1 National Community Development Association White Paper Foreclosure Prevention By Vicki Watson Assistant Director March 2013
2 National Community Development Association The National Community Development Association (NCDA) is a national non-profit organization that represents local government agencies that administer community development, affordable housing, and economic development programs, including the Community Development Block Grant (CDBG) Program and the HOME Investment Partnerships (HOME) Program. The mission of the Association is to assist local governments achieve high-quality, locally-responsive programs for making communities better places to live and work, particularly for low- and moderate-income people. NCDA grew out of the Model Cities Program in 1968, with the commitment to help local governments respond to their community development and affordable housing needs. For more information go to NCDA would like to thank Freddie Mac for their support in the development of this paper.
3 CRA - Community Reinvestment Act of 1977 GAO - U.S. Government Accountability Office Acronyms and Definitions Government Sponsored Enterprises (GSEs) - Freddie Mac, Fannie Mae, and the Federal Home Loan Bank Mortgage Fraud Foreclosure rescue schemes that take advantage of homeowners who have fallen behind in their mortgage loan. Schemers promise to prevent foreclosure for a hefty up front fee by having so-called investors purchase the mortgage or transfer title to other persons involved with the scheme. Loan modification schemes that, again, require advance fees from homeowners to negotiate on behalf of the homeowner for a better mortgage with their lender. Oftentimes, the negotiator does nothing and walks away with the fee. Short sale fraud. Similar to the scenario above, so called short sale negotiators guarantee to negotiate a short sale with your bank for a fee oftentimes a percentage of the sales price of the home. The negotiator takes the fee and does little or nothing in return. Prime Mortgages - mortgages made to borrowers with strong credit ratings. Prime mortgages provide the most favorable interest rates and terms. Sub-Prime Mortgages - mortgages made to borrowers with blemished credit histories. Subprime mortgages feature high interest rates and less favorable terms.
4 How Did We Get Here and How Do We Fix It? Most agree the housing crisis was caused by loose lending practices and unaffordable mortgages. Add in depressed housing values, high unemployment, and lost equity, and you have the makings of both a housing and national financial crisis. According to various federal agencies and housing experts, the continued increase in foreclosures between 2008 and 2011 can be attributed to several factors: continued depreciation in home values, elevated numbers of unemployed nationwide, and weaknesses in the servicing industry s response to the large number of delinquent borrowers. 1 While housing sales and prices seem to be increasing in most areas of the country, foreclosure filings and mortgage delinquencies remain an issue for many regions. First and foremost, mortgage affordability led to the problem. An excess of mortgages were originated at very high debt-to-income ratios or included interest rate resets that resulted in unsustainable payments. Moreover, home price declines since 2006 have pushed as many as a quarter of homeowners underwater, owing more than the current value of their homes. Throughout the research of this paper, several themes emerged as to how to best address the problem. First, outreach and housing counseling appear to be effective tools for helping borrowers address their mortgage situation. Next, sensible mortgage modifications that provide affordable mortgages must be provided by lenders. The key here is affordability; most experts agree that mortgage debt to loan ratio should be in a range of percent to be considered affordable. In addition to reasonable debt-to-income loan ratios, sensible modifications can also include a combination of fixed interest rates, interest rate reductions, amortization extensions and principal reductions. Short sales should not be an option. The goal should be to keep borrowers in their homes. Foreclosures Remain High; Affordable Modifications are Needed According to the Standard and Poors/Case- Shiller home price index, average U.S. home prices rose by 192 percent from 1996 to 2006 and have fallen an average of 31 percent since Some regions have seen a decline in home prices of 50 percent or more from peak levels. Home foreclosures impact the credit and stability of homeowners, wreak havoc on neighborhoods with vacant properties and depressed home values, and deplete local tax coffers. Many point to 2006 or 2007 as the starting point of the foreclosure crisis when foreclosures begin to increase in areas that had previously seen few foreclosures such as California, Nevada, and Arizona; all of which benefitted greatly from the housing boom. While overall foreclosure filings have plunged since the peak foreclosure year of 2010, some states are seeing foreclosure rates rise. Florida, Illinois, and Georgia were home to the largest number of zip codes with the highest foreclosure rates in 2012, displacing California, Nevada, and Arizona which accounted 1 Board of Governors of the Federal Reserve System, The U.S. Housing Market: Current Conditions and Policy Considerations, Washington, DC, January 4, 2012.
