Group Title: Affordable housing issues
Title: Affordable housing issues ; vol. 17 no. 4
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 Material Information
Title: Affordable housing issues ; vol. 17 no. 4
Series Title: Affordable housing issues
Physical Description: Serial
Language: English
Creator: Shimberg Center for Affordable Housing
Publisher: Shimberg Center for Affordable Housing
Place of Publication: Gainesville, Fla.
Publication Date: June 2007
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Bibliographic ID: UF00087009
Volume ID: VID00045
Source Institution: University of Florida
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M.E. Rinker, Sr., School of Building Construction College of Design, Construction & Planning PO Box 115703,
University of Florida, Gainesville, FL 32611-5703 TEL: (352) 273-1192 SUNCOM: 622-7697 FAX: (352) 392-4364

Volume XVII, Number 4

June 2007

The rise in mortgage foreclosures, and especially the dramatic rise in subprime mortgage foreclosures,
has the potential to undermine the significant homeownership gains made by lower-income and minority
consumers during the 1990s. Aside from the devastating impact of foreclosures on borrowers and commu-
nities, their increase also costs all participants in the mortgage industry. To address the problems caused
by a rising foreclosure rate, banks and others have developed programs to reduce the number of foreclo-
sures. Many of these programs were developed as partnerships between banks acting as loan services and
nonprofit organizations that provide financial counseling to homeowners.
The June 2007 Community Developments Insights produced by the Community Affairs Department of the
Controller of the Currency is dedicated to the subject of preventing mortgage foreclosure. Selected por-
tions of that report have been reproduced here. The full report can be found on the Internet at http://www.

Over the past two decades, technological innovations in
credit scoring, processing, and underwriting of mort-
gage loans helped fuel the growth of the prime and sub-
prime mortgage markets. Additionally, the growth of
the secondary mortgage market, the increased appetite
of investors for mortgage backed securities (MBS), and
the more recent period of low interest rates, all came
together to create a housing boom that increased the
nation's homeownership rate from 65 percent in 1995 to
69 percent in 2006.
However, as lenders tried to keep pace with the demand
for MBSs, some originators, primarily in the subprime
mortgage market, began to combine the underwriting of
borrowers with weaker credit scores with other higher
risk elements, such as higher loan-to-value ratios or
incomplete income documentation. The unintended con-
sequence of the mortgage industry's ongoing effort to

extend homeownership opportunities to less creditwor-
thy consumers has been an increase in foreclosure rates.

Banks recognize that keeping homeowners in their
homes is often the best way to mitigate credit losses,
preserve customer relationships, maintain stable
neighborhoods, and minimize the detrimental effects
vacant properties can have on crime and property val-
ues. Banks that originate and service mortgage loans
are aware that prudent attempts to workout loans of
homeowners who have defaulted on their contractual
obligations are often in the best interests of both the
lender and the borrower. When borrowers default on
their home loans, some specific and measurable reasons
exist for why banks should be interested in preventing
foreclosure. These reasons include:

Reputation Risk Banks face negative public-
ity over rising foreclosure rates in general and
over individual cases when the bank may have
made the loan or is currently servicing the loan.
In addition, when a significant number of loans
in an investment pool go into default, the second-
ary market can develop concerns about all loans
originated by that institution. These defaults can
negatively affect the institution's ability to sell
new loans on the secondary market. In addition,
investors rely on the Nationally Recognized Sta-
tistical Rating Organizations (NRSROs) to gauge
the effectiveness of a servicing operation and the
quality of loans. A large number of foreclosures
can affect negatively a bank's servicing rating
assigned by a rating agency.

Costs to Bank-Owned Portfolio For loans that
are held in a bank's portfolio, direct losses can re-
sult from foreclosures. These losses are affected
by the property's condition, local market condi-
tions, fees, and advances related to the length of
time it took to foreclose on the property. General
estimates of the losses to lenders on a foreclosure
range from 20 to 60 cents on the dollar.

Costs of Servicing Most mortgage loans are
sold to secondary market investors, shifting much
of the risk of foreclosure to the services and
investors and costing banks that service loans. As
a delinquency progresses, services often make
advances for taxes, insurance, property preserva-
tion, inspections, and legal costs. Servicers must
also make advances on principal and interest to
investors, regardless of whether the service has
received a payment from the borrower. Many, but
not all, of these advances are reimbursed once the
property is liquidated, but the service still faces
the cost of funds for advancing fees, expenses,
and debt service payments. In addition, servicing
a foreclosure requires the service to use ad-
ditional staff resources. One bank reported that
servicing a loan in foreclosure is at least three
times as costly as servicing a current loan.

