A Primer on Foreclosure Interventions

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A Primer on Foreclosure Interventions

• J. Michael Collins
• jmcollins_at_wisc.edu
• 608.262.0369
• 20 Jan 2009
• Cooperative Extension Western District Meetings

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Overview

• History
• Terms
• Consumer behavior
• Interventions
• Public Policies

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Little History Old French "dead pledge,"

• why it is called mortgage is that it is doubtful
  whether the borrower will pay at the day or not,
  and if he doth not pay, then the Land which is
  put in pledge upon condition for the payment of
  the money is taken from him forever, and so dead
  to him upon condition. And if he doth pay the
  money, then the pledge is dead as to the Tenant.
• - jurist Sir Edward Coke (1552-1634)
• Until the 1930s 50 down and 5 year term w/o
  amortization
• 1934 FHA established to guarantee loans
• 1938 FNMA established to buy FHA-insured loans
  from banks
• became private in 1968 and role expanded
• 1984 The Secondary Mortgage Market Enhancement
  Act
• 1986 Tax Reform - facilitated securitization of
  mortgage loans.
• 1999 Financial Modernization allowed functions
  to combine

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Mortgage

• Contract with lien on property
• Legal agreement
• Contract between mortgagor and mortgagee
• Lien placed on property as collateral
• Any violation of contract is called default
• Foreclosure is reaction to default on agreement
• Lender made the loan
• Servicer collects payments for a fee
• Investor funded and/or owns the loan

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Consumer/Borrower
Trust

• Underwriters (Wall Street)
• Trustees
• Custodians (usually banks)
• Rating Agencies
• Insurers

Loans

Mortgage Brokers

Securities

Loans
Issuer
Mortgage Originators
Servicer Primary and Master
Investors

• Intermediaries/ Aggregators/ Issuers
• Supplies money to originator
• Aggregates and sells securities

Originator/Lender Supplies money to consumer
(often via broker)
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The Pitfalls

• Delinquency
• Payment is past due
• Default
• Violation of mortgage contract often
  seriously delinquent
• Foreclosure
• A legal filing to take a property
• REO
• Real Estate Owned lenders inventory of
  foreclosed assets

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Multiple Underlying Causes of Foreclosure

• Business
• Practices
• lax lending
• fraud
• appraisals
• inspections
• -seller grants

• Housing
• Market
• house prices
• collateral risks

• Borrower
• Behavior
• consumer credit usage
• income/employment
• property maintenance

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Finding Solutions Benefits Families, Lenders
Communities

• Neither lenders nor investors make money on
  foreclosures.
• Losses range from 20 cents to 60 cents on the
  dollar
• One estimate lenders cost of a foreclosure
  averages 58,800
• Servicers incur expenses with problem loans
• Legal costs and costs of securing/maintaining
  properties
• Vacant properties can attract crime and reduce
  neighborhood property values.
• One estimate each foreclosure associated with a
  0.9 decrease in values of properties within
  1/8th mile (139,000 on average per foreclosure
  in Chicago)
• Municipal costs estimated as high as 34,199 for
  worst properties
• Estimate average municipal cost of 6,937 per
  foreclosure.

Sources Crews Cutts et al, Freddie Mac
working paper, 2005 Immergluck et al, There
Goes the Neighborhood, Woodstock Institute,
2005. William Apgar et al Collateral Damage
Homeownership Preservation Foundation, 2005
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Causes of Borrower Falling Behind

• Borrowers in Default
• 32 are in bankruptcy
• 69 1st time buyers
• 55 1st time refinance
• Average of 2.1 refinances
• 11.6 years in home
• 22 retired seniors
• Unpaid mortgage 91,213

Source Chicago Mortgage Default Counseling
Survey, 2005
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Incidence of Foreclosure Varies by Loan Type
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Small Share of all Loans Are Subprime
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Foreclosure Filings

• Some borrowers dont focus on their problems
  until the filing
• Find resources family other debt sell assets
• Sell home
• Some borrowers may qualify for special loan
  workouts and other means to avoid foreclosure
• Also may sell home
• Only a portion of filings end with an auction or
  loss of home

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Understanding Borrowers in Default

• The majority of borrowers (historically) will
  self-cure
• Lenders/Servicers have wide array of tools
• workouts 6 24 months
• Budgeting
• Forbearance lower payment and tack on end of
  term
• Loss mitigation legal renegotiation of
  contract
• Loan modifications rate, term, balance, fees
• Short Refinance (principal reduction)
• Pre-foreclosure sales
• Short sale
• Deed in Lieu
• Marketing assistance
• But
• Borrowers dont trust their lender
• And confident they can solve own problems
• Borrowers are under great stress
• Financial, health, employment, family effects
• Lenders are overwhelmed

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Making Contact

• Early contact within first 15 days of missing
  payment best
• Requires a referral from lenders
• Can provide education counseling in advance of
  delinquency
• But must be targeted need incentives
• In early stages borrowers are triaged
• Budgeting problem
• Short-term income problem
• Long-term disruption
• Property problem
• But as many has half of borrowers are NOT in
  contact with lenders
• Head in the sand

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Roadblocks to Connecting with Borrowers

• Feelings of regret, embarrassment fear
• Stress from physical/emotional problems
• Avoid all bill collectors
• Little differentiation between lender/servicer
  nonprofit
• Distrust
• especially related to their failing loan
• Reluctant to talk about their problems
• May have medical problemsadding to challenges

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Borrower Voices

• Borrowers are under a great deal of stress,
  leading them to avoid help.
• I was always week to week. I get paid, I pay my
  bills. I get paid, I pay my bills. Then its not
  there. Then youre in trouble. I didnt know
  which way to turn. I didnt know there was help
  out there.
• Borrowers feel little sympathy from their lender
  (although borrowers dealing with loss mitigation
  staff were more favorable)
• They make you feel like a deadbeatthe way they
  interrogate you, they seem like they want to
  catch you in a lie because the questions are
  repetitiousthe only thing Im going to say is
  blah, blah, blah. Im not lying. I need help.
• They want us to lose our homes. They dont care.

Source NHS Chicago Inc, HOPI Borrower Focus
Groups, May 2006
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Why Did You Not Contact Your Lender?
Source Chicago Mortgage Default Counseling
Survey, 2005
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3rd Party Counseling Can Help

• Typical Borrower Counseling
• 2.2 counseling sessions
• 1.9 hours total time
• Phone 1.3 hours
• Face-to-face 2.2 hours
• Health and death in family take longer - 2.7 hours

Impact of an Additional Hour of Counseling
Source Chicago Mortgage Default Counseling
Survey 2005
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Intervention Timeline
Time slow pay 15-30 days
late 30-90 days late
60-120 days 90 days
180 days

• Preventing problems with targeted counseling,
  phone calls, workshops
• Making contact with delinquent borrowers (sooner
  is better)
• Hotlines are helpful, but not enough
• Managing expenses to pay mortgages
• Often consumer just needs help prioritizing
• Restructuring consumer debt
• Debt management plans can help free up cash flow
  for mortgages
• Repairs to the home
• Unexpected costs of repairs are frequent problem
• Modifying the loan
• If partnership with lender is in place, mods are
  possible and very helpful
• Bridging an income shortfall (short-term)

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Policy Responses

• Moratoria
• Mediation
• Mandated Referrals
• Outreach Campaigns / hotlines
• Grant / Loan Pools
• Facilitated modifications
• Bankruptcy proposals cram downs

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• J. Michael Collins
• University of Wisconsin-Madison
• jmcollins_at_wisc.edu
• 608.262.0369