WHAT CITIES NEED TO KNOW ABOUT THE HOUSING CRISIS (2007)

By Ken Cooley

The housing crisis, with falling values and high foreclosure rates, is still underway years after I saw it begin in my city in 2007. Foreclosures and home loss, while devastating for individuals & kids, drag down home values in surrounding areas. This "economic millstone effect" hits every homeowner hard. This paper, written in 2007, advises cities on what they can do.

ISSUE:

The sub-prime mortgage slump + with falling home prices and rising foreclosure rates + is expected to get worse before it gets better. Foreclosure and loss of a home, while devastating for the individuals and children affected, drag down home values in surrounding areas. This "economic millstone effect" hits every homeowner hard, especially older homeowners -- who may have already lost significant retirement assets during the 2002 stock market crunch. For all Californians who rely on their home's value as a financial asset, falling values -- driven by bank "fire sales" -- hit personal net worth hard. Unfortunately, in 50 percent of all foreclosures, the borrowers do not take any steps to try to work out a responsible alternative with their lender.

Given the magnitude of the current sub-prime lending crisis, ands its potential to spread weakness into other sectors of the economy, influential observers, including Federal Reserve Chairman Bernanke, are advising banks and other lenders to seek to restructure loans where that can be done as an alternative to foreclosure.

PROBLEM:

Most of our city constituents may not realize that housing lenders are being strongly urged by their regulators to first try to restructure existing loans rather than take properties back in foreclosure. As cities, we have an interest in getting the word out to possibly at-risk residents that if they have a loan worry, now is a great time to contact your lender.

Such a communication effort:

• Helps protect all neighborhood home values.
• Does not reduce a borrower's responsibility to see if they can reach a mutually agreed alternative with their lender.
• Does help mitigate the effects of the sub-prime crisis on families and kids although, realistically, there will be situations when the facts in a borrower's situation are such that no "fix" is possible.
• Need not expose the public fisc to unusual financial expense; in fact, to the degree it slows the decline in property values by slowing the foreclosure rate in a community, it helps uphold tax collections.
• Helps at risk borrowers because a revised loan worked out with your current lender can be less costly than attempting to locate a different, brand new loan.

Lenders are most likely to approach restructuring on a case-by-case basis and cannot guarantee that every loan situation can be fixed.

In simple terms, loans are either portfolio loans + held on the books of the original lender + or sold and bundled with others in a "mortgage" security. Portfolio loans are easier to fix, if an agreed upon revision is available, because the originating lender owns it. Securitized mortgages are owned by investors. Still, even these have some potential for modification. These securities are subject to "Pooling and Servicing Agreements", which establish the obligation of the loan servicer to the investors in the security. Such mortgage loan servicers are generally recognized to have authority to take steps reasonably necessary to protect the security's value. In the current environment, with the economy facing the peril of a potential "tsunami" of foreclosures in the months ahead, this general authority is being seen by industry leaders as sufficient to support a mortgage servicers revising even of a securitized mortgage's terms. The basic rationale is that taking back property, paying for its upkeep, and administering its sale and transfer in a down housing market is very financially burdensome; in such a context, some agreed income from a borrower still in the home beats no income and the added costs of foreclosure.

Lenders are open to prudent loan restructuring arrangements that can be seen, in light of all facts and circumstances, to be consistent with safe and sound lending practices as such modifications are most likely the best for both lenders and borrowers. Financial regulatory agencies are encouraging lenders to consider prudent workout arrangements that increase the potential for financially stressed residential borrowers to keep their homes. The same regulators acknowledge the exact terms of a workout arrangement can vary widely + subject to the requirements of prudent underwriting + based upon a borrower's financial capacity. For example, a lender might consider modifying loan terms + including delaying a rate reset, deferring interest, converting a sub-prime to a prime loan or converting loans with variable rates into fixed rate products with more predictable payments.