Major Investors Paying Incentives for Work-
outs The income from these workout incentive
payments can be substantial and offset some of
the costs associated with servicing operations.

The availability of such incentives is determined
by the performance of an investor's loans and the
relationships among the various parties involved
servicee, investor, etc.).

Property Values Vacant and abandoned proper-
ties are vulnerable to vandalism, deterioration, and
criminal activities. A large number of foreclosures
can increase the supply of homes on the market,
negatively affect neighborhood values, and drive
down sale prices.

Community Reinvestment Act (CRA) Credit
Two primary activities are useful in preventing
foreclosures and each may receive positive CRA
consideration. First, banks can provide financial
counseling to low- or moderate-income homeown-
ers, either directly or through a nonprofit agency,
to help keep them in their homes. Second, banks
may provide refinancing of higher variable rate
mortgages into lower fixed-rate mortgages for
low- or moderate-income borrowers. Examiners
will consider such a program as responsive in
helping to meet the credit needs of its community.

Effective foreclosure prevention relies on increasing
the amount of contact between services and delinquent
borrowers. According to the Communtiy Development
Insights report, all of the banks interviewed for the report
described increasing the contact rate between services
and delinquent borrowers as the key to success of their
foreclosure prevention initiatives. However, mortgage
services have found that traditional collection methods
are no longer producing satisfactory results. The old
method was to flood borrowers with letters and tele-
phone calls. Although services still use the letter and
the telephone as the main means of contacting borrow-
ers, the callers convey a number of positive messages
early in the call. Many services use software that can
propose a workout solution with a payment schedule
based on such factors as the borrower's income and other
expenses. The software also incorporates any investors'
requirements into the servicing agreement. These soft-
ware packages also script the call for the servicing staff.

There are three main models for reaching borrowers
who are late on payments:
Direct service contact Banks are trying a
number of direct contact strategies to improve
their contact rate such as using non-standard call
times, using customer friendly approaches, at-
tempting to contact by going door-to-door. Some
banks are using scoring models to help them
determine which late paying borrowers are prior-
ity contacts. These models provide a score that
identifies the risk of a borrower going further into
delinquency. The models incorporate borrower-
specific factors, such as payment patterns and
credit scores, combined with economic data, such
as local unemployment rate and trends in real
estate values. The main purposes of these scoring
models are: (1) to streamline collection calls by
risk-ranking delinquent accounts to identify loans
most likely to benefit from early intervention to
avoid foreclosure and (2) to identify loans most
likely to create a loss without an intervention.

Direct contact by counseling agencies In
addition to the services' requirements to no-
tify eligible borrowers of the availability of
homeownership counseling by the service or
a HUD-approved nonprofit counseling agency,
many services have begun to partner with these
counseling agencies. Some services have real-
ized that counseling agencies are more trusted
by borrowers and that borrowers may be more
likely to respond to a call or letter from a coun-
seling agency. These services have found that by
partnering with a counseling agency, their contact
rates with delinquent borrowers have increased.
These partnerships capitalize on the desire of
both banks and counseling agencies to have bor-
rowers stay in their homes if they can afford their
mortgage payments.

National toll-free number for borrowers to call
Several reputable national nonprofit organiza-
tions have partnered with mortgage services to
provide no-cost telephone counseling to delin-
quent borrowers. NeighborWorks America has
partnered with the Homeownership Preservation
Foundation to establish a 24-hours-a-day, seven-

days-a-week, toll-free hotline for homeowners
to discuss their delinquency problems with a
housing counselor. Calls flow into a national call
center staffed by English- and Spanish-speaking
counselors. Callers are prioritized immediately.
Depending on the nature of the problem, counsel-
ing can be provided as part of the initial call or
through a series of follow-up calls or in-person
visits to a local housing counseling service to
which the borrower is referred. If a workout can
be arranged with the lender, counselors can also
provide budgeting assistance and other financial
education to help ensure that these borrowers can
meet the terms of their workout agreements. In
about 25 percent of the counseling sessions, the
homeowner is recommended for loan workout,
and the counselor helps the homeowner work
with the service on a loan modification.

Some services have contracted with nonprofit housing
counseling agencies to make an initial contact with bor-
rowers who are late on payments. Under this scenario,
a service provides a pre-selected counseling agency
with a list of borrowers to contact. The counselor is
trained to make a friendly call to the borrower, empha-
sizing his or her ability to work with the borrower and
help the borrower work out a solution with the lender.
The borrower has the option of sharing financial infor-
mation with the counselor.

