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BOSTON — Jane Petion lived in her home for 15 years and saw its value rise slowly, rise rapidly and, when the housing bubble burst, plunge at a sickening pace that left her owing $400,000 on a house worth closer to $250,000. Last June, her lender foreclosed on the property. The family received notices of eviction and appeared in housing court.
Then they discovered a surprising paradox within the nation’s housing crisis: Their power to negotiate began after foreclosure, rather than ending there.
In December Ms. Petion signed a new mortgage on her house for $250,000, with monthly payments of less than half the previous level. She and her husband now have a mortgage they can afford in a neighborhood that benefits from the stability they provide. A nonprofit lender made the deal possible by buying the house from her original mortgage company and selling it to her for 25 percent more than its purchase price — a gain to hedge against future defaults.
“It was exactly what we needed to get back on our feet,” said Ms. Petion, who works for a state agency. “We have income. But another bank, it would have been easy to look at our foreclosure and say, ‘I’m sorry, we have nothing for you now.’ ”
This counterintuitive solution — intervening after foreclosure rather than before — is the brainchild of Boston Community Capital, a nonprofit community development financial institution, and a housing advocacy group called City Life/Vida Urbana, working with law students and professors at Harvard Law School.
Though the program, which started last fall, is small so far, there is no reason it cannot be replicated around the country, especially in areas that have had huge spikes in housing prices, said Patricia Hanratty of Boston Community Capital. “If what you’ve got is a real estate market that went nuts and a mortgage market that went nuts, what you’ve got is an opportunity.”
Two years into the nation’s housing meltdown, and after hundreds of billions of dollars of federal rescue programs, government officials and housing advocates denounce the unwillingness of lenders to adjust the balances on homes that are worth less than the mortgage owed on them.
Research suggests that such disparity, rather than exotic interest rates, is the main driver of foreclosures, in tandem with a job loss or another financial setback. The financial industry lobbied aggressively to defeat legislation that would empower bankruptcy judges to adjust mortgage balances to properties’ market value.
That reluctance, however, eases after foreclosure, when lenders find themselves holding properties they need to unload, Ms. Hanratty said.
“We found, frankly, the industry wasn’t ready to do much pre-foreclosure,” she said. “But once it was either on the cusp of foreclosure or had been taken into the bank portfolio, banks really do not want to hold on to these properties because they don’t know how to manage them, don’t know what to do with them.”
Working with borrowed money, Boston Community Capital buys homes after foreclosure and sells or rents them to their previous owners, providing new mortgages and counseling to the owners, who typically have ruined credit. During the process the families remain in their homes. Since late fall it has completed or nearly completed deals on 50 homes, with an additional 20 in progress, Ms. Hanratty said. The organization is now trying to raise $50 million to expand the program.
Steve Meacham, an organizer at City Life/Vida Urbana, is one reason banks may be willing to sell their foreclosed properties to Boston Community Capital. When families receive eviction notices, his group holds demonstrations or blockades outside the properties, calling on lenders to sell at market value. It also connects the residents with the Harvard Legal Aid Bureau, whose students work to pressure lenders to sell rather than evict by prolonging eviction and “driving up litigation costs,” said Dave Grossman, the clinic’s director.
“So they’re being defended legally, and we’re ramping up the pressure publicity-wise,” Mr. Meacham said. “And B.C.C. came in; they had a part that buys properties and a part that writes mortgages. It wouldn’t work without all three.”
A focus of the program has been the working-class neighborhood of Dorchester, where home prices dropped 40 percent between 2005 and 2007, compared with a 20 percent drop statewide, according to research by the Federal Reserve Bank of Boston. Foreclosures and delinquencies there are more than twice the state average, the bank found.
In such neighborhoods, lenders and residents are hurt by evictions, which often leave vacant properties that invite crime and drive down values of neighboring houses, Ms. Hanratty said. “So it’s in the lenders’ interest to get fair market value as quickly as possible, and in the interest of the community to have as little displacement as possible.”
The program is not a solution for all lenders or distressed homeowners. After months of post-foreclosure negotiations with her bank, Ursula Humes, a transit police detective, is waiting for her final 48-hour eviction notice. Her belongings are in boxes.
Mrs. Humes owed $440,000 on her home; her lender offered to sell it to Boston Community Capital for $260,000. But after assessing Mrs. Hume’s finances, the nonprofit asked for a lower selling price, and the lender refused.
On a recent evening, Mr. Grossman of the Harvard law clinic counseled Mrs. Humes on her options. “This is a case that doesn’t have a happy ending,” Mr. Grossman said.
Mrs. Humes said, “I depleted my retirement account and everything I owned, but I’m still going to lose it.”
Many commercial lenders, similarly, would shy away from such a program because it involves writing mortgages for borrowers who have already defaulted once — a high risk for a small reward.