5 for 81 of the top 100 zip codes in The number of loans in foreclosure remains elevated and many mortgage loans are at risk of foreclosure. By most estimates the foreclosure wave is only halfway over with 8% of borrowers delinquent on their mortgages as of the third quarter of The Government Accountability Office s (GAO) analysis of mortgage data showed that in June 2011 between 1.9 million and 3 million loans still had characteristics associated with an increased likelihood of foreclosure, such as serious delinquency and significant negative equity (a loan to value ratio of 125% or greater). Moreover, as of December 2011, total household mortgage debt was $3.7 trillion greater than households equity in their homes, representing a significant decline in household wealth nationwide, possibly leading to borrowers walking away from their homes. 4 In total, loan servicers completed more than 4 million loan modifications under various programs between January 2009 and December 2011, according to the GAO. At the beginning of the mortgage crisis, servicers were slow to offer meaningful modification plans to borrowers. Using data obtained from Core Logic, the GAO found that in 2007, at the beginning of the foreclosure crisis, most modifications resulted in higher monthly payments for borrowers because servicers chose to capitalize past due amounts into the new payment instead of forgiving the past debt. This resulted in higher rates of borrowers According to GAO, beginning in the first quarter of 2010, more than half of modifications involved payment reductions of 20 percent or more. By early 2011, about a quarter of all modifications involved payment reductions of 40 percent or more. Since 2008 the performance of modified mortgages has steadily improved. re-defaulting on their modifications. For example, according to GAO, 36 percent of prime loans and 31 percent of sub-prime loans modified in the last quarter of 2008 re-defaulted within six months. Fast forward to 2010 and beyond when servicers begin to focus more on lowering monthly payments in the modification through reduced interest rates, extended loan terms, and principal forgiveness in some cases. This effort to make the loan affordable vs. recouping loan losses resulted in much lower re-default rates among servicers. According to GAO, prime loans modified in the fourth quarter of 2010, had a 9 percent re-default and sub-prime loans had a 10 percent re-default rate. 5 2 America s Hardest Hit Neighborhoods, CNN Money, January 17, Mortgage Banks Association, Mortgage Delinquency Survey, November 7, U.S. Government Accountability Office, Foreclosure Mitigation: Agencies Could Improve Effectiveness of Federal Efforts with Additional Data Collection and Analysis, June U.S. Government Accountability Office, Foreclosure Mitigation: Agencies Could Improve Effectiveness of Federal Efforts with Additional Data Collection and Analysis, June
6 Community Reinvestment Act Resources for Foreclosure Prevention Enacted as part of the Housing and Community Development Act of1977, the Community Reinvestment Act (CRA) requires regulated banks to meet the credit and deposit needs of consumers and neighborhoods including low- and moderate-income persons and communities. Before CRA was enacted in 1977, there were severe shortages of credit available to low- and moderate-income neighborhoods as well as concerns about redlining and discrimination. CRA was intended to expand access to credit and reduce discriminatory credit practices. Consistent with safe and sound operations, CRA assigns federally insured financial institutions a continuing and affirmative obligation to help meet the credit needs of their communities, including low- and moderate-income neighborhoods. FDIC examiners evaluate the performance of approximately 5,200 institutions. 6 Some studies have tried to lay the blame for the mortgage crisis squarely on the shoulders of the CRA and the low- and moderateincome borrowers it helps. However, other studies and agencies point out that only about one-in-four higher priced first mortgage loans were made by CRA covered banks during , the pinnacle of the subprime mortgage lending. 7 The rest were made by private independent mortgage companies and affiliates of large banks not covered by CRA. According to the Center for Responsible Lending, the loans that caused the financial crisis sub-prime and Alt-A loans were overwhelmingly originated by non-cra Types of CRA lending that may warrant favorable bank review ratings (source: Interagency Questions and Answers Regarding CRA, Notice, Federal Register, July 21, 2001, p ): Providing loan programs that include a financial education component about how to avoid lending activities that may be abusive. Offering lending programs that transition borrowers with higher interest rates and fees to lower cost lenders. 8 Moreover, according to former FDIC chief, Sheila Bair, CRA works because it encourages FDIC-insured banks to lend in low- and moderate-income areas consistent with safe and sound operations. In 2007, early on in the housing crisis, the FDIC sent a letter to the 5,200 banking institutions under its regulatory control alerting them that they could receive CRA consideration for programs that transition low- and moderate-income borrowers from higher-cost 6 Federal Deposit Insurance Corporation, Sandra L. Thompson, Division of Supervision and Consumer Protection, Community Reinvestment Act: Thirty Years of Accomplishments, but Challenges Remain, Testimony before the House Financial Services Committee, February 13, Federal Deposit Insurance Corporation, Sheila Bair, Chairman, December 17, 2008 speech. 8 Center for Responsible Lending, Center for American Progress, University of North Carolina Center for Community Capital, Affordable Housing: The Way Forward from Here,