This strategy begins with a letter from the counseling
agency to the borrower, providing a toll free
number and a Web site. The letter states that if the coun-
seling agency does not hear from the
borrower, the agency will contact the borrower by tele-
phone. When contact is made, the counselor
can collect documentation and information needed to
evaluate loss mitigation options, with
permission from the borrower. If no feasible plan can
be developed, the counselor helps develop a
detailed plan for selling the property. Overall, some
services have concluded that the fees paid to
counseling agencies are considerably lower in compari-
son with the costs of foreclosure.

Several reputable national nonprofit organizations have
partnered with mortgage services to provide no cost
telephone counseling to delinquent borrowers. Neigh-
borWorks America has partnered with the Homeowner-
ship Preservation Foundation to establish a 24 hours
a day, seven days a week, toll-free hotline for hom-
eowners to discuss their delinquency problems with a
housing counselor. Calls flow into a national call center
staffed by English- and Spanish-speaking counselors.
Callers are prioritized immediately. Depending on the
nature of the problem, counseling can be provided as
part of the initial call or through a series of follow-up
calls or in-person visits to a local housing counseling
service to which the borrower is referred. If a workout
can be arranged with the lender, counselors can also
provide budgeting assistance and other financial educa-
tion to help ensure that these borrowers can meet the
terms of their workout agreements. In about 25 percent
of the counseling sessions, the homeowner is recom-
mended for loan workout, and the counselor helps the
homeowner work with the service on a loan modifica-
tion. A further discussion of these partnerships can be
found in Section V of this report. Nationwide lenders
who also service loans for others have established their
own toll-free numbers to encourage borrowers to con-
tact them. Borrowers who have defaulted on their home
loans are advised of these phone numbers by letter or
phone call from the service or the nonprofit partner.

Options for Borrowers and Servicers Once the
service has made contact with the delinquent borrower,
either directly or through a counseling agency, there
are a variety of options to be discussed. These options
are divided into two major groups: retention workout
options and non-retention options. Retention workout
options allow a borrower to retain possession of the
home. Alternatively, non-retention options result in
the borrower relinquishing the home, but avoiding the
expense and stigma of foreclosure process.

Retention Workout Options Retention options allow
a borrower to retain possession of the home. There are
several workout options that loan services, borrowers,
and nonprofits can utilize in their best efforts to keep
the borrower in the home. The earlier these conversa-
tions occur, the greater is the likelihood of a successful

Early Contact Discussion of Alternatives For
loans with upward adjusting payments (such as
hybrid ARMs and payment-option ARMs), some
services have begun contacting borrowers prior
to the scheduled payment increase to advise them
of the new payment amount. If the borrower
cannot afford the new payment and is reason-
ably likely to default, the service may be able
to modify the loan to create longer-term afford-
ability. In some cases, services acting on behalf
of lenders are offering to refinance ARMs into
lower-cost, fixed-rate loans.

Repayment Plan -The service increases the
regular monthly payment until the delinquency
is repaid. Typically, the payment period extends
over a two- to six-month period.

Loan Modification A loan is modified in
a written agreement between a borrower and
service that permanently changes one or more
of its original terms. The loan modification may
include an interest rate concession, reducing the
principal balance outstanding, extending the term
of the loan, establishing escrows for taxes and in-
surance, or adding the delinquent interest amount
to the unpaid principal balance.

Forebearance Forebearance is an agreement
to allow a reduced or suspended payment for
a specific period of time, usually not to exceed
three months. The borrower still owes the unpaid
amount, which may be worked out later with a
loan modification.

Non-retention Options There are some situations in
which the borrower will be unable to retain the home,
and foreclosure is inevitable. In these cases, quick
action is needed to reduce the financial hardship on
the borrower and to limit any losses to the lender. All
parties involved must look seriously at the borrower's
financial profile and be willing to admit when leaving
the home is the best alternative.

Sale of the House Borrowers are encouraged to
sell their house and pay off the mortgage in full.
Servicers can assist in the marketing and sale of
the home.

Short Sale A service agrees on behalf of an in-
vestor to accept the proceeds of a pre-foreclosure
sale in satisfaction of the loan, even though the
proceeds may be less than the amount owed on
the mortgage.

Deed in Lieu of Foreclosure A workout in
which a borrower voluntarily conveys clear
property title to the service in exchange for a
discharge of the debt. This option is generally
used when the home has been listed for sale for a
period of time with no activity.