For other homeowners, though, the program is a rescue at the last possible second. Roberto Velasquez, a building contractor, lost his home to foreclosure last November, owing the lender $550,000. After extensive wrangling, during which his family stayed in the house, he bought it again in March for $280,000, a price he can afford.
On the night after he closed, he joined other members of City Life/Vida Urbana at a foreclosed four-unit building in Dorchester from which most of the tenants had been evicted. A group of artists projected videos on sheets in the windows, showing silhouettes of families re-enacting their last 72 hours before eviction. Garbage filled one of the units. Mr. Velasquez said it hurt to stand amid such loss, but he was jubilant at his own perseverance.
“We’ve been fighting for so long,” he said, “and we win, because we’re still in the house.”
A version of this article appeared in print on March 22, 2010, on page A12 of the New York edition.
By DAVID STREITFELD
Published: March 7, 2010
In an effort to end the foreclosure crisis, the Obama administration has been trying to keep defaulting owners in their homes. Now it will take a new approach: paying some of them to leave.
This latest program, which will allow owners to sell for less than they owe and will give them a little cash to speed them on their way, is one of the administration’s most aggressive attempts to grapple with a problem that has defied solutions.
More than five million households are behind on their mortgages and risk foreclosure. The government’s $75 billion mortgage modification plan has helped only a small slice of them. Consumer advocates, economists and even some banking industry representatives say much more needs to be done.
For the administration, there is also the concern that millions of foreclosures could delay or even reverse the economy’s tentative recovery — the last thing it wants in an election year.
Taking effect on April 5, the program could encourage hundreds of thousands of delinquent borrowers who have not been rescued by the loan modification program to shed their houses through a process known as a short sale, in which property is sold for less than the balance of the mortgage. Lenders will be compelled to accept that arrangement, forgiving the difference between the market price of the property and what they are owed.
“We want to streamline and standardize the short sale process to make it much easier on the borrower and much easier on the lender,” said Seth Wheeler, a Treasury senior adviser.
The problem is highlighted by a routine case in Phoenix. Chris Paul, a real estate agent, has a house he is trying to sell on behalf of its owner, who owes $150,000. Mr. Paul has an offer for $48,000, but the bank holding the mortgage says it wants at least $90,000. The frustrated owner is now contemplating foreclosure.
To bring the various parties to the table — the homeowner, the lender that services the loan, the investor that owns the loan, the bank that owns the second mortgage on the property — the government intends to spread its cash around.
Under the new program, the servicing bank, as with all modifications, will get $1,000. Another $1,000 can go toward a second loan, if there is one. And for the first time the government would give money to the distressed homeowners themselves. They will get $1,500 in “relocation assistance.”
Should the incentives prove successful, the short sales program could have multiple benefits. For the investment pools that own many home loans, there is the prospect of getting more money with a sale than with a foreclosure.
For the borrowers, there is the likelihood of suffering less damage to credit ratings. And as part of the transaction, they will get the lender’s assurance that they will not later be sued for an unpaid mortgage balance.
For communities, the plan will mean fewer empty foreclosed houses waiting to be sold by banks. By some estimates, as many as half of all foreclosed properties are ransacked by either the former owners or vandals, which depresses the value of the property further and pulls down the value of neighboring homes.
If short sales are about to have their moment, it has been a long time coming. At the beginning of the foreclosure crisis, lenders shunned short sales. They were not equipped to deal with the labor-intensive process and were suspicious of it.
The lenders’ thinking, said the economist Thomas Lawler, went like this: “I lend someone $200,000 to buy a house. Then he says, ‘Look, I have someone willing to pay $150,000 for it; otherwise I think I’m going to default.’ Do I really believe the borrower can’t pay it back? And is $150,000 a reasonable offer for the property?”
Short sales are “tailor-made for fraud,” said Mr. Lawler, a former executive at the mortgage finance company Fannie Mae.
Last year, short sales started to increase, although they remain relatively uncommon. Fannie Mae said preforeclosure deals on loans in its portfolio more than tripled in 2009, to 36,968. But real estate agents say many lenders still seem to disapprove of short sales.
Under the new federal program, a lender will use real estate agents to determine the value of a home and thus the minimum to accept. This figure will not be shared with the owner, but if an offer comes in that is equal to or higher than this amount, the lender must take it.
Mr. Paul, the Phoenix agent, was skeptical. “In a perfect world, this would work,” he said. “But because estimates of value are inherently subjective, it won’t. The banks don’t want to sell at a discount.”
There are myriad other potential conflicts over short sales that may not be solved by the program, which was announced on Nov. 30 but whose details are still being fine-tuned. Many would-be short sellers have second and even third mortgages on their houses. Banks that own these loans are in a position to block any sale unless they get a piece of the deal.
