Mortgage bailouts: Who qualifies?

Meet the Keenans

Many people think the consumers who get loan workouts were irresponsible and borrowed way more than they could afford, Wagner said. But, he contended, most are like the Keenans: generally reasonable people whose financial lives were upended by some catastrophe, such as a job loss, divorce or major illness.

The Keenans have had a series of upsets over the past year.

"There's no simple explanation of what happened with us without turning this into a novel," Bob said.

• Home Affordability Calculator: Run the numbers

They were in the middle of building their dream home -- a 3,200-square-foot house on the bank of a river -- when Bob, 63, lost his job.

The Keenans were not worried. Mary, 69, earned a comfortable living selling advertising for a local newspaper. They could make their payments on one income if they needed to. Besides, Bob was confident that he'd quickly find a new job.

But he'd barely started looking when he started to experience shooting pains in his leg. It turned out to be a nerve disorder that took months of physical therapy to resolve. In the meantime, the economy continued to sour, making jobs in banking -- Bob's former profession -- harder to find.

Last May, as Bob was recovering, Mary felt a lump in her breast. It turned out to be cancer. She was rushed through a double mastectomy and put on a heavy regimen of chemotherapy. After finishing chemotherapy, she faces several months of radiation treatments.

Though Mary still earns some residual commissions on long-term advertising contracts, she's been able to work only sporadically for the past six months. Her income has been cut to roughly a quarter of what she earned before she got sick.

In less than a year, the Keenans went from earning a comfortable six-figure income to taking home roughly $4,600 a month in pensions, Social Security and unemployment checks. Their expenses, whittled down to the bare bones, are $6,750 a month, including the $2,800 they pay on the $470,000 mortgage on their home.

The devil in the details

It doesn't take a genius to know that the Keenans can't afford their mortgage. But they don't qualify for an expedited loan workout either.

Why not?

Problem No. 1: Their payments aren't late enough. Bob has been draining their retirement savings to keep their bills current, thinking this would ingratiate him to his lenders and keep his credit rating solid. Last month, when he couldn't swing the full $2,800 mortgage payment, he sent $1,000, as much as he could afford.

He didn't know that being current on his loan violates the first rule of loan workouts: The loan payments must be at least 60 days past due.

Why must payments be late? Because lenders are able to modify mortgages only if the loan is in default or if "default is reasonably foreseeable," Wagner said. IndyMac says that if payments are more than 60 days past due, default is reasonably foreseeable.

Problem No. 2: Modifying the mortgage doesn't make sense for investors. The Keenans have plenty of equity in their home, even given today's bad market. They have a $470,000 first mortgage, but the house was appraised less than a year ago for more than $800,000.

IndyMac, which has to balance the interests of borrowers with those of the investors who bought their loans, has suggested that the Keenans list their home for sale. That's the best option for the investors who bought the Keenans' loan.

It's a rotten option for Bob and Mary, though. That's because they also took out an additional $110,000 in unsecured debts to finish the construction. If they sold the house for $650,000 or $700,000 they'd wipe out their debts but also wipe out their equity and have nowhere to live.

Problem No. 3: They can't afford the new payment. Even if IndyMac could talk investors into taking a lower return on the Keenans' mortgage, it might not cut their rate low enough to make a difference, given the couple's circumstances. The Keenans' mortgage is at 6.5%; IndyMac would reduce it to about 5.1% under the bank's first workout option.

If IndyMac extended the loan term to 40 years, that would cut the Keenans' payment by only about $200 a month, far shy of what they would need.

If the bank temporarily cut the rate to 3%, it would still leave the Keenans with a $1,900 monthly payment.

That, too, is unaffordable. Given their other bills, a $1,900 monthly mortgage would still leave them with expenses that exceeded their monthly income by more than $1,000. That would boost the chance that they would default again, causing them to fail the expedited mortgage modification test a third time.

"If they can reduce their expenses or Bob can bring in more income, things might change," Wagner said. "But there's no way we can get them to an affordable payment as things stand."

Other options

What the bank did agree to do is buy the Keenans some time.

For the next three months, IndyMac will reduce the Keenans' required mortgage payment to just $1,000 a month. The $1,800 difference between this temporary payment and their normal mortgage payment will be added to their loan balance.

It is far from the nirvana the Keenans had hoped for.

"We get a little breathing room, but it's not a solution," Bob said. "There's no way Mary can work for a while, so it's all on me. If I can get another job, we can get back on track. We'll have to see what happens.

"What a bleak situation," he added. "Everything was going so well for us, but in the blink of an eye, everything turned around. It was like a domino effect -- and just bewildering. At some point you think, 'How much more can happen to me?'"

Published Dec. 19, 2008

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