Developing Options Some banks that hold mortgage
loans in their portfolios have determined that offering
fixed-rate loans to refinance a higher rate ARM may
save some borrowers from foreclosure. Recent an-
nouncements from the government-sponsored enterpris-
es (GSEs), specifically Fannie Mae and Freddie Mac,
have indicated a willingness to purchase some of these
refinanced loans once program guidelines have been
established. This is a significant option for loan ser-
vicers to monitor in the near future. Separately, at least
two states are considering a bond sale to establish a
pool of funds to refinance higher rate and ARM loans in
danger of foreclosure into new fixed-rate loans. Certain
states also have rescue funds that will refinance loans
from areas hit by job losses from industrial dislocations.
Loan services should be aware of options available in
various states.

Banks must consider a number of risks and regulatory
issues as part of their foreclosure prevention programs.
Most often mentioned issues relate to privacy and the
need to obtain third-party authorizations from borrow-
ers. These third-party authorizations would permit the
service to engage a local nonprofit counseling agency
to reach out directly to delinquent borrowers, as the
borrowers are more likely to open mail and answer
telephone calls from a nonprofit counseling agency.
The 'u.P'.iliOiI has been made that a disclosure ex-
plicitly authorizing the service to provide information
on a borrower to a nonprofit counseling agency if the
borrower is in danger of default should be made part of
standard mortgage closing documentation. Foreclosure
procedures vary by state. Some states mandate judicial

foreclosures, which are processed through the courts,
and others allow non-judicial foreclosures, which are
processed without court intervention. Judicial foreclo-
sures take much longer to process, allowing more time
for the development of a workout plan, yet providing an
incentive for borrowers to remain in their homes with-
out making payments for a significant period of time.

Declining housing prices in some areas create addi-
tional risks to lenders, services, and investors. Declin-
ing values present a scenario in which the service has
little or no built-in equity margin to serve as a cushion
while negotiating a workout with a delinquent borrower.
Also, the borrower has no real incentive to agree to
the workout plan if the property is worth less now than
when it was originally purchased. There also are safety
and soundness issues that banks also address as part of
offering foreclosure prevention programs.

The National Foundation for Credit Counseling has a
network of local affiliated credit counseling agencies
that are available to partner with loan services. Other
community-based organizations are involved in these
initiatives and are listed on HUD's Website (http:// I li.' I ig fh, h h/hcc/hcs.crm)

The detrimental effects of numerous foreclosures in
any residential neighborhood are well documented. As
a result, some local governments have combined forces
with nonprofits and loan services to develop outreach
programs to delinquent borrowers. For example, Chi-
cago's Homeownership Preservation Initiative (HOPI)
links delinquent borrowers with nonprofit credit coun-
seling agencies through a 3-1-1 non-emergency hotline.

Government Sponsored Enterprises (GSEs) The
major secondary market investors, who are the largest
purchasers of mortgages in the United States, recognize
the benefits of foreclosure prevention programs and are
directing their delegated services to incorporate them
into their operations.

Federal Housing Administration (FHA) The Federal
Housing Administration, a major insurer of mortgages
made to subprime borrowers, requires that all delin-
quent borrowers of FHA-insured loans be referred to
nonprofit credit counseling agencies.

Banks recognize that keeping homeowners in their
homes is the best way to mitigate credit losses, preserve
customer relationships, and maintain stable neighbor-
hoods. Unfortunately, not all borrowers can avoid the
loss of their property. In many instances, however,
foreclosure prevention works best when borrowers and
loan services communicate to determine their options
and the best course of action.
For a variety of reasons, borrowers often avoid having
this communication with their loan services. Because
the number of delinquent mortgages is rising, loan
services are looking at new techniques to improve
their contacts with delinquent borrowers to enhance the
chances for homeowners to remain in their homes and
to reduce losses. Best practices include: training servic-
ing personnel in customer friendly outreach and on
how nonprofit counseling agencies can assist them in
this activity; providing service training for counseling
agencies on acceptable options and outcomes related
to delinquent borrowers; and, paying incentives to staff
members based on the number of successful workouts
they complete.

OCC Community Developments Newsletter on
Foreclosure Prevention
Interagency Statement on Working With Mortgage
NeighborWorks America Center for Foreclosure
HUD Certified Counseling Agencies
http: // /offices/hsg/sfh/hcc/hcs.cfm
Homeownership Preservation Foundation
http: //
Service Members Civil Relief Act
http://www t t ii \ ;- '\ Consumer/servicemember.htm

Affordable Housing ISSUES is prepared bi-monthly by the Shimberg Center for Affordable Housing for the purpose
of discussing contemporary issues facing affordable housing providers. Reproduction of this newsletter is both permitted and
encouraged. Comments or questions regarding the content are welcome and should be addressed to Robert C. Stroh, Director.

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