“You have one loan, it’s no sweat to get a short sale,” said Howard Chase, a Miami Beach agent who says he does around 20 short sales a month. “But the second mortgage often is the obstacle.”
Major lenders seem to be taking a cautious approach to the new initiative. In many cases, big banks do not actually own the mortgages; they simply administer them and collect payments. J. K. Huey, a Wells Fargo vice president, said a short sale, like a loan modification, would have to meet the requirements of the investor who owns the loan.
“This is not an opportunity for the customer to just walk away,” Ms. Huey said. “If someone doesn’t come to us saying, ‘I’ve done everything I can, I used all my savings, I borrowed money and, by the way, I’m losing my job and moving to another city, and have all the documentation,’ we’re not going to do a short sale.”
But even if lenders want to treat short sales as a last resort for desperate borrowers, in reality the standards seem to be looser.
Sree Reddy, a lawyer and commercial real estate investor who lives in Miami Beach, bought a one-bedroom condominium in 2005, spent about $30,000 on improvements and ended up owing $540,000. Three years later, the value had fallen by 40 percent.
Mr. Reddy wanted to get out from under his crushing monthly payments. He lost a lot of money in the crash but was not in default. Nevertheless, his bank let him sell the place for $360,000 last summer.
“A short sale provides peace of mind,” said Mr. Reddy, 32. “If you’re in foreclosure, you don’t know when they’re ultimately going to take the place away from you.”
Mr. Reddy still lives in the apartment complex where he bought that condo, but is now a renter paying about half of his old mortgage payment. Another benefit, he said: “The place I’m in now is nicer and a little bigger.”
By BOB TEDESCHI
Published: February 24, 2010
HOMEOWNERS on the verge of foreclosure will often seek a short sale as a graceful exit from an otherwise calamitous financial situation. Their homes are sold for less than the mortgage amount, and the remaining loan balance is usually forgiven by the lender.
But with short sales beyond the reach of some homeowners — they typically won’t qualify if they have a second mortgage on the home — another foreclosure alternative is emerging: “deeds in lieu of foreclosure.”
In this transaction, a homeowner simply relinquishes the property, turning over the deed to the bank, in exchange for the lender’s promise not to foreclose. In a straight foreclosure, a lender takes legal control of the property and evicts the occupants; in deeds-in-lieu transactions, the homeowner is typically allowed to remain in the home for a short period of time after the agreement.
More borrowers will at least have the chance to consider this strategy in the coming months, as CitiMortgage, one of the nation’s biggest mortgage lenders, tests a new program in New Jersey, Texas, Florida, Illinois, Michigan and Ohio.
Citi recently agreed to give qualified borrowers six months in their homes before it takes them over. It will offer these homeowners $1,000 or more in relocation assistance, provided the property is in good condition. Previously, the bank had no formal process for serving borrowers who failed to qualify for Citi’s other foreclosure-avoidance programs like loan modification.
Citi’s new policy is similar to one announced last fall by Fannie Mae, the government-controlled mortgage company. Fannie is allowing homeowners to return the deed to their properties, then rent them back at market rates.
To qualify for the new program, Citi’s borrowers must be at least 90 days late on their mortgages and must not have a second lien on the home.
That policy may be a significant obstacle for borrowers, since many of the people facing foreclosure originally financed their homes with second mortgages — called “piggyback loans” — or borrowed against the homes’ equity after buying them.
Partly for that reason, Elizabeth Fogarty, a spokeswoman for Citi, said that the bank had only modest expectations for the test. Roughly 20,000 Citi mortgage customers in the pilot states will be eligible for a deed-in-lieu agreement, she said, and of those, about 1,000 will most likely complete the process.
As is often the case with deed-in-lieu settlements, Citi will release the borrower from all legal obligations to repay the loan.
In some states, like New York, New Jersey and Connecticut, banks can legally retain the right to pursue borrowers for the balance of the loan after a foreclosure, a short sale or a deed-in-lieu of foreclosure. That is one reason why housing advocates say borrowers should carefully weigh these transactions with the help of a lawyer or nonprofit housing counselor before proceeding.
Ms. Fogarty said Citi had no specific timetable for rolling out the program nationally.
Among the other major lenders, there is no formalized program for deeds-in-lieu. Bank of America, JPMorgan Chase and Wells Fargo, for instance, generally require borrowers to try a short sale before considering a deed-in-lieu transaction.
A deed-in-lieu is better for banks than a foreclosure because it reduces the company’s legal costs, and it is better for the homeowners because it is less damaging to their credit score.
Banks may also end up with homes in better condition.
J. K. Huey, a senior vice president at Wells Fargo, says her bank usually offers relocation assistance — often $1,000 to $2,500 — as long as the borrower leaves the property in move-in condition after a deed-in-lieu transaction.
