The Obama administration’s foreclosure plan has won plaudits for tackling an issue at the heart of the current financial crisis, but an exact pattern for identifying at-risk mortgages and how to restructure them has yet to be unveiled.
Alterations or “workouts” of troubled mortgages are key to stemming the nation’s tide of foreclosures, say housing advocates and industry experts. The plan announced last week also creates a process to restructure loans, which will spur resolution of pending foreclosure cases, they added.
Curbing foreclosures also has implications for the housing market in particular and the economy in general. “The rise of foreclosure means more houses coming back on market which pushes home prices down further, depresses toxic assets further and continues to erode household wealth,” said Nariman Behravesh, chief economist at IHS Global Insight in Lexington, Mass.
While lenders and servicers restructured nearly 2.3 million mortgages in 2008, the financial industry has been criticized for its slow response at processing foreclosures. In addition, housing advocates have said the industry has been too stingy with concessions to troubled homeowners, which they say perpetuates bad loans.
“The affordability piece is critical, otherwise the (workout) loans fail and we’ll be modifying terms again,” said Sister Barbara Busch, executive director of Working in Neighborhoods. a nonprofit housing agency in South Cumminsville.
The stakes are high. Industry estimates say the U.S. could see another 2 million foreclosures this year. The administration estimates 6 million Americans could face foreclosure in the next several years.
Southwest Ohio and Northern Kentucky saw foreclosures in 2008 respectively rise 7.5 percent and 17.2 percent.
Foreclosure filings in Hamilton, Butler, Clermont and Warren counties increased to 12,251 in 2008 compared with 11,397 in 2007. Filings in Boone, Campbell and Kenton counties climbed to 2,001 last year from 1,708 in 2007.
A Delhi Township woman’s case illustrates how a workout may only delay and not prevent a foreclosure.
Shirley Nagy, a 63-year-old retired secretary for Cincinnati Public Schools, fell behind on her mortgage with Wells Fargo last year when her rate began to adjust after two years. Her monthly payments jumped from about $950 to $1,500.
“They wouldn’t deal with me or accept partial payment,” she recalled, noting she fell behind four months when she got a notice her lender would file foreclosure. She avoided losing her two-bedroom, single-bath home last spring when WIN helped negotiate a workout plan.
But there’s a catch. Under the workout, the bank simply agreed to extend by two years the period when her rate is fixed and her payments are below $1,000 – her rate will begin to float again in the spring of 2010.
She owes $130,000 on a house that’s appraised at $115,390. “I’ll be lucky to get it valued at that,” she said. In the next 18 months, “I have to re-fi or I’ll be right back where I was,” Nagy said.
Workout statistics maintained by the Hope Now Alliance, an industry group formed in 2007 to stem the tide of foreclosures, suggest the industry has dug a little deeper as the foreclosure crisis worsened in 2008.
Fifth Third Bank, Greater Cincinnati and Northern Kentucky’s largest mortgage lender with 7,921 local mortgages originated in 2007 with a value of more than $1.2 billion, said it has restructured $770 million worth of consumer loans since the third quarter of 2007.
In 2007 and into early 2008, financial institutions emphasized “repayment plans” that stressed giving homeowners more time to “catch up” with payments. By December, however, more than half of workouts were more aggressive “modification” plans that change the actual terms of a mortgage, such as interest rate, duration and even principal owed.
Industry officials say Obama’s yet-to-be-unveiled modification template could solve the issue of sustainability.
Jeff Quayle, general counsel for the Ohio Bankers League, said Obama’s plan could spur loan modifications by reducing liability issues.
Up until now, lenders and servicers have negotiated workouts on a case-by-case basis. Servicers, who act as bondholders’ agents, have limited flexibility because they could be sued by investors if they don’t collect enough money from homeowners. Establishing industry standards for identifying mortgages in trouble and how they should be restructured provides servicers with the legal protection to conduct more workouts.
“It creates a template the industry can use and they don’t have to be worried about being second-guessed in the court system,” he said.
Once the template is set, the scope of the aid to at-risk homeowners will be clearer, said John Glascock, the director of the University of Cincinnati’s real estate center.
The government is “trying to help but not waste taxpayers’ money,” he said. If homeowners put no money down when they purchased, officials are “probably not going to consider you ‘at-risk,’ they’re going to consider you ‘gone,’ ” Glascock said.
Changing terms in court
Still, one key provision to cutting the burden on homeowners that requires congressional approval – the bankruptcy “cram down” – has emerged as a lightening rod.
The plan advocates allowing judges to modify terms of mortgages for homeowners in bankruptcy. Specifically, bankrupt homeowners who owe more on their mortgage than their house is worth could convert the excess debt into an unsecured claim – which could ultimately mean the lender collects less or even no money for that portion of the debt.
Lenders argue imposing mortgage terms would spur bankruptcies, further undermining value for investors and further destabilize financial markets.
“We’re against the cram down,” Quayle said.
But housing advocates say “you’ve got to have sticks – not just carrots – if banks won’t do it,” Busch said.
To protect themselves, lenders want to be allowed to veto any alteration in a home mortgage, said Michael Calhoun, president of the Center for Responsible Lending, a consumer advocacy group. Bankruptcy lawyers argue that such a veto isn’t necessary because under the proposed change, the homeowner and the lender would be able to present their case.
Each side could have an appraiser, and the judge would hear the testimony of both sides, including information about the borrower’s income and expenses, said Joe Lee, bankruptcy judge for the Eastern District of Kentucky.
It’s likely that the bankruptcy provision will be attached to a congressional appropriation bill, and in the process, some details could change. It will also face GOP opposition.
In a statement last week, House Republican leader John Boehner, R-West Chester, questioned whether the provision would increase mortgage payments for responsible borrowers. But U.S. Rep. Steve Driehaus, D-Cincinnati – who as a state representative served on Ohio’s task force to prevent foreclosures – said allowing bankruptcy judges as a last resort to rewrite terms would prompt lenders to “get serious” about loan modification. “I don’t think it will be abused – it’s another tool,” he said.
Joseph H. Spring, Esq.
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