Impact on Children Growing Concern in Foreclosure Crisis
In the latest in a series of monthly forums by Chapin Hall at the University of Chicago and the Urban Institute to discuss public policy issues related to children, their families and the community, participants on a March 12 panel in Washington, D.C. said that people are really starting to worry about the harmful consequences of the foreclosure crisis for children.
“The foreclosure crisis is forcing families to move in unplanned and stressful ways,” said Olivia Golden, an Urban Institute fellow, with ill-effects on children that can be long-term, outlasting the actual period of disruption.
While the scale of the current housing crisis is opening up new territory and research in this area is in short supply, Golden said that it has been generally found that the disruption from foreclosures undermines educational achievement and increases absenteeism at school. Children also feel the repercussions of the instability and parental stress and lose ties to friends, relatives, health care and the community, she said.
“A record volume of foreclosures is expected this year," noted Ingrid Gould Ellen, associate professor of public policy and urban planning at New York University and codirector of its Furman Center for Real Estate and Urban Policy. Foreclosures could total eight million over the next four years without intervention, she said, and there are an estimated eight million children living in those at-risk homes, or 10% of all the children in the U.S.
Ellen said that there has been a 35% spike in homelessness in New York City over the past year, much of it stemming directly from owners and renters losing their housing through foreclosures.
Foreclosures, she said, are very concentrated in a few states, and within those states they are concentrated in specific neighborhoods, raising safety issues for children living in families that have not lost their homes but find themselves in the midst of boarded-up properties that provide a breeding ground for crime.
Ellen voiced optimism that the efforts of the Obama Administration to reduce foreclosures, help communities stabilize neighborhoods and provide assistance to help vulnerable families avoid becoming homeless will succeed in addressing the problem to a significant extent. However, she added that foreclosures will happen nevertheless, requiring policy makers to address their impact on children.
Mobility, she said, is detrimental to children in school, particularly moves that happen at odd points in the year. Among possible solutions, she said, local school systems should consider allowing children to stay in a school when their families move out of the school district.
Time, Money and Free Legal Advice
Thomas Perez, secretary of the Maryland Department of Labor, Licensing and Regulation, said that he believes the state has addressed the foreclosure problem prospectively through a package of reforms, among the farthest-reaching in the nation, that strengthen lending and licensing standards for mortgage professionals and ban prepayment penalties and other defective loan features.
The state, he said, also ended fast tracking in which the foreclosure process could be completed in as little as 15 days. What people facing foreclosure need most, he said, are “time, money and free legal advice” so that they can work with their lenders to stay in their homes or pursue other alternative solutions to find housing.
Also, when entities decide to pursue foreclosure, notices are now required to be sent to the state government as well as the home owner in order to prevent the delinquent borrowers from being victimized by scam artists. The mastermind behind the Metropolitan Money Store case, the largest mortgage foreclosure scam in the country, was a stripper before she became a loan originator, he said.
In its efforts to prevent in the future a recurrence of the problems besetting many Maryland home owners today, Perez said that the state learned that minority home owners were disproportionately offered subprime loans with higher interest rates — 54% of African American home buyers in the state and 47% of Hispanics, compared with 18% of whites.
Even before loan adjustments to higher payments, these loans “were set to fail to begin with” and they represented a case of “brokers steering borrowers to bad loan products,” he said.
Perez said that Maryland has reached agreements with six mortgage services to provide meaningful loss mitigation to its home-owning residents who have run into trouble and has brought on 750 pro-bono lawyers for an outreach effort to get borrowers out of toxic loans.
Opening up lines of communication with families who can benefit from these efforts, however, has been a major hurdle. “Fifty percent of people in foreclosure have had no meaningful contact with their servicer,” he said. Falling behind on mortgage payments is “a shameful event” and those who start receiving delinquency notices “put the letters in a drawer and pray things get better.”
One approach to ensure that people don’t bury their heads in the sand when they are having payment problems, he said, is to form partnerships with the faith community. “We have to make house calls here. We have to get in people’s comfort zones.”
Delinquent borrowers are also more likely to open an envelope when it comes from the state itself, according to Perez. Maryland has sent out 85,000 pieces of mail, including information on housing counselors who experience shows improve the outcomes for these households.
A Case Against Option ARMs
Lewis Smith, a mortgage counselor and reverse mortgage specialist with Manna Mortgage in Washington, D.C., said that it isn’t easy getting low- and moderate-income borrowers out of bad loans and into good ones, especially if they took out an option adjustable rate mortgage, “the worst product on the market.”
In one case, the mother of two children with a $70,000-a-year job ran into serious problems after she refinanced in 2007 to reduce monthly payments on a home she had purchased in 2006 with 100% financing. With the negative amortization on her new $365,000 option ARM, she now has increased her principal to $417,000 and if she continues to pay the loan for another 13 months, the principal will grow to $438,000.
The home owner now owes the lender about $20,000 in past payments and penalties, and the home is only worth $309,000.
It is highly unlikely that she will be able to get her loan modified, Smith said. “She gets deeper in debt as she stays in the loan, until it explodes. Her only option is to walk away and find a rental.”
Getting a Lender on the Line
The situation is “more dire” than people know, said Malcolm Bush, a research fellow at Chapin Hall. The foreclosure situation and the housing market need to be stabilized, he said, to prevent other properties from losing value. However, he questioned whether the Obama Administration’s loan modification and refinancing effort will accomplish this mission.
Loan servicers are already overwhelmed, he said, and it will be challenging for qualified home owners to get somebody on the line “who knows what they are doing” and will agree to participate in the loan modification.
The refinancing component of the plan “should work better,” he said, but “the home owner has to take the first step. How many know about Fannie Mae or Freddie Mac or if their note is owner or guaranteed by them?”
How many of them will pick up the phone, he wondered, and of those who do, how many will be discouraged by a busy signal?
Bush cited a more radical proposal that would enable anyone who owns a home in a zip code where there has been a 20% decline in prices to have their loan rewritten so that the principal is reduced to their current market value.