Financial regulators will not allow loan revisions that jeopardize the lenders financial well-being. That having been said, financial institutions are being advised explicitly that regulatory agencies will not penalize financial institutions that pursue reasonable workout arrangements with borrowers who have encountered financial problems. Furthermore, while safe and sound lending practices will continue to be required, regulators are advising lenders that institutions may receive favorable Community reinvestment Act (CRA) consideration for programs that transition low and moderate income borrowers from higher cost loans to lower cost loans, provided the loans are made in a safe and sound manner.

WHAT ARE FINANCIAL REGULATORS SAYING?

United States Federal Reserve Chairman Ben S. Bernanke testified on November 8th, 2007 on the US economic outlook to the Congress' Joint Economic Committee In his testimony, Chairman Bernanke addressed the needs of distressed subprime borrowers as follows:

"I would like to say a few words about actions being taken to help homeowners who have fallen behind on their mortgage payments or seem likely to do so. As I mentioned, delinquencies will probably rise further for borrowers who have a subprime mortgage with an adjustable interest rate, as many of these mortgages will soon see their rates reset at significantly higher levels. Indeed, on average from now until the end of next year, nearly 450,000 subprime mortgages per quarter are scheduled to undergo their first interest rate reset. Relative to past years, avoiding the payment shock of an interest rate reset by refinancing the mortgage will be much more difficult, as home prices have flattened out or declined, thereby reducing homeowners' equity, and lending terms have tightened. Should the rate of foreclosure rise proportionately, communities as well as individual borrowers would be hurt because concentrations of foreclosures tend to reduce property values in surrounding areas. A sharp increase in foreclosed properties for sale could also weaken the already struggling housing market and thus, potentially, the broader economy. Home losses through foreclosure can be reduced if financial institutions work with borrowers who are having difficulty meeting their mortgage payment obligations. In recent months, the Federal Reserve and other banking agencies have issued statements calling on mortgage lenders and mortgage servicers to pursue prudent loan workouts. Our contacts with the mortgage industry suggest that servicers recently have stepped up their efforts to work with borrowers facing financial difficulties or an imminent rate reset. Some servicers have been proactive about contacting borrowers who have missed payments or face resets, as experience shows that addressing the problem early increases the odds of a successful outcome. Foreclosure cannot always be avoided, but in many cases loss-mitigation techniques that preserve homeownership are less costly than foreclosure. To help keep borrowers in their homes, servicers have been offering assistance with repayment plans, temporary forbearance, and loan modifications. (EMPHASIS ADDED) Comprehensive data on the success of these efforts to avert foreclosures are not available, but my sense is that there is scope for servicers to further increase their loss-mitigation efforts. The development of standardized approaches to workouts and the sharing of best practices can help increase the scale of the effort, even if, ultimately, workouts must be undertaken loan by loan. Although workouts are to be encouraged, regulators must be alert to ensure that they are done in ways that protect consumers' interests and do not disguise lenders' losses or impair safety and soundness."

WHAT CAN CITIES DO?

Cities can work in their own jurisdiction and region to raise the visibility of the idea that today, unlike ordinary times, is a period when lenders are under considerable pressure + from both regulators and their own economic interest + to find ways to restructure loans so as to avoid the wave of foreclosures.

A city's focus should be on reaching out to at-risk borrowers to try to encourage more than the typical of 50% of at-risk borrowers to contact their lender. The more foreclosures which are avoided via loan restructuring, the better off your community will be, including your community's kids and local tax base.

A city communication program can also provide a secondary message about the perils of foreclosure scam activity.

RECOMMENDED PUBLIC & "NOT FOR PROFIT" RESOURCES

http://www.HUD.gov : Website of the United States Department of Housing and Urban Development: Find a certified financial counselor and get advice on how to avoid foreclosure.

http://www.hud.gov/foreclosure : HUD Tips for Avoiding Foreclosure and Other Resources

http://www.fha.gov/foreclosure : Website of the United States Federal Housing Administration: offering tips on how to keep your family home.

http://www.nw.org : NeighborWorks is a highly respected not-for-profit organization that specializes in assisting people in improving their housing and options for home ownership. Visit NeighborWorks for online resources, including the "Center for Foreclosure Solutions".

