Lenders aim to forestall wave of foreclosures

By Jim Christie

SAN FRANCISCO (Reuters) - The sharp increase in subprime borrowers falling dangerously behind on mortgage payments may not trigger a tsunami of a million or more foreclosures that some analysts forecast.

A coalition of civil rights groups underscored such fears last week by calling on lenders to stop foreclosing for six months on subprime mortgages, which involve loans to risky borrowers with blemished credit.

Optimistic analysts say that will not be necessary because lenders on a strong footing are moving aggressively behind the scenes to limit losses from faltering subprime mortgages.

Most lenders are working very hard to get to folks early to see if they can make forbearance agreements," said Bob Walters, chief economist at privately held Quicken Loans.

Lenders must try to work out deals because foreclosures would only mean a bigger stockpile of vacant houses amid a sluggish real estate market, said Sean Snaith, director of the University of Central Florida's Institute for Economic Competitiveness in Orlando.

"If it's salvageable, it's in their best interest to do that," Snaith said. "Nobody wins with a foreclosure."

Based on talks with lenders, Milton Ezrati, senior economist at money manager Lord Abbett, expects many to be as aggressive in saving subprime mortgages as they were making them.

"One guy said, 'If you think you've seen creative financing to date, you ain't seen nothing,'" he said. "I'm sure we'll see 50-year mortgages before we're done."

Not all lenders aim to quietly fend off foreclosures. EMC Mortgage Corp. is touting its "EMC Mod Squad," which will partner with credit counselors to find and advise high-risk borrowers struggling with mortgage payments after interest rates reset from low initial levels, said John Vella, president and CEO of the Bear Stearns (BSC.N: Quote, Profile, Research subsidiary.

They can expect intense customer support if they ask for it. "We want to make our borrowers out there aware that we're out to help them," Vella said.

According to Vella, of every 10 distressed borrowers EMC negotiates with, two will reinstate loans to bring them current, three will enter repayment plans and two will have loans modified. Two others will execute a "short sale" of their home -- a fast sale under market value -- and one will offer to sign over the deed on the property in lieu of foreclosure.

The problem for lenders is that half of delinquent borrowers avoid contact, said Duke Olrich, president of DRI Management Systems Inc., Newport Beach, California maker of software for managing mortgage defaults.

"Lenders certainly understand they have to get a lot more efficient in this arena," Olrich said, adding that orders for his firm's software are on the rise.

"The biggest interest is from those lenders in the subprime market," said Olrich, noting an urgency to shore up weak borrowers.

Foreclosures may not surge also because of the availability of cash for refinancing and because mortgages -- even subprimes -- remain appealing to investors, promising added capital.

"There is a tremendous amount of money still," said Louis Galuppo, director of residential real estate at the University of San Diego's Burnham-Moores Center for Real Estate.

Impac Mortgage Holdings Inc. (IMH.N: Quote, Profile, Research Chief Executive Joe Tomkinson said hedge funds are keen to know more about his REIT's Arch Bay Group LLC unit, formed to manage "loss mitigation" efforts for lenders and buy nonperforming home loans and property.

"There is a lot of capital out there looking for a way to take advantage, and I hate to say take advantage, of these distressed products," Tomkinson said.