7 loans to affordable loans, provided the loans were made in a safe and sound manner. 9 National Foreclosure Mitigation Counseling Program In December 2007, the National Foreclosure Mitigation Counseling (NFMC) Program began. The program is operated through NeighborWorks America and provides grants to housing counseling agencies nationwide. Upwards of over 1,700 counseling agencies operate under the program. As of August 31, 2012, the NFMC provided nearly $600 million to local counseling agencies for foreclosure mitigation counseling services and legal assistance to homeowners. 10 According to a study conducted by the Urban League, homeowners who received NFMC counseling were twice as likely to obtain a mortgage modification and remain current on their mortgages after the modification. The Hardest Hit Fund and the National Mortgage Settlement Most of the federal funding available for foreclosure prevention has been allocated directly to states through the Hardest Hit Fund and through the National Mortgage Settlement. The Hardest Hit Fund (HHF), enacted through the Emergency Economic Stabilization Act of 2008, is administered by the U.S. Treasury Department and has provided resources to states, mainly through state housing finance agencies, to develop local and regional solutions to foreclosure. Beginning in February 2010, the HHF provided $7.6 billion to states with high foreclosure rates and high unemployment rates. The following 17 states and the District of Columbia received funding through the program. Alabama - $162.5 million Arizona - $267.8 million California - $2 billion District of Columbia - $20.7 million Florida - $1.1 billion Georgia - $339.3 million Illinois- $445.6 million Indiana - $221.7 million Kentucky - $148.9 million According to NeighborWorks America, the NFMC Program has provided counseling services and legal assistance to 1.45 million borrowers. NFMC counseled borrowers were nearly 70% more likely to remain current on their mortgages nine months after receiving a modification rather than re-default. 9 Federal Deposit Insurance Corporation, Sheila Bair, Chairman, April 2007 letter to banking institutions. 10 NeighborWorks America, National Foreclosure Mitigation Counseling Program: Congressional Update, December 10,
8 Michigan - $498.6 million Mississippi - $101.9 million Nevada - $194 million New Jersey - $300.5 million North Carolina - $482.8 million Ohio - $570.4 million Oregon - $220 million Rhode Island - $79.4 million South Carolina - $295.4 million Tennessee - $217.3 million These states have implemented a variety of targeted programs to help struggling homeowners pay their monthly mortgage payments, help delinquent homeowners bring their mortgage current, provide principal reductions for homeowners who are underwater, help homeowners pay-off second liens, and provide relocation assistance to homeowners who are faced with short sales and deed-in-lieu of foreclosures. Some states have been criticized for slow implementation of the program and for helping homeowners who made poor financial decisions. Since the program has been slow to commit funds there is a good chance that resources are still available to help homeowners in most states. In February 2012, 49 state attorney generals (the State of Oklahoma chose not to be a party to the settlement) and the federal government announced a $25 billion settlement, the National Mortgage Settlement, with the country s five largest mortgage servicers: Ally/GMAC, Bank of America, Citi Bank, JPMorgan Chase, and Wells Fargo. The agreement settles state and federal investigations against these servicers which found instances of mortgage fraud and deception. The servicers violated federal mortgage law in several areas: (1) robo-signing (where foreclosure documents were signed by people who had no knowledge about whether the information contained in the documents was correct), (2) inaccurately notarized documents; (3) improper foreclosure procedures, and (4) deceptive practices in the loan modification process (such as telling a borrower that a loan modification was imminent while simultaneously foreclosing). The settlement provided monetary relief to borrowers in the following areas. 11 $17 billion - Immediate aid to borrowers needing loan modification, including first and second lien principal reduction. $3 billion - Immediate aid to borrowers who are current, but whose mortgages currently exceed their home value. Borrowers will be able to refinance at today s low rates. $1.5 billion - Payments to borrowers who lost their homes to foreclosure. $2.5 billion - Immediate payments to the 49 states to help fund consumer protection and state foreclosure prevention efforts. 11 Office of Mortgage Settlement Oversight, Ongoing Implementation: A Report from the Monitor of the National Mortgage Settlement, February 21,