IMPORTANT NOTE: The legitimate NeighborWorks' website is simply http://www.nw.org. Neither http://www.neighborworks.com or http://www.neighborworks.org are bona fide websites of the NeighborWorks organization. Do not direct your people to these sites.

http://www.995hope.org Visit the Homeownership Preservation Foundation or call for counseling assistance any time day or night to 1-888-995-HOPE (4673)

USEFUL MESSAGE RESOURCES

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If you are facing financial difficulties, the following steps can help you keep your home.

• Contact your lender NOW! Many people avoid their mortgage lenders when money problems occur, but they can help. Most lenders have workout options and are willing to explore every possible option. The key is to contact them as soon as problems occur.

• Stay in your home. You may not qualify for assistance if you abandon your property.

• Talk to a Housing Counselor. U.S. Department of Housing and Urban Development (HUD) - approved housing counseling agency near you at 1-800-569-4287. They can help you assess your financial situation, prioritize your debts, determine your options and help you negotiate with your lender. They have information on services and programs that may help you. They may also offer credit counseling. These services are usually free of charge.

Get Help from a Housing Counselor You Can Trust

Contact a Housing Counselor 1-800-569-4287 or TDD 1-800-877-8339 SOURCE: http://www.hud.gov/offices/hsg/sfh/econ/smhlend.cfm

• * * * * Watch out for phony "Foreclosure Scams"

• Equity skimming. A buyer promises to pay your mortgage or sell your home if you sign over the deed and move out. The "buyer" ends up not making any payments and the property is foreclosed.
• Phony counseling agencies. They offer counseling for a fee when it is often given free of charge. Contact 1-800-569-4287 or TDD 1-800-877-8339 for a HUD-approved housing counseling agency.

While most mortgage lenders are reputable, a few unscrupulous lenders engage in predatory lending practices that can increase the likelihood that you will lose your home to foreclosure. These practices include making a mortgage loan to an individual who does not have the income to repay it, charging excessive interest, points and fees or repeatedly refinancing a loan without providing any real value to you. If you are facing foreclosure, you may also receive refinance offers in the mail telling you that you have been "pre-approved" for credit based on the equity in your home. But consider this, if you cannot make your current payments, increasing your debt, even if you get some temporary cash, will make it harder to keep your home. Here are several precautions that should help you avoid falling prey to scam artists and predatory lenders:

• Don't sign any papers you don't fully understand.
• Make sure you get all "promises" in writing.
• Beware of any contract of sale or loan assumption where you are not formally released from liability for your mortgage debt.
• Check with a lawyer or your mortgage company before entering into any deal involving your home.
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Here's how foreclosure "rescue" scam artists work: They will ask you to surrender your deed and say they'll rent your house to you. In a few years, they say, they'll let you buy it back. Or, they promise to negotiate for you with your lender. But first, they'll need an up-front fee that can range from $750 to thousands of dollars. Typically, these self-proclaimed "Rescue Consultants" will do nothing other than cash your check. If they get their hands on your deed, they will evict you and sell your house for all the equity they can extract.

Foreclosure Scam Red Flags:

• The "Rescuers" want you to sign a Quit Claim Deed or other paperwork you do not understand.
• They advertise their services as "Fast Cash," "Equity Funding," or "a Foreclosure Service."
• They are not listed with the Better Business Bureau, the California Department or Corporations, or the Department of Real Estate.
• They ask for money without presenting you with written details about the services they will perform.

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Contact a Housing Counselor 1-800-569-4287 or TDD 1-800-877-8339 SOURCE: http://www.hud.gov/offices/hsg/sfh/econ/smhlend.cfm