“The idea is to help them transition in a way where they can keep their family intact while looking for another place to live,” Ms. Huey said. “This way, they only have to move once, as opposed to getting evicted.”
By DAVID STREITFELD
Published: February 25, 2010
The Obama administration, under intense pressure to help millions of people in danger of losing their homes, is considering a ban on foreclosures unless they have first been examined for potential modification, according to a set of draft proposals.
That would raise the stakes from the current practice, which strongly encourages lenders to evaluate defaulting borrowers for a modification but does not make it mandatory.
Meg Reilly, a Treasury Department spokeswoman, said Thursday that the proposed foreclosure ban was “one of the many ideas under consideration in the administration’s ongoing housing stabilization efforts.” The proposal was first reported by Bloomberg News.
Laurie Goodman, a senior managing director at the Amherst Securities Group who has been highly critical of the government’s modification program, said even if the proposal came to pass, it would not be “a major change. We think there is a large public relations element to this.”
The government could use some favorable public relations for its modification program, which has been deemed disappointing.
Begun a year ago, the program was meant to help as many as four million homeowners but has fallen considerably short of those goals. The Treasury Department has said 116,297 loans have been permanently modified and more than 800,000 more are in trial programs.
The Mortgage Bankers Association said its members were already doing what the administration was considering.
“Lenders generally go to foreclosure as a measure of last resort, after all other options, including loan modification, are exhausted,” said John Mechem, the trade group’s vice president for public affairs.
Any enhancements the government made to the modification program would be unlikely to stem many foreclosures, said Howard Glaser, a prominent housing consultant.
The modification program was designed for people who had subprime loans, he said, not for borrowers with high-quality loans who are unemployed. Tweaking the interest rate for an unemployed family does not provide enough help.
The Mortgage Bankers Association announced this week their own plan for reducing foreclosures: Lenders and loan servicers would reduce unemployed borrowers’ payments for up to nine months while they looked for new jobs.
The banking group said the servicers would need special loans from the Treasury to pay for the program. The administration has not commented publicly on the proposal.
“The real strategy in Washington now is to pray for an improving economy so these issues will resolve themselves,” Mr. Glaser said. “At the end of the day, a strong jobs market will prevent the generation of new foreclosures.”
There was some positive news in that regard last week, when the mortgage bankers said the number of borrowers entering default unexpectedly declined in the fourth quarter. But on Thursday, the government reported that home prices sank 1.6 percent in December, a fresh sign that the real estate market is nowhere near healed.
As Home Sales Rise, Foreclosure Filings Keep Recovery Elusive
January 18, 2010 By RANDI F. MARSHALL randi.marshall@newsday.com
Quick Summary
A Newsday analysis found that new foreclosures are outpacing new sales in many LI neighborhoods.
Photo credit: Getty Images | Overall, experts say, home sales across the Island are increasing and the steep price declines of the last year are slowing. (April 29, 2008)
For the first nine months of last year, the residential market on Long Island looked like this: For every 10 homeowners who were able to sell their houses, another eight slid into default at the beginning of the foreclosure process.
An example of the region’s deeply troubled housing market is Windsor Parkway in Hempstead, which is like so many dozens of streets and neighborhoods across Long Island, where residential sales appear to be making a modest comeback – but that positive news isn’t really the full story.
On this street, eight homes were sold in the first nine months of 2009. A closer look at these eight sales shows that four were foreclosures – properties sold at auction, where, records show, the banks themselves bought the homes back. That meant a new owner was not moving into an empty house on Windsor Parkway and perhaps spending money to improve the property with repairs and landscaping. And, in addition, there were 10 lis pendens filings – the first step in the foreclosure process – on this street during the same period.
Many communities on Long Island have fared far worse, where the ratio between homeowners heading into foreclosure and those able to sell during the first nine months of 2009 was more than 3 to 1, according to a Newsday analysis of data on home sales and lis pendens filings. Across the Island, the average during the same period was nearly 1 to 1.
“Certain places have just been so hard-hit, that they’ll take much longer to come back,” said Beth Marten, a buyers’ agent and real estate investor in Baldwin.
The data Newsday examined were provided by the Long Island Real Estate Report in West Islip.
No recovery – yet
Overall, experts say, home sales across the Island are increasing and the steep price declines of the last year are slowing. While real estate sources say one of the reasons home sales increased last year was because falling prices made more houses affordable, the numbers of foreclosures in many communities are also a significant factor.
Newsday reported last week that home sales on Long Island fell in 2009 by more than $1 billion, a 9.3 percent drop from 2008, but the number of homes sold from the previous year went up 2.8 percent.
