Mortgage Lenders, Community Groups Team Up to Fight Foreclosure
Mortgage lenders are finding themselves a strong ally in preventing home loan foreclosures: community groups.
Consider East Side Organizing Project, a neighborhood organization founded in Cleveland more than a decade ago to focus on improving local schools.
J. White, among hundreds of other local residents, also credits the group for preserving homeownership in the community by serving as a liaison between the financially strained and their home mortgage company.
White, 57, turned to East Side as he was seeking help negotiating with his lender about modifying the terms of an adjustable-rate mortgage that White says he and his wife were duped into by a mortgage broker.
The Whites accepted the mortgage in 2003 out of the desire to lower their monthly payment and pay off other bills that had piled up since White lost his job a year earlier due to the shutdown of the commercial printing company for which he worked.
Two years after the mortgage refinancing, however, the couple saw their mortgage payment almost double to $2,035 a month.
“We did a stupid thing by refinancing with the people we refinanced with and not recognizing the fact that we had an option to just get out of the chair and not take the loan,” White says.
Facing the prospect of foreclosure and turning their house over to the lender, White and his wife contacted the Department of Housing and Urban Department, the local United Way, and then East Side.
“They are very good at working out deals with lenders,” White says of the neighborhood group.
Under an agreement brokered by East Side recently, another lender came through for the couple, agreeing to loan them $147,000 to pay off their existing $167,000 home mortgage, while the original lender agreed to waive the $20,000 difference. As a result of the effort, the Whites got to keep their home.
Amid rising mortgage delinquencies and default rates, community groups like East Side, together with some non-profit housing counselors, are becoming increasingly valuable to financially stressed homeowners to battle against foreclosure.
A powerful tool in their arsenal, says Mark Seifert, executive director at East Side, is the fact that “contrary to the common myth, the lender loses, too, when someone goes to foreclosure.”
A Federal Reserve study estimates that foreclosure can cost a home loan provider anywhere between 30-60 percent of the outstanding loan balance due to legal fees, foregone interest and property expenses.
Mike Fratantoni, a senior economist at the Mortgage Bankers Association, said: “Every party to a foreclosure loses — the borrower, the immediate community, the servicer, mortgage insurance provider and investor.”
According to the industry group’s analysis, three out of four borrowers who enter the foreclosure process leave it through something other than a forced foreclosure sale — whereby a lender repossess a borrower’s house and sells it.
It means that through lenders’ “loss mitigation” efforts, they either pay off the arrears through agreed-upon payment plans with their lenders or sell their homes to avoid foreclosure and protect their credit score and their ability to borrow again.
But the lowering of foreclosure rates has proved challenging for both borrowers and lenders. To start with, delinquent borrowers may feel too tired of creditors to reach out to them, while lenders often find borrowers hard to reach. That’s where community groups and nonprofit housing counselors come into play.
The partnerships call on the lenders to be committed to combating both predatory lending and foreclosure. The forming of those pacts has come a long way.
“It’s not in the corporate mindset to work with community groups,” says David Rose, a director at the Chicago-based nonprofit community network NTIC.
But more and more, mortgage lenders “see us as a bridge to reach out to troubled customers as early as possible.” When a lender calls a homeowner about a delinquent loan, Rose says, the homeowner may not call the lender back. “Borrowers don’t see lenders as partner, but as somebody only trying to get money out of them.”
That may explain why borrowers never contact their lenders in more than half of all foreclosure cases. A study conducted last year by Freddie Mac and Roper Public Affairs and Media also found that nearly two-thirds of delinquent borrowers surveyed were not aware of lenders’ “workout options” designed to avoid foreclosure.
Among the common options are forbearance (which temporarily delays or reduces payments, and loan modifications) which means changing the payment terms for a fixed period. If the borrowers knew about those options, “they would be more willing to work with servicers,” says Bill Merrill, director of default asset management at Freddie Mac.
Other reasons cited by troubled borrowers for not contacting lenders included “embarrassment,” “fear” or “not knowing whom to call.”
The survey results, mortgage-industry executives say, serve as a reminder to lenders of the need to strengthen their borrower outreach and education programs — especially at a time when national delinquency and foreclosure rates, though still historically low, are creeping up from their year-ago levels.