9 Go to for the contact information for your State Attorney General s Office. The settlement also included nationwide reforms to servicing standards requiring a single point of contact for borrowers, adequate staffing levels and training, better communication with borrowers, and appropriate standards for executing documents in foreclosure cases, ending improper fees, and dual track foreclosures. As of December 31, 2012, the servicers reported assisting 554,389 borrowers with some type of consumer relief representing $45.83 billion in assistance. Of this assistance, nearly $25 billion has come in the form of first lien modifications. 12 Unfortunately, much of the remainder of the assistance has come in the form of short sales ($19.5 billion) which does not help borrowers remain in their home. Of the $25 billion settlement, $2.5 billion is directed to states. Of this amount, less than half $1 billion is being used for foreclosure prevention efforts or other housing related programs. The remainder is being used by states to plug budget holes. Case in point, the State of California received $410 million from the national mortgage settlement but only $18.4 million went to the State Attorney General s Office for housing counseling. Arizona s state assembly diverted $50 million - just over half of its settlement to the general fund. And the list goes on. However, some states are making good use of the funds. The following provides some examples of how states are using their portion of the National Mortgage Settlement to help consumers. The Commonwealth of Pennsylvania is using 90% of its allocation for its emergency mortgage assistance program - the Homeowner s Emergency Mortgage Assistance Program. The program was started in 1983 and helps homeowners faced with foreclosure pay their mortgage payments. Washington State is allocating most of its $54 million to non-profits for a range of counseling and legal aid services, as well as to cities for demolition of blighted housing. The State of Michigan s $97.2 million will go into a Homeowner Protection Fund to help people avoid foreclosure, alleviate the effects of the foreclosure crisis, and support law enforcement activities to prevent or prosecute financial fraud. Most notably the Fund will provide $7.5 million to a foreclosure rescue scam victim restitution program to compensate Michigan residents who fell victim to foreclosure scams. Another $20 million will go to foreclosure counseling for homeowners, $25 million will be allocated to cities for blight elimination, $5 million will go towards paying the closing costs of homeowners who refinance their mortgage, and the remainder will go to other housing related efforts. With its $11 million, the State of New Mexico is funding a new foreclosure hotline and a pilot program for facilitating settlements in court cases. 12 Ibid 6
10 The State of Nevada Department of Business and Industry is in the process of creating a program to help homeowners who have underwater mortgages. The program would create a $150 million loan pool to buy up nearly 52,000 distressed mortgages en masse and refinance them. The Home Means Nevada Home Retention Program would buy pools of underwater mortgages at a 30% discount then work with homeowners to refinance. The State of Louisiana plans to allocate its $17.7 million to various programs including settlement oversight, a financial fraud unit, and litigation over faulty drywall. The State of New Hampshire is using its $9.6 million on a new financial fraud unit in the Attorney General s office and to launch a statewide complaint database to help coordinate investigations. Some Local Examples City of Boston, MA Department of Neighborhood Development Boston Home Center The Department of Neighborhood Development s Boston Home Center provides consumer outreach, information, and counseling to help homeowners avoid predatory lending and prevent foreclosure. One of the services offered is a one-day workshop on Options for Reducing Monthly Mortgage Payments that helps homeowners learn how to prevent foreclosure through budgeting and credit counseling. Don t Borrow Trouble is an educational campaign started by Freddie Mac in 1999 to enhance consumer awareness around predatory home loans. The program started in the City of Boston and has since gone nationwide to 30 states. The campaign primarily focuses on referral hotlines that connect borrowers to resources, consumer awareness campaigns, and homeownership and foreclosure prevention counseling services. Miami-Dade County Foreclosure Prevention Program. The City of Miami created the Foreclosure Prevention Program to help people who have faced a significant and unexpected loss of income stay in their homes. The primary goal is to help families get back on track with their mortgage payments. The program provides financial and cash grants up to $7,500 to eligible homeowners facing foreclosure. The program also provides legal assistance and representation to homeowners faced with foreclosure including victims of mortgage fraud. The project is funded through the State Attorney General s Office and is administered through Legal Services of Greater Miami. 7