“We’re seeing improvement but let’s not mistake it for a recovery,” said Jonathan Miller, who heads the appraisal firm Miller Samuel in Manhattan. “There’s some good news and we’ll take it, but very little has been resolved.”
Foreclosure sales rise
Even as home sales rose last year, an increasing number of them were foreclosure sales, which take place at auction and, in many cases, simply send the property back to the bank, with virtually no positive economic impact on the street on which the house sits. Across Long Island for the first nine months of last year, 9 percent of all home sales were foreclosure sales. In some communities, that number was 33 percent.
Newsday’s analysis showed that the trends worsened in many of the Island’s low-income and minority communities, making a real estate comeback there – and the dream of home ownership – even more elusive.
“The higher the [lis pendens- to-sales] ratio, the higher probability that housing prices will fall,” Miller said.
While many of those communities always had some foreclosures, home sales used to far outpace them, according to Long Island Real Estate Report president Pat Ammirati.
The number of foreclosures in a community affects far more than just the homeowners in trouble. As foreclosures rise and prices fall, it’s particularly tough for homeowners who are not in default to sell – especially if they bought at high prices.
“There’s someone who has paid for a house and is sitting in that house and has watched it go down in value,” said John Fitzgerald, a foreclosure and bank-owned property specialist with RealtyConnect USA, a new real estate agency in Hauppauge. “Now, they can’t refinance, they can’t sell and they can’t get out.”
And in communities with fast-rising lis pendens notices, the number of eventual foreclosures could rise even more, imperiling more homeowners who are keeping up with their mortgages. For the first nine months of last year, for example, just to name two communities, Brentwood had more than three lis pendens filings for every house sale; East Moriches had nearly two.
Blame it on the recession
To experts, the reasons for the rise sit squarely on the recession.
“The majority of people we’re counseling now have prime mortgages and their primary reason for default was a loss of job or loss of income,” said Eileen Anderson, a senior vice president at the Community Development Corp. of Long Island.
There’s little sign of a letup to come, especially if the two keys to the region’s economic growth – jobs and credit – remain unstable.
“It’s unlikely that we are going to see a significant improvement in unemployment and an easing of credit in 2010,” Miller said.
Indeed, it could take three to five years before foreclosures abate and the market makes a real recovery, said Island Advantage Realty broker Todd Yovino, whose Huntington firm specializes in bank-owned foreclosed properties.
Nonetheless, there are some bright spots. Kisha Wright, an assistant vice president with the Long Island Housing Partnership, said she has had more success in modifying the terms of mortgage loans recently.
“I think the government and the lenders and the banks and the investors are making strides in the hopes of a recovery,” Wright said. “I don’t think we’re quite there yet.”
Foreclosures Creep Upmarket
THE 54-year-old red-shingled ranch has peeling paint, an untended yard and an overall appearance of disrepair. Its look may seem consistent with the image of a house in foreclosure — but not its address: Greenwich Road in Bedford.
These days, when it comes to foreclosures, very little is typical “and no community is immune,” said Mark Boyland, a broker with Keller Williams NY Realty.
In Scarsdale, where the median household income is $217,000, among the highest in the country, 57 properties, or one in 254, are in some stage of foreclosure, according to RealtyTrac, a firm in Irvine, Calif., that tracks foreclosures.
White Plains has 201 properties, or one in every 133 houses, in some stage of foreclosure — which covers everything from an initial notice of pending action to the lender’s acquisition of the home.
One example, a well-maintained $1 million single-family colonial, looks like any other on its street. But its landlord stopped paying the mortgage six months ago, although he continues to collect $8,000 a month from his tenants, said Mr. Boyland, who is also president of the Westchester-Putnam Multiple Listing Service.
What’s happening in Westchester is not atypical, said Rick Sharga, the president of RealtyTrac. “There is no ZIP code, no neighborhood, no place except perhaps the White House, that is not feeling the effects of the current downturn,” he said. “What’s unusual this time, compared to the late 1980s and early 1990s, is that much higher-ticket homes are also involved.”
Such homes remain in the minority, however; the densest concentration of foreclosures is occurring in low-income areas. Within Westchester, Yonkers is in the lead in raw numbers, with 655 houses, or one in 107, in some stage of foreclosure, and Mount Vernon is in second place, with 519, or one in 53.
In Port Chester, where housing prices tend toward the lower end of the spectrum for Westchester, 128 homes are in foreclosure, one in every 128, RealtyTrac said.
But the problem there is expected to worsen soon, said George Groves, an agent with Re/Max Prime Properties in Scarsdale. With 52 two-family houses for sale and only two in contract, the situation in Port Chester is “a real disaster in the making,” Mr. Groves said.
For Westchester as a whole, the number of foreclosures as of Sept. 1 was 2,984, equal in one in 119 housing units. By comparison, in Queens County, the number was 10,654; in Suffolk County, it was 9,091, according to RealtyTrac.
