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Foreclosure expert favors reducing loan amounts

PROVIDENCE — A former bank executive working to hasten a resolution to hundreds of foreclosure disputes in Rhode Island’s federal courts called the mortgage crisis a ‘‘Gordian knot’’ and said debt forgiveness needs to be part of the solution.

Former Bank Rhode Island CEO Merrill Sherman said in her special master’s report to US District Judge John McConnell last week that the best approach to fixing the mortgage crisis is reducing struggling ­homeowners’ loan amounts — an approach that has garnered significant resistance from mortgage giants Fannie Mae and Freddie Mac despite pressure from the Obama administration.

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Sherman called it ‘‘economic folly’’ for defaulting homeowners to stay in homes that are underwater — or worth less than the amount owed — by means of other loan modifications, including stretching out payments over a longer period of time and reducing interest rates.

Rhode Island has the highest foreclosure rate in New England and one of the highest in the country.

Hundreds of homeowners in the state have sued, saying their mortgage foreclosure proceedings were fraudulent or flawed.

McConnell appointed Sherman special master in January to bring together homeowners and lenders to negotiate settlements and keep people in their homes.

As of Sept. 28, 215 of the cases Sherman is overseeing involved homes already foreclosed on, with more than three-quarters of the plaintiffs still living in the properties. In 288 cases, the homes had not yet been foreclosed on. The median mortgage size was $226,000.

Sherman said she could not yet report on how productive the settlement process has been because so many requests to modify loans are pending and she doesn’t yet know the outcomes.

Of the 131 settlement conferences Sherman held between Aug. 7 and Sept. 13, the report said, 81 led to requests for loan modifications and 33 led to ‘‘cash for keys’’ negotiations, a program in which home­owners are effectively offered money to leave. Nine cases have been resolved, and one dismissed.

Rhode Island was also one of 49 states to sign on to a $25 billion settlement with the nation’s five largest mortgage services. Some 5,500 Rhode Islanders who lost their homes because of improper foreclosures are eligible to claim funds under that agreement.

Sherman said ‘‘nothing could be worse’’ for Fannie Mae and Freddie Mac than if homeowners stopped fighting their foreclosures and handed over the deeds to the homes.

In that case, she wrote, Fannie and Freddie ‘‘would be TOAST.’’

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