Update: Going Upstream on Underwater Mortgages

In our Winter 2011 issue on capital markets and neighborhood stabilization we reported on some programs to buy mortgages and modify them and/or to facilitate short sales.

These programs were in their early stages of development or piloting, but we wrote about them because, I wrote in my introduction, we thought they were important potential models for large-scale ways to move forward out of the foreclosure crisis.

But we didn't know—and no one did—how these programs would fare in the rapidly changing economic and political climate. So this week I checked in with Second Opportunity of Arizona and Oregon’s Loan Refinancing Assistance Pilot Project. I'm pleased to report that they are both moving ahead.

SOAZ is purchasing notes and modifying the principal using some of the state of Arizona's Hardest Hit Funds principal reduction incentives to fund the program. When we wrote they were modifying their first two loans. Marcos Morales of SOAZ reports that the spread of results from their first mini pool of four loans went very close to their assumptions: two have modified and are seasoned to the point that they can sell them into the secondary market; one is still in trial mod status and hopefully will be moved to full mod status before the end of the year; and one has gone to foreclosure. SOAZ is working on a larger loan purchase over over 300 loans now.

Oregon's program ended up conducting effective modifications by purchasing properties by short-sale and reselling them to the original owner for current market value. They have closed 33 loans (and 4 more are expected to close any day) with an average principal reduction of $120,000. “It's early,” acknowledges Erik Sten of Further Development, which is administering the program for the state, “but so far our payment record on the new loans is 100 percent.”  The program has invested roughly $5 million of the state's initial $10 million commitment of Hardest Hit Funds to the program.

It's not quite thousands and thousands yet, but it looks like these programs are at least making it through their proof of concept phase solidly—it will be interesting to see if and how their models spread and scale up, especially as principal reduction by lenders themselves finally starts to hit more substantial volume, with Ocwen in the lead, even as it remains a contentious issue in the federal government.

Miriam Axel-Lute is CEO/editor-in-chief of Shelterforce. She lives in Albany, New York, and is a proud small-city aficionado.


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