As the numbers continue to mount (they were up 11 percent in Westchester during August from the same time a year ago), each element of the market is coping with fallout of one kind or another.
Some investors are profiting, and real estate agents like Mr. Groves have “a ton of work” — though he emphasized, “It’s very specialized and not for every broker.”
In a recent transaction, Mr. Groves represented investors who bought a four-bedroom raised ranch at a bank auction for $320,000. The investors then listed it for sale for $399,000 and within a week received eight offers. Even after fees and the real estate commission, they will realize about $60,000, Mr. Groves said. “That’s what I call flipping a property,” he added. “But it doesn’t always happen that way.”
For the lending institution, chances are that such transactions will involve a loss. Take, for example, the case of a 30-year-old four-bedroom split with an indoor pool in Rye Brook. The owner bought it several years ago at the height of the market for $1.1 million and then took out a second mortgage to remodel. But after his payments went up, he defaulted on the mortgages. The house was sold for $870,000, with the bank swallowing a $1 million loss, Mr. Groves said.
And then there are the homeowners who lose everything, including their good credit ratings. Surprisingly, said Mr. Boyland of Keller Williams, not everyone these days is taking such losses to heart.
Gary Leogrande, a colleague of Mr. Boyland at Keller Williams, says the less-than-concerned attitude toward foreclosure is shown by some sellers at every economic level, from those in less well-to-do neighborhoods to those in upscale communities like Harrison and Rye.
Because a foreclosure takes so long — sometimes two or three years — some owners unable to keep up with payments and taxes in essence decide to live rent-free for a year, then start stalling when eviction proceedings begin, Mr. Leogrande said.
“Certainly, there are some victims in this wave of foreclosures,” he said, adding that while “we tend to feel sorry for them,” some people these days “are just playing the system.”
Enough economic tools are available to avoid a foreclosure, he said, if a client really wants to. Forbearance agreements can be struck, with banks accepting lower payments in the short run. And short sales can be negotiated, in which a home is sold for less than what is owed on the mortgage.
That way a bad credit rating can be avoided. But not everyone is worried about that, according to Mr. Boyland. “At that point,” he said, “their credit isn’t in great shape, and they’re not going out to buy a house again soon. So they just shrug their shoulders and walk away.”
Interesting NY Times article on loan defaults, worth reading…
Housing Lenders Fear Bigger Wave of Loan Defaults
By VIKAS BAJAJ
Published: August 4, 2008
The first wave of Americans to default on their home mortgages appears to be cresting, but a second, far larger one is quickly building.
Homeowners with good credit are falling behind on their payments in growing numbers, even as the problems with mortgages made to people with weak, or subprime, credit are showing their first, tentative signs of leveling off after two years of spiraling defaults.
The percentage of mortgages in arrears in the category of loans one rung above subprime, so-called alternative-A mortgages, quadrupled to 12 percent in April from a year earlier. Delinquencies among prime loans, which account for most of the $12 trillion market, doubled to 2.7 percent in that time.
The mortgage troubles have been exacerbated by an economy that is still struggling. Reports last week showed another drop in home prices, slower-than-expected economic growth and a huge loss at General Motors. On Friday, the Labor Department reported that the unemployment rate in July climbed to a four-year high.
While it is difficult to draw precise parallels among various segments of the mortgage market, the arc of the crisis in subprime loans suggests that the problems in the broader market may not peak for another year or two, analysts said. Defaults are likely to accelerate because many homeowners’ monthly payments are rising rapidly. The higher bills come as home prices continue to decline and banks tighten their lending standards, making it harder for people to refinance loans or sell their homes. Of particular concern are “alt-A” loans, many of which were made to people with good credit scores without proof of their income or assets.
“Subprime was the tip of the iceberg,” said Thomas H. Atteberry, president of First Pacific Advisors, a investment firm in Los Angeles that trades mortgage securities. “Prime will be far bigger in its impact.”
In a conference call with analysts last month, James Dimon, the chairman and chief executive of JPMorgan Chase, said he expected losses on prime loans at his bank to triple in the coming months and described the outlook for them as “terrible.”
Delinquencies on mortgages tend to peak three to five years after loans are made, said Mark Fleming, the chief economist at First American CoreLogic, a research firm. Not surprisingly, subprime loans from 2005 appear closer to the end of defaults than those made in 2007, for which default rates continue to rise steeply. “We will hit those points in a few years, and that will help in many ways,” Mr. Fleming said, referring to the loans made later in the housing boom. “We just have to survive through this part of the cycle.”
