When her brother could no longer help support her, Luzetta Reeves asked her small mortgage company to cut her monthly payments. It did — by 11 percent — making it possible for her to afford her house here on her modest fixed income.
In Miami, Jeffrey Mitchell saw his family income drop just as real estate taxes and insurance premiums increased, making his monthly mortgage payments crushing. He got a lower interest rate, too. But with the added fees and penalties, his monthly payment remained the same. He is now back in foreclosure.
As the Obama administration steps up efforts to help troubled homeowners modify their mortgages, it might consider the experiences of these two South Florida borrowers and their mortgage companies, one small, one large.
National statistics on mortgage modifications suggest that what happened to Ms. Reeves, a disabled 54-year-old, and Mr. Mitchell, a 42-year-old union representative, is fairly typical.
The nation’s 14 largest banks reported that more than half of the loans they modified last year were delinquent again after just six months, according to the federal bank regulator, the comptroller of the currency. But several small mortgage companies like the one that helped Ms. Reeves, which have been pursuing modifications longer, say that less than 25 percent of their modified loans became delinquent again.
“It’s becoming more and more clear to us that if you do real modifications the default rate is significantly lower,” said Tom Miller, the attorney general of Iowa, who has led a group of state officials pushing the industry to modify more loans. “They shouldn’t be called modifications if people pay more or approximately the same.”
Two years into the foreclosure crisis, many borrowers say they still have trouble reaching anyone at their bank or mortgage company to discuss loan modifications.
Banks and investors absorb huge losses in foreclosures, but some mortgage companies may view foreclosure as more profitable and expedient than modifications because they can levy extra fees and they do not have to wait to see if a homeowner will continue to make payments.
Bankers counter that they pursue options that minimize losses, but add that it is often hard to reach delinquent borrowers because many hide from their creditors.
While both arguments appear to have merit, reports by analysts at Credit Suisse and a law professor, Alan M. White, show that when mortgages are renegotiated, borrowers often face higher monthly payments or balloon payments at the end of the term.
Rod Dubitsky, a mortgage analyst at Credit Suisse, found that modifications that result in lower payments tended to re-default at half the rate as plans under which payments were higher or remained roughly the same.
The performance of individual companies varies greatly. Some, like Wells Fargo, one of the nation’s largest servicers of home loans, have modified few loans as a percentage of their delinquent mortgages, said Mr. White, an assistant professor of law at Valparaiso University.
Other companies like Ocwen Financial and Litton Loan Servicing, a subsidiary of Goldman Sachs, have modified a big portion of their delinquent loans, according to Credit Suisse. (The studies cover only loans packaged into securities, not those held on the books of banks.)
In the case of Ms. Reeves, Ocwen cut the interest rate to 5.6 percent, from 8.9 percent, lowering her payments by $125, to $1,027. Officials at the company said the reduction would cost less than seizing and selling Ms. Reeves’s modest two-bedroom house near Dolphin Stadium.
“Ocwen was very patient with me, and they really worked with me,” said Ms. Reeves, who has back problems and breast cancer.
The company said its modifications were not acts of charity but were based on calculations of whether changing loan terms was in the best interests of investors. Using home price data, estimates of legal costs and the time it takes to foreclose, the company determines how much it will recover in foreclosure. It compares that with estimates of what borrowers can afford based on income, family size and expenses.
“Our biggest hurdle is reaching out and talking to people,” said Margery A. Rotundo, Ocwen’s senior vice president for residential loss mitigation. “If a borrower has a desire and the ability to stay in the home, we can help them.”
Ms. Rotundo said the company’s decades-long experience with borrowers with blemished credit histories informed its approach.
Ocwen, which is based in West Palm Beach, Fla., modified half of the delinquent loans it resolved last year. It foreclosed on a third, and most of the rest were sold before foreclosure for less than what was owed on them.
But many more people appear to have the experience of Mr. Mitchell, the other Florida borrower.
Mr. Mitchell bought his Miami home four years ago for $282,000. In 2007, his wife had to work less to care for a sick child, and the family was hit with higher tax bills and insurance premiums, raising monthly payments to $2,700 from $2,200.
When Mr. Mitchell told Wells Fargo he could not keep up, he said, “It fell on deaf ears for a while.”
Wells Fargo ultimately cut Mr. Mitchell’s interest rate to 6.1 percent, from 6.5 percent. But it added fees, back payments and penalties to his principal, raising it above $300,000. His payments were virtually unchanged, and he was asked to make a $5,000 payment to get out of foreclosure. He fell behind again right away. His house, he estimates, is worth only $199,000.
“The arrangements they come up with are not really in your best interest,” he said. “You feel like you’re trapped.”
Wells Fargo declined to comment for this article.
Analysts say it is hard to know exactly why different mortgage companies handle delinquent loans so differently.
Smaller companies like Ocwen that are under more financial pressure and have more experience in dealing with higher-cost loans have been most aggressive in lowering payments, said Mr. Dubitsky, the Credit Suisse analyst. Big banks like Wells Fargo, which would need to be retooled to emphasize modifications over foreclosures, appear to favor modifications that do not lower payments or debts very much.
A spokesman for the comptroller, Bryan Hubbard, said that many banks began focusing on lowering monthly payments last year and that it would be premature to say they had not done enough to help borrowers.
Lowering payments is becoming more important as the economy weakens, Mr. Dubitsky said, because more borrowers are likely to lose jobs or encounter expenses they cannot afford.“If the borrower is spending every last dollar on their debt,” he said, “that leaves them vulnerable to unexpected expenses.”