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Housing Crisis June 26, 2008, 5:00PM EST

A Beacon of Sanity in Subprime

(page 2 of 2)

—part touchy-feely counselors and part nitty-gritty lenders who work directly with homeowners. "The first thing you want to do when you are working out a bad loan is say: 'I'm listening, I hear what you're saying,'" says Toni Nadolski, HSBC's head of collections in Tampa.

Besides dealing with homeowners who are already behind on their payments, HSBC is being proactive, scouring its files for the most at-risk customers whose adjustable-rate mortgages are due to jump to higher rates. The bank initially sends letters to borrowers 120 days before the increase, then phones them 60 days before.

Many borrowers don't realize such mortgage relief is even an option. As a result, they often don't respond to HSBC or other lenders' communications for fear that callers will demand payments. To help get the message out, HSBC is working with nine community groups, including Detroit HOPE Center and the Center for NYC Neighborhoods.

Before HSBC could begin to attack the problem, a small team spent six months developing processes and technologies to automate loan workouts. Each homeowner is sorted by three characteristics: geography, credit profile, and type of loan. The system allows HSBC to rank borrowers into seven different risk categories and decide the best course of action. That could be anything from a short-term loan modification, which lowers the interest rate on a temporary basis, to selling the property.

A homeowner in Pennsylvania with a $277,800 mortgage whose rate is scheduled to jump from 7.5% to 9%, for example, was offered a fixed rate of 8% for the life of the loan. In North Carolina, where housing prices have held up relatively well, a borrower got only a six-month break on interest. "Without a framework, we couldn't understand what we're dealing with or how to deploy solutions," says Grant Miles, HSBC's head of default services, a 25-year risk-management veteran for the bank.

Of course, there can be kinks in the system. Rick Arvielo, president of New American Funding in Irvine, Calif., a brokerage firm that works with homeowners to help restructure their loans, hit a dead end when he contacted HSBC using the normal channels. Arvielo says he made more than 50 phone calls to several different departments. Only after he heard about the bank's centralized effort through the industry grapevine did he make any headway. "Most of the time with lenders, it's like trying to call the Pentagon to find someone who will answer questions about a legitimate offer," he says.

A RETIREE'S RELIEF

Despite the hiccups, even Arvielo concedes the bank is among the most responsive lenders in the industry. Back in 2005, his client, Calvin Croom, a retired public school teacher, refinanced the $220,000 mortgage on his three-bedroom ranch house in Stone Mountain, Ga. After fees, his new adjustable-rate mortgage ballooned to $251,000. Earlier this year, with rates that had already jumped once and were set to explode again, Croom was on the verge of losing his home of 16 years.

Arvielo intervened with HSBC on Croom's behalf in mid- February. Eight days later, Croom had a new, less onerous mortgage. His fixed monthly payment is $1,200—less than half the amount he was struggling to pay before. The bank has also cut the balance on his mortgage to $186,000. Says Croom of the workout: "I just wanted to break into tears."

"A Beacon of Sanity in Subprime" (In Depth, July 7) should have cited Moody's Investors Service as the source for a finding that lenders have restructured 1% of troubled mortgages.

Der Hovanesian is Banking editor for BusinessWeek in New York.

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