Data on securities backed by subprime mortgages show that 8.41 percent of loans from 2005 were delinquent by 90 days or more or in foreclosure in June, up from 8.35 percent in May, according to CreditSights, a research firm with offices in New York and London. By contrast, 16.6 percent of 2007 loans were troubled in June, up from 15.8 percent. Some of that reflects basic math. Over the years, some loans will be paid off as homeowners sell or refinance, and some homes will be foreclosed upon and sold. That reduces the number of loans from those earlier years that could default. Also, since the credit market seized up last year, lenders have become much more conservative and have stopped making most subprime loans and cut back on many other popular mortgages.
The resetting of rates on adjustable mortgages, which was a big fear of many analysts in 2006 and 2007, has become less problematic because the short-term interest rates to which many of those loans are tied have fallen significantly as the Federal Reserve has lowered rates. The recent federal tax rebates and efforts to modify more loans have also helped somewhat, analysts say.
What will sting borrowers more than rising interest rates, analysts say, is having to pay interest and principal every month after spending several years paying only interest or sometimes even less than that. Such loan terms were popular during the boom with alt-A and prime borrowers and appeared appealing while home prices were rising and interest rates were low.
But now, some borrowers could see their payments jump 50 percent or more, and they may not be able to sell their properties for as much as they owe.
Prime and alt-A borrowers typically had a five- or seven-year grace period before payments toward principal were required. By contrast, subprime loans had a two-to-three-year introductory period. That difference partly explains the lag in delinquencies between the two types of loans, said David Watts, an analyst with CreditSights. “More delinquencies look like they are on the horizon because so few of them have reset,” Mr. Watts said about alt-A mortgages.
The wave of foreclosures is still rising in states like California, where many homeowners turned to creative mortgages during the boom. From April to June, mortgage companies filed 121,000 notices of default in California, up nearly 7 percent from the first quarter and more than twice as many as in the second quarter of 2007, according to DataQuick, a real estate data firm based in La Jolla, Calif. The firm said the median age of the loans increased to 26 months from 16 months a year earlier.
The mortgage giants Freddie Mac and Fannie Mae, which own or guarantee nearly half of all mortgages, are trying to stem that tide. Last week, they said they would pay more to the mortgage servicing companies that they hire to modify delinquent loans and avoid foreclosures. Delinquencies in prime and alt-A loans are particularly challenging for banks because they hold more such loans on their books than they do subprime mortgages. Downey Financial, which owns a savings bank that operates in California and Arizona, recently reported that 11.2 percent of its loans were delinquent at the end of June, a big increase from the 6.1 percent that were past due at the end of last year. The bank’s troubles stem from its $6.2 billion portfolio of so-called option adjustable-rate mortgages, which allow borrowers to pay less than the interest owed on their mortgage in the early years. The unpaid interest is added to the principal due on the loan, so over time borrowers can owe more than the initial loan amount. Eventually, when loans grow by 10 percent or 15 percent, the borrowers are required to start paying both the interest and principal due. Many borrowers who got these loans during the boom had good credit scores, but many of them owe more than their homes are worth. Analysts believe that many will not be able to or want to make higher payments.
“The wave on the prime side has lagged the wave on the subprime side,” said Rod Dubitsky, head of asset-backed research at Credit Suisse. “The reset of option ARM loans is a big event that will drive the timing of delinquencies.”
Feb. foreclosures up 60 percent over year before
Nevada, California, Florida have highest rates of those losing their homes
updated 12:31 p.m. ET, Thurs., March. 13, 2008
LOS ANGELES – Nearly 60 percent more U.S. homes faced foreclosure in February than in the same month last year, with Nevada, California and Florida showing the highest foreclosure rates, a research firm said Wednesday.
A total of 223,651 homes across the nation received at least one notice from lenders last month related to overdue payments, up 59.8 percent from 139,922 a year earlier, according to Irvine, Calif.-based RealtyTrac Inc.
Nearly half of the homes on the most recent list had slipped into default for the first time.
Foreclosures up 75% in 2007
More than 1% of all households slipped into foreclosure in 2007, as more borrowers failed to keep up on their mortgages. Nevada led the nation with the highest foreclosure rate, while California had the highest total number of foreclosures.
U.S. foreclosures jumped 75% in 2007 to more than 2.2 million filings. The end of the year saw an acceleration in the rate of foreclosure activity, which was up 7% in December from the previous month and 97% from the previous year, according to the data firm RealtyTrac. December was the fifth straight month to have more than 200,000 filings, erasing any hopes that the surge in foreclosures was slowing.
“We really don’t see any indication that the rate of activity will come down anytime soon,” says Rick Sharga, RealtyTrac vice president.
A total of 642,150 foreclosure filings — from notices of default to bank repossessions — were reported in 2007′s fourth quarter. That represents a 1% increase from the previous quarter and an 86% boost from the fourth quarter of 2006.
