Partners (Summer 2002)
Partners (Summer 2002)
Homeownership rates in the U.S. are at the highest level in history. The Department of Housing and Urban Development (HUD) reported in 1999 that the national homeownership rate in the U.S. was 66.8%.
In the 1990s, a strong economy, lower interest rates, low unemployment, and growth in the subprime market created more opportunities for low- and moderate-income families to realize their dream of homeownership. The current economic downturn, however, has stymied this growth and presented financial challenges to many lower-income families in being able to make timely payments.
In August 2001, the Washington Post reported that U.S. borrowers who took out mortgages in 2000 are falling behind on their monthly payments in greater numbers than any comparable group in almost a decade. The data are from the Mortgage Information Corporation, the countries’ largest monitor of home-loan repayments.
Those faring even worse were borrowers who had mortgages categorized as “subprime” due to higher risk. The risk of late payments or default is higher when a borrower originated a loan with unrepaired credit blemishes or a lack of credit history, and a lender typically mitigates such risk through higher pricing. Loan delinquencies on subprime mortgages are up 21%, a substantial increase from the prior three years.
Foreclosure is the last resort for most lenders, and it brings a monetary cost to the lender as well as the borrower. A 1999 Neighborhood Reinvestment study estimated that on a typical $75,000 mortgage in default after the 36th month, at 8% interest, the costs incurred in foreclosure result in a loss of owner’s equity amounting to $4,200. The lender in turn loses $16,600 in associated maintenance fees, property taxes, legal fees, broker fees and closing costs.Proactive Measures to Prevent Foreclosure
What can nonprofit organizations, financial institutions, and mortgage lenders do to stem the devastation caused by foreclosure?
First, mortgage lenders and post-purchase counselors agree that the homeowner needs to be convinced to take action before the loan becomes 90 days past due. Mortgage servicers can be more effective by closely monitoring their loan portfolios and following up past-due loans with personal telephone calls sooner rather than sending out the customary 30-day past due notice.
It also helps to know who in their community is providing post-purchase counseling and referring the homeowner to these agencies. A list of HUD-approved post-purchase counseling agencies can be found on their website (www.hud.gov).
Establishing an open and active relationship with housing counseling agencies can also help collections personnel be more active in avoiding foreclosure. Most housing counseling agencies emphasize how homeowners should work to maintain good relationships with their mortgage lender after they purchase their home, including contacting the lender whenever they will be late with a payment.Foreclosure Prevention Counseling
What happens once the client is referred for foreclosure prevention counseling?
Most agencies will require that the client come into the office with their monthly bills and budget, then explain how they fell into delinquency on their loan. Then the client and the counselor together will determine a course of action for getting back on track with payments. The agencies quite often have working relationships with the mortgage lender and will communicate with the lender on behalf of the client to discuss options for preventing foreclosure.
The most common workout plans include creating a realistic repayment schedule and modifying loan terms until the client is able to get back on their feet. One option is deferring past-due loan payments by lumping them onto the principal of the entire loan. The lender may choose to suspend or reduce the mortgage payments if the client can show how they are able to meet the requirements of the workout plan and eventually get back on track.
Lenders sometimes restructure the entire loan so that mortgage payments are more affordable. HUD offers a “partial claim” interest-free loan to help bring the mortgage current if the borrower meets certain criteria. These criteria are that the loan is at least 4 months delinquent but no more than 12 months delinquent; the mortgage is not yet in foreclosure; and the borrower is able to begin making full mortgage payments.
In the worst cases, the client might request a pre-foreclosure sale that allows the owner to sell their property and pay off the mortgage loan to avoid foreclosure and damage to their credit rating. In most instances the owner qualifies if three criteria are met:
“Deed in lieu” of foreclosure is the last measure available to the owner before foreclosure. In this case, the owner turns over the property to the lender. This option is most attractive if the owner is in default and doesn’t qualify for any of the other options; the attempts at selling the house before foreclosure were unsuccessful; and the owner does not have another mortgage in default.Fed Hosts Foreclosure Prevention Workshops
Recognizing the financial hardships many families were experiencing in the wake of September 11 and an economic downturn, the Federal Reserve Bank of Atlanta convened a group of interested parties in two of its branch cities (New Orleans, Louisiana and Jacksonville, Florida) to address the problem. United Way agencies, homebuyer counseling agencies, workforce development officials, and representatives from HUD met with mortgage lenders and collections staff to share resources and information regarding foreclosure prevention.
For many, this was the first time that financial institutions had met with nonprofit organizations to address this issue together. At the New Orleans meeting, attendees discovered that FEMA, through nonprofit organizations, had emergency housing funds available. Churches and faith-based organizations also offered housing assistance funding, and several local governments offered emergency funds that could be used to make mortgage payments.
Other organizations offered help with paying utility bills, and the workforce development agency discussed the resources available to help the un- and under-employed regain employment and increase their work skills. All attendees received a list of the available contact phone numbers and resources.Finding Answers through Collaboration
Information from the meeting soon helped save the home of a single mother of three children (one of whom was disabled). The borrower was five months past due on her mortgage. The lender who held the mortgage had been present and agreed to absorb some of the past-due payments if the other payments could be made current. After the meeting, three community organizations contributed three of the mortgage payments, and the family was able to stay in the home. These results are easily duplicated in any community by simply linking resources.
A March 1996 paper presented to HUD estimated that “between 70 and 80 % of homeowners who become 90 days delinquent on their mortgages can still cure the problem on their own in an additional 30 to 60 days.” Given the high cost of foreclosures to our financial institutions, homeowners and communities, we would do well to continue to work together to help the 20 to 30% who are most vulnerable stay in their homes.