Homeownership and home values have increased dramatically in the United States in recent years. So, too, has the number of mortgages, with mortgage debt far out-pacing consumer and even the national debt. The availability of mortgages has made all the difference for the millions of households that needed assistance in becoming homeowners. For many, however, that assistance may have led them into financial situations that simply are not sustainable.
As property values have gone up, homeowners’ paper wealth has increased. Mortgage lenders have encouraged owners to convert that equity into cash, and many people do not understand the ramifications of doing so, says Jim Wheaton, deputy director of Neighborhood Housing Services of Chicago (NHS). At the same time, adjustable-rate mortgages, interest-only loans and other products aimed at low-income buyers have proliferated in the last 10 years. Underwriters have expanded their rules to allow people with higher credit risk profiles and riskier employment situations to purchase homes. In some cases, says Wheaton, it has become easier to buy than rent, in terms of the amount of cash required at the outset.
These factors, coupled with a rise in predatory lending practices (which lure homebuyers into loans with huge fees, undisclosed balloon payments and other traps), have led to an increase in the foreclosure rate in recent years. While the threat of foreclosure has always been scary to homeowners, research is now demonstrating that other stakeholders lose out when a home is repossessed. As a result, some community and national nonprofits are offering services to help low-income homeowners stave off the loss of their home when faced with foreclosure.
The Costs of Foreclosure
Ira Goldstein, director of public policy and program assessment at The Reinvestment Fund in Philadelphia, says that, “in instances where people lose their homes through foreclosure the homeowner loses, the lender loses, the municipality loses and the community loses.” Research has only just begun to try to quantify these losses, he says.
A 1998 study by the Minnesota Family Fund estimated the cost of foreclosure on a household to be about $7,200, taking into account the hard costs of moving, legal fees, loss of equity upon transfer of the home and long term costs of higher borrowing due to poor credit, as well as the more intangible costs of emotional distress and other adverse family effects.
Lenders lose money through the foreclosure process, but those losses are easier to calculate and easier to mitigate through the structure of the larger loan pool. As the industry has evolved and tracked repayment patterns, it has determined how to shift the cost of that risk onto other borrowers. Lenders’ losses are also lessened by the fact that most lender fees are upfront, Goldstein adds.
Still, “it always is better to keep someone in their house than go to foreclosure,” says Donna Sheline, director of the homeownership preservation office (HPO) at JPMorgan Chase. “Otherwise it’s costly for the bank and the investor. We don’t make money on foreclosure, and there’s also a negative impact to the community, and we’re in that community.” Chase established the office in 2004 to work with nonprofits assisting Chase mortgage customers who are delinquent or at risk of foreclosure. The HPO created a toll-free number for organizations to contact Chase’s mortgage center and offered 17 loss mitigation training sessions to those agencies.
For the municipality, foreclosures can mean a loss in tax revenue, increased demands on social services for those forced out of their homes and an increased need for police and fire services as abandoned buildings can become magnets for criminal activities. Studies have estimated these costs to the municipality to be as much as $34,000 per foreclosure. This suggests that in some cases the timeline for foreclosure ought to be sped up, says William Apgar, senior scholar at Harvard’s Joint Center for Housing Studies. “Where it is clear that a foreclosure isn’t going to be contested, you need faster resolutions so that the city or a nonprofit can take over the property and secure it and rehab it before it becomes a drain on services and the community.”
The Reinvestment Fund’s own research into foreclosures in Philadelphia helped quantify the cost to the surrounding community. When examining home prices in areas where houses had been foreclosed on, they discovered that foreclosures did have a negative effect on home values. “If you have five foreclosures near you, you lose 5 percent of the value of your home,” says Goldstein. “That’s the amount of a downpayment or a year of appreciation, and you’re losing it for no other reason than the fact that people around you are in financial distress.” The economic instability caused by such a drop in home values can be enough to trigger a major change in a community, from a stable one to one in severe distress, he says.
Similar research has found evidence of the contagion effect in Chicago, Atlanta and other cities. Because of the increased risk, investors and banks do not want to invest in neighborhoods where a few foreclosures have undermined home values. Therefore, the neighborhood becomes markedly weaker in a very short period of time. These patterns are most prevalent in inner-city neighborhoods with predominantly low-income and African-American populations.
Over the past decade “a lot of people stretched themselves, finance agencies gave overly aggressive terms, and builders may have been willing to take on homebuyers who weren’t necessarily rock-solid,” says Apgar. With interest rates rising, adjustable-rate mortgages reaching their adjustment dates and the job market changing, foreclosures have predictably increased as a result, and solutions are needed.
“The first and best solution would be to not get people into loans they can’t handle,” suggests Apgar. Homeownership programs should do more to educate potential owners about mortgage lending pitfalls so that they recognize if a lender is overly ambitious. “It would make sense to go upstream and develop better ‘buyer beware’ programs because the number of people getting into debt they can’t handle is rampant. Marketers know all the hot buttons to draw people into mortgages, and a broker will approve you for a loan within 24 hours.”
