; 2) worth less than $729,750; and 3) written before Jan. 1, 2009. You also have to show you’re having trouble making payments — for example, because the payment increased or your income dropped — and that your payment is more than 31 percent of your income.

The problem with this program is that it’s voluntary. It also won’t help you if you owe more than your house is worth. A recent report by Deutsche Bank estimates that half of all U.S. homeowners will be “underwater” by 2011. So while you may be able to get your payment reduced, getting your lender to accept less than the full amount you owe is highly unlikely.

Just trying to get your monthly payment reduced is a long and frustrating process; readers report spending hours on the phone talking to multiple representatives, often getting conflicting advice and information. So far, not many homeowners have succeeded in getting lenders to agree to new terms.

To get started, call your lender, find out which company services your loan, and ask to speak to someone in the “loss mitigation” department. You can find out more about the process from, a Web site devoted to helping people with bad mortgages

You may be better off working with a professional housing counselor, but you need to choose very carefully. The Web is crawling with scam artists preying on people with mortgage trouble. You should seek a HUD-approved counseling agency, which you can find on HUD’s Web site or through the National Foundation for Credit Counseling.

You may also want to find a good lawyer who specializes in fixing bad mortgages. Some of the loans written during the peak of the lending boom were prepared so sloppily you may be able to find errors that force the lender to rewrite the loan.

No matter what route you take, keep in mind that the decision to modify a loan is entirely up to the lender. If your mortgage was bundled with others and sold to investors, the lender also has to get those investors to agree to new terms as well. That roadblock is one of the biggest reasons so many homeowners are still stuck with bad mortgages.

Trillions of dollars worth of bad assets will be written down (by the banking industry). Where do those bad assets go and who will profit and who will lose?
— Jack B., Address withheld

Not all bad assets are created equal.

The most common reason a bank writes down an asset, typically a loan, is that the borrower is having trouble paying it back. But it’s not always clear just how likely it is that the borrower will actually default. So the writedown often represents a guess as to the risk the loan will go bad. (Once it actually goes bad — the borrower stops paying for good — the loan is “written off” the bank's books at a loss.)

The assets that are causing the biggest headaches for bankers these days aren’t whole loans; they’re the bonds that are backed by pools of loans, including mortgages, student loans, car loans and credit card debt. These “asset-backed securities” were at the heart of the lending boom because they allowed bankers to sell off these loans to investors, use the proceeds to make more loans and bundle them into more pools backed by bonds, etc.

Unfortunately, when the debt bubble burst, banks were stuck with a boatload of these bonds which are backed by loans that are going bad. But unlike a whole loan, it’s a lot tougher to know what these bonds are worth.

For one thing, the rules governing which bonds get paid from the loan payments in the pool are extremely complex. If your bond is first in line to get paid, you probably won’t get hurt if some of the loans in the pool go bad. As you go further back in line, your risk of losing money increases. With hundreds of separate loans in these pools, it’s a lot tougher to predict how many of them eventually will default and which bonds will turn out to be losers.

The other problem for banks holding these assets is that they're backed by home mortgages which are, in turn, backed by the house bought with the mortgage. If the borrower defaults the bank forecloses, sells the house, and writes off the difference. But with house prices falling, it’s difficult to predict how much value will be left in that house if and when the borrower defaults. Until the housing market stabilizes, the value of assets backed by houses is a moving target. The same is true for assets backed by commercial real estate, which may take longer to recover than the residential market. No one knows when real estate prices will stop falling.

When a bank makes a writedown, shareholders are the losers. Those writedowns take a bite out of profits, which has a big impact on the price of a company's stock.

It will take years before you can accurately add up the winners and losers, because to do so you need to know which loans eventually go bad and which ones are paid off in full. And you need to know where real estate prices will end up.

If the bank writes down an asset and then sells it, the buyer could be a winner or a loser — depending on whether the sale price accurately accounts for the future loss from defaults. If more loans go bad than expected, the buyer loses. If the loans that looked bad eventually pay off, the buyer could be a winner.

Banks (and their shareholders) could also be long-term winners if the writedowns on assets the bank holds turn out to be overly pessimistic. If loans are written down because they look dicey, and then eventually pay off, the bank gets to “write up” the value off the asset to reflect that. The same is true for assets backed by real estate: if the housing market recovers and home prices go back up, writedowns based on falling prices could be reversed.

But unless someone can figure out how to get these assets off banks' hands, it will be years before the books are closed on how much they’re actually worth.