Loss Mitigation Helping to Limit Subprime Loan Foreclosures
Advances over the last decade in loss mitigation and refinancing programs are showing success in helping home owners who have defaulted on their mortgages avoid foreclosure, according to panelists participating in a May 14 Homeownership Summit in Washington conducted by the Department of Housing and Urban Development.
Syndicated Washington Post columnist Ken Harney called loss mitigation “one of the most important consumer advances for housing in the past 50 years.” In the days when he bought his first home, he said, “loss mitigation didn’t exist” and there wasn’t “a whole lot of outreach or sympathy” for people behind on their mortgage payments.
Today, lenders are able to work out a loan with 70% of the delinquent buyers they are able to get in touch with, said John Anderson, senior vice president of First Madison Services. About 15% to 20% of the workouts “do fall apart,” he conceded, “but we spend a lot of time upfront to ensure they don’t.”
At a workshop for home owners earlier this month in Atlanta, William Longbrake, vice chair of Washington Mutual, Inc. and senior advisor to the Housing Policy Council of the Financial Services Roundtable, said that his company was able to provide workout packages for all 50 of the borrowers with whom it had set up appointments.
Because of the costs involved “no responsible lender is interested in foreclosing,” Longbrake said. “We are interested in any other solution possible.”
“No two cases are the same,” he added, and that requires taking a case-by-case approach and assuming some risks. Foremost in the process is looking at the borrower’s ability to repay the mortgage, but “there is never any absolute certainty” about the outcome, he said.
The principle challenge for the lender, Longbrake said, is getting in touch with the borrower, and that effort is being made easier by working with non-profits who are helping to get the word out that there are opportunities to avoid foreclosure.
If the loan is close to being current and the family is in good shape financially, he said, a lender may be able to substitute a fixed-rate mortgage at 50 basis points below the going rate for an adjustable-rate loan that will cause payment problems when it resets at a higher interest rate. In a case where illness is the problem but the home owner has good prospects for returning to full earning power, a forbearance agreement may be the answer, with the period of missed payments being tacked onto the loan amount.
Modifications include extending the repayment period from 30 to 40 years, he said. Another option is to extend for an additional two years the current payments on an adjustable rate mortgage that is ready to be reset at the end of a two-year period, recasting the loan and then having it return to its original terms. Also, the interest rate on the loan can be reduced to as low as 5%, and then stepped up afterwards by no more than 1% a year.
In cases where the borrower doesn’t have the ability to repay, a short-sale to an investor enables the buyer to walk away with no remaining obligation, Longbrake said.
Douglas Garver, executive director of the Ohio Housing Finance Agency, said that the state is selling taxable mortgage revenue bonds to fund its Opportunity Loan Refinance Program, which provides affordable 30-year, fixed-rate financing to borrowers who feel that their current loan does not fit their financial circumstances.
Eligible buyers can have no more than 125% of area median income, and are typically grappling with payments they can’t afford from an adjusting ARM or interest-only loan or having an employment problem, he said.
Opportunity Loan borrowers can also obtain a 20-year fixed-rate second mortgage for up to 4% of the appraised value of the home at an interest rate that is two percentage points higher than the first mortgage. The second mortgage can be used for financing charges such as paying off the first mortgage, including late fees or attorney fees.
“Keeping doors open in Ohio is increasingly important,” Garver noted, at a time of weakness in the state economy. There were 80,000 foreclosures in Ohio last year, up 25% from 2005, and this year foreclosures have been running 15% to 16% higher over 2006.
Garver added that his agency is unable to use non-taxable revenue bonds to support the program because federal requirements prevent refinancing programs from using them.
George Miller, executive director of the American Securitization Forum, noted that there remains a significant amount of flexibility to restructure mortgage loans that have been securitized, but contractual terms and other conditions designed to protect the interests of investors in those loans can impose certain limitations, such as restrictions on the dollar volume or number of modifications that can be made.
Construction Forecast Conference Now Available on the Internet
The simultaneous Webcast of the Construction Forecast Conference — Spring 2007 held in Washington, D.C. on April 26 is available for purchase for the next three months.
Those interested can purchase the conference Webcast, which includes panels of nationally recognized experts discussing economic trends, government policies, developments in the housing industry and the results from NAHB's recent surveys.
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NAHB Kit Gives Builders Back-to-Basics Tips in Cooling Market
With the current cooling of the nation’s housing market expected to persist into next year, NAHB has developed a comprehensive online toolkit geared to providing association members with information that will help them prosper in today’s changing business environment.
To access the “Back to Basics” toolkit, you must be an NAHB member and have a login to www.nahb.org. To create a login, go to www.nahb.org/login or click on the log-in button on the main menu bar.
For assistance, call the NAHB Member Service Center at 800-368-5242.