Whatever solutions are found today still will not affect the increasing number of foreclosures expected in the near future. “The problem is that there’s a big pipeline of people who have already said yes to a bad loan,” says Apgar.
Preserving Homeownership in Chicago
Neighborhood Housing Services of Chicago has been involved in foreclosure prevention since the mid 1990s, when the city awarded the group a $900,000 grant to offer foreclosure intervention loans and counseling to certain low-income households that were at risk of foreclosure. By the late 1990s, however, NHS realized that the small loans were not addressing the root causes of the still increasing foreclosure rate. “People were in loans that they shouldn’t have been in in the first place,” says Deputy Director Wheaton. “It became clear that many people were falling into traps set by subprime lenders and mortgage companies.”
When the group tracked foreclosures in a single neighborhood between 2000 and 2001, they discovered that fully 10 percent of the housing within one square mile had gone into foreclosure. “People were getting into loans they didn’t understand and were falling into foreclosure within a few months of closing,” he says. According to Wheaton, most of the foreclosures were on loans that were targeted at minority and low-income homeowners.
To mitigate the problem, NHS, with some local financial institutions, put together a $2.2 million loan fund to refinance homeowners out of predatory loans. In less than a year, the loan fund had been depleted.
At the end of 2002 NHS created a new capital pool by establishing mortgage-backed certificates, funded with a three-year, $100 million commitment from Chicago’s financial community and $3 million from the city’s CDBG fund. The capital pool funds NHS’s Home Ownership Preservation Initiative (HOPI), which focuses on helping homeowners at risk of foreclosure due to predatory loans. Homeowners participate in an intensive counseling program, get help with budgeting and developing realistic financial plans for themselves and are offered restructured loans if they can afford them.
Along with the loan restructuring component, HOPI has an extensive counseling and training element. Each year, more than 1,600 people go through the homeownership training program, an eight-hour classroom session offered five times a week in English and Spanish. The classes include lessons on credit records, housing markets, the home-buying process and homeowner responsibilities such as maintenance and rehabilitation. The program also offers post-purchase workshops to which servicers send representatives to answer questions from homeowners. Because many homeowners are unaware of the steps to take when they find themselves unable to make a mortgage payment, this opportunity to discuss the process with mortgage servicers can be beneficial. It can help them avoid a contentious interaction with a mortgage servicer.
Typically when homeowners miss a mortgage payment, they receive a call from the mortgage servicer’s collection department. Collection representatives have a single goal – to get the payments in and the account current – and have no authority to discuss other payment options. As a result, these conversations are often frustrating for the homeowner, who may need assistance because of extenuating circumstances. It’s only after the account is several months overdue that the account shifts to the servicer’s loss mitigation department, where officers have more flexibility to help the borrower.
“[It] seemed counterintuitive to us,” says Wheaton, “for the process to be hard at first and then more open, so we get homeowners past the collection folks and to the loss mitigation staff right away.” A big part of NHS’s role in helping to avoid these situations and alleviate these tensions, says Wheaton, stems from the working relationships NHS staff have developed with local lenders. NHS staff have contact with those who can make decisions about individual customers and can bypass the 800 numbers and voice mail menus that the customers traditionally have to deal with.
As a result of HOPI, one Chicago-area lender realized that offering options earlier in the process is a better way to prevent foreclosures and has begun cross-training its loss mitigation and collection staff. And other information sharing has occurred as lenders and servicers have come together around HOPI. Wheaton says that one lender has a list of mortgage brokers that it will not purchase loans from. Now other lenders are keeping track of brokers from which more foreclosures originate.
After going through the counseling process and working out a budget with NHS, the next step is to present a proposed loan restructuring to the bank. This could mean changing certain terms, such as the interest rate, payment schedule or length of loan. “Most people don’t realize that lenders have flexibility,” says Wheaton, “and close to half feel there’s no point in even talking to the lender.” In most cases, however, if the restructuring proposal is feasible, the banks will accept it.
“We’ve saved about 25 to 30 percent of the people who have called us from foreclosure,” says Wheaton. But about 40 percent of the calls are from homeowners who are less than a week from the foreclosure sale. There is rarely anything that can be done in that amount of time, he says. Most foreclosure cases last 10 to 14 months, starting from the first late payment to the sale. The earlier borrowers connect with NHS to help resolve the problem, the better their chances of keeping their homes.
Donna Sheline, of Chase, believes that the services provided by a nonprofit intermediary are invaluable. “We have a huge operation and do all of the outreach to try to reach our customers [who are delinquent in their mortgage], but this is an emotional time in their life,” she says. “Fifty percent of them don’t answer our calls or open the letters. They’re more comfortable going to a non-bank entity, someone local with a reputation of helping and caring about the community.”