11 City of Seattle Office of Housing Foreclosure Prevention Program. The program provides stabilization loans up to $5,000 to help homeowners who have suffered a temporary set-back remain in their home. The program also provides financial and mortgage counseling, and help in negotiating repayment plans with lenders. The program is administered by local non-profits including the local Urban League. Summary The housing crisis is attributable to a set of factors. These include inadequate consumer protections, poor lending standards, unemployment, and inadequate due diligence by originators and investors. The results are massive home foreclosures, loss of homeowner equity, and depressed housing markets and neighborhoods. Foreclosures result in vacant homes that mar neighborhoods, invite crime, and create an appearance of market distress, diminishing the market value of nearby properties. Foreclosures are costly; resulting in direct costs to servicers (holding costs, property maintenance), erosion of local tax bases, depletion of consumer equity, and enormous emotional toll on borrowers. To help borrowers faced with foreclosure, loan holders and servicers need to adopt systematic approaches to loan modifications that result in affordable loans that are sustainable over the long term. It would seem that a modified, performing loan is of greater value to mortgage investors than a foreclosure, but servicers have been slow to provide meaningful mortgage modification to borrowers and have been slow to providing principal reduction. Homeowners who find themselves behind in their mortgage need help, but don t seem to know how or who to reach out to for assistance. It is safe to say that most don t understand the foreclosure process, know their mortgage rights, or how to contact their lender or a housing counseling agency. State and local governments have stepped in to help educate homeowners and prevent foreclosures. States have received the bulk of federal funding allotted during the housing crisis and are in a good position to fund new and existing programs at both the state and local level. While it appears we ve reached the pinnacle of the foreclosure crisis in most regions, others are still suffering. State and local governments located in these regions must be quick to reach out to borrowers to provide avenues for housing counseling and legal assistance to modify mortgages quickly and effectively. Some Tips A proactive outreach and education campaign to contact borrowers is necessary to ensure early modification of loans before there is an extended period of delinquency. Outreach should focus on the use of radio, television, the internet, and concentrated mailing campaigns to neighborhoods with high-foreclosure rates. The outreach campaign must 8
12 focus on connecting at-risk borrowers with HUD-certified housing counseling agencies. A proactive approach to follow-up with borrowers post-modification (post modification counseling and tracking) is needed to ensure lower re-defaults. Modifications must result in an affordable monthly payment for the borrower to lessen the chances of re-default. The University of North Carolina Center for Community Capital suggests the use of a financial coach after a loan modification to help borrowers adopt behaviors and make decisions that lower debt, increase credit scores, and maintain homeownership for the long run (see the example below). Collaboration among state and local government agencies, local housing counseling agencies and other non-profit organizations, and banks is needed to forge partnerships, marshal resources, and develop long-term solutions to foreclosure prevention and mitigation. Good Examples The Texas Department of Housing and Community Affairs provides detailed information on its web site (www.tdhca.state.tx.us/homeownership/foreclosure/index.htm) that outlines the loan workout process, the stages of foreclosure, tips for improving credit and prioritizing debt, and housing counseling information. The State of Michigan also has an excellent foreclosure prevention web site (www.michigan.gov/mshda) that provides a list of housing counseling agencies throughout the state, a community foreclosure response tool kit targeted at homeowners and stakeholder groups that provides information on organizing an effective local response to foreclosure, the foreclosure process and time line, federal, state, and local resources, information on foreclosure rescue scams, legal assistance, and counseling services, data, and other important information. The Foreclosure Response Coalition of Kent County, MI launched an aggressive marketing campaign to get the word out to residents on counseling services. The Coalition, comprised of over 40 agencies from a wide spectrum of non-profits, local government, foundations, banks, realtors, and neighborhood organizations, went door-todoor to inform residents of federal, state, and local programs and resources, attended neighborhood association meetings, printed foreclosure counseling information on water bills, and broadcast public service announcements on Spanish radio stations. Miami-Dade County provides information to residents on how to avoid foreclosure rescue scams on its website. The videos are in both English and Spanish. 9
13 Home Free-USA Project Restore. Home Free-USA developed Project Restore to improve the likeliness of post-modification success. The program recognized two important points: First, many struggling borrowers continue to be burdened with excessive consumer debt after their workout and second, default counselors do not usually continue to work with borrowers following the successful negotiation with the lender. Project Restore set out to couple modification of borrower finances with modification of mortgages through a long-term financial coaching model. The program combined ownership counseling with a class called Financial Mistakes to Avoid, but also added a third component: a financial coach. The coach s role was to identify and help change financial behaviors that made homeownership difficult to maintain. The coach tracked metrics such as debt, savings, debt-to-income ratios, and credit scores University of North Carolina Center for Community Capital, Community-Based Initiatives for Foreclosure Prevention and Mitigation, May