“We need to do more outreach to get customers to get back to us,” Sheline says. “The further behind they get in their payments, the harder it is.” When the customer does come to the bank with their counselor, she says “anything is up for discussion. It could be special forbearance – no payments for a certain amount of time, or a loan modification.” The same opportunities are available to customers who call the bank directly, but by going through a nonprofit such as NHS, borrowers deal with a trained advocate who can help them with their household budget and figure out their priorities with them.
NHS’s parent organization, NeighborWorks America, has launched the Center for Foreclosure Solutions, as a national effort to reduce the rate of foreclosures as well as the negative impact of foreclosures on borrowers and communities. The Center is convening and supporting a coordinated foreclosure prevention and intervention strategy in communities nationwide, beginning in Ohio. In addition, NeighborWorks has joined forces with the Homeownership Preservation Foundation to promote a toll-free hotline, free foreclosure prevention services and counseling to consumers.
Since 1987, ACORN Housing has been providing housing counseling and working with lenders to help low-income borrowers obtain loans. In recent years, the group has launched a nationwide foreclosure mitigation program, developing relationships with 24 large mortgage servicers and creating an extensive communication system between its housing counselors and the lenders’ loss mitigation staff.
ACORN Housing’s decision to offer mitigation services was informed largely by the experiences of counselors who shared stories of antagonistic communication with servicers’ collection staff. Prior to improving its communication with loan servicers, Bruce Dorpalen, director of housing counseling, felt that the organization provided a sound foreclosure prevention service. “We had good plans, would work out budgets and what would work, and the lenders all said we were doing good work,” he recalls. “But at a conference of counselors from our agency and others, everyone reported that they had been yelled at or even hung up on by servicers. The problem was that the people who understand the dollar value of these resolutions were not the people answering the phones.”
As a result, ACORN Housing asked 15 of the largest servicers in the United States to each train one person to negotiate affordable, workable resolutions for the homeowners and to take calls from ACORN counselors. ACORN Housing explained that they wanted the servicers “to listen to all of our proposals, including rate reductions, fee waivers, extension of terms and other long-term and realistic solutions.” Dorpalen says that within a month all of the servicers did so, and what happened was “a 180-degree turnaround…We got them to do this. It has been a big surprise, but we can negotiate things now that 10 months ago we couldn’t have.”
Dorpalen says “It’s a much more economical strategy for them to put together a realistic, affordable plan, even if it means less income for that loan. From the business side, having a customer long-term and making payments is always better for the bank.” Since launching the program, ACORN Housing has received 3,500 calls from homeowners needing assistance, and has resolved 3,200 of them satisfactorily, Dorpalen says. “Before we had these relationships we weren’t even batting .500.” Though these close relationships with lenders and servicers are critical, it’s not the key to getting households back on financial track. “We focus on the whole household’s finances,” says Dorpalen. “We help them look at their income, their debts, give them advice about trimming costs and put together an affordability plan that we can take to a lender.” Educating servicers’ loss mitigation staff to help them differentiate between housing counselors who have done such extensive work with the borrower, versus credit repair operations that can actually cause more harm than good and tend to simply counsel people toward bankruptcy filings, has also been critical, he added.
“Our role is as mediator, counselor and adviser,” says Emmett Gross, a counselor for ACORN Housing in Milwaukee. The homeowner needs to have ownership of the process and be the one making the decisions and understanding their options in order for the solution to be appropriate and lasting, he adds.
In most cases the hardships for the homeowner are temporary – layoffs, health issues, other family emergencies – and the solutions for those circumstances tend to be easy and routine. But while servicers have proven their ability and willingness to be flexible, even going so far as to reduce fees and alter other terms of mortgages, the borrower’s dealings with the lender are a factor as well. When borrowers become antagonistic or stop answering their phone, the servicer indicates that uncooperative behavior on the borrower’s record. “That can be difficult to overcome,” says Gross, “so people need to stay in regular contact with their servicer and be as specific as possible about what the problems are and how they plan to resolve them.”
Tools for Reducing Foreclosure
The homeownership counseling industry is still growing, and new products and services such as those provided by NHS of Chicago and ACORN Housing are being made available more regularly. But some researchers say that still more are needed. Apgar advocates post-purchase counseling, for example, as a welcome tool in the fight against foreclosures. Many agencies do not provide such a service, and those that do have found that once people are in their new homes, getting them to come back for more classes or counseling is challenging. Building a trigger into a loan document that compels people to take classes might be a solution, he says, particularly if they are trying to refinance their way out of financial trouble.
Early warning indicators that would allow municipalities to develop a finely tuned policy response when they begin to see concentrations of foreclosures are also useful, says Apgar. Foreclosures themselves can often be warning signs of deeper problems within a community, he says, and so should be monitored closely by cities and towns.
“It’s good business all around to keep a family in a home if they can afford it,” says Wheaton. “It’s good for the family, good for the neighborhood and good for the lender. Housing is a very powerful economic engine, but it has to be successful for all of the players involved.”