The number of foreclosures is expected to increase steadily through the second half of this year, when the next wave of subprime adjustable-rate mortgages (ARMs) — the industry’s worst-performing loans – is expected to reset.
Until these low-quality loans work their way through the system, Sharga says, there’s no reason to expect the number of foreclosure filings to drop.
Nevada, Florida, Michigan lead the pack
While foreclosure filings totaled more than 2 million in 2007, the number of properties in trouble rose to 1.3 million, up 81% from the 717, 522 homes in foreclosure in 2006. (Some homes have more than one loan out on them.) More than 1% of all households were in some phase of the foreclosure process last year, up from just over 0.5% in 2006.
Nevada posted the highest rate of foreclosure for the year — more than three times the national average — followed by Florida and Michigan. Rounding out the top 10 were California, Colorado, Ohio, Georgia, Arizona, Illinois and Indiana.
Nevada’s 66,316 foreclosure filings on 34,417 properties last year represented a 215% increase from 2006 and were largely a result of high-risk lending and a frenzy of real-estate speculation. Almost 3.4% of households in Nevada were in foreclosure in 2007.
Florida had the second-highest foreclosure rate, with more than 2% of households entering some stage of foreclosure. This was due in large part to an extended boom that had pushed prices up so high that borrowers were stretching themselves to get into a home. A total of 279,325 foreclosure filings on 165,291 properties were reported in the Sunshine State during the year — more than twice the number reported in 2006.
Michigan had the third-highest foreclosure rate for 2007, with 1.95% of its households filing foreclosure, largely a result of auto-industry layoffs in Detroit. A total of 136,205 filings on 87,210 properties were reported last year — a 68% increase from 2006.
California keeps foreclosure agent busy
California posted the highest number of total foreclosure filings for the year, with 481,392 notices of default, action and bank repossession on 249,513 homes. That number had more than tripled from 2006, and its foreclosure rate of 1.92% was the fourth-highest in the country.
Indeed, Southern California Realtor Leo Nordine, who specializes in bank-owned properties, had more listings than he could possibly sell last year so he cut back his business to just two financial institutions. “It’s just been a steady increase since 2006,” Nordine says, with two new bank repossessions being handed to him every day. “This is by far the scariest (downturn) I’ve been through so far.”
Banks, Nordine says, are now slashing prices on their repossessed homes by $10,000 to $30,000 a month in Southern California just to move them off their books. But buyers aren’t exactly snatching them up. “They know the longer they wait, the better off they are going to be,” he says.
Meanwhile, these price cuts are further dampening sale prices on surrounding homes, Nordine notes, delaying a recovery.
Government aid has yet to help
RealtyTrac estimates that between half a million and three-quarters of a million bank-owned properties in the U.S. will return to the market this year.
December’s surge in foreclosure filings suggests that state intervention efforts have yet to make a dent in the problem. The bailout program announced in December by Treasury Secretary Henry Paulson did not affect these numbers, as it did not include borrowers already in default. (Read more on who qualifies for the bailout here.)
Still, activists don’t hold out much hope that that program will turn the tide of foreclosures either, mainly because many homeowners won’t qualify to have their loans refinanced. Moreover, the program is voluntary and doesn’t require lenders to report the outcomes of their discussions with troubled borrowers. (Read more on why the plan is being called inadequate here.)
The Center for Responsible Lending (CRL) estimates that the Paulson program will help only about 118,200 U.S. borrowers, or about 3% of the outstanding subprime mortgages with adjustable interest rates. “Even if it’s up and running as best as can be, it’s not going to stem the tide, says Kathleen Day, CRL spokeswoman.
Refinancing gets bogged down
State-run counseling and refinance programs are encountering some of the same problems borrowers are in getting workouts done.
Brian Hudson, director of Pennsylvania’s Housing Finance Agency, says he has been able to refinance 29 loans since launching a program to refinance struggling homeowners last October. The agency has another 300 loans that are being reviewed as part of a separate campaign which seeks to work out loans in which the borrower owes more than the house is worth. However, resolving these cases with servicers and investors has been difficult.
“I’m frustrated in that it’s tough to get some decisions quickly when you may have a sheriff’s sale in a week or two,” Hudson says.
The CRL says that for every loan modification done on a subprime adjustable-rate mortgage — those mortgages at the root of the current crisis — foreclosures outnumber it 13 to 1.
Activist groups push to change laws
Activist groups such as the CRL are pushing for reforms to give distressed borrowers an opportunity to work with their lender.
One is a change to U.S. bankruptcy laws to allow court-supervised modifications of distressed mortgages for homeowners, who have typically been excluded. Legislation to lift this barrier for homeowners is now moving through the House and Senate.
And a bill introduced in the New York Assembly seeks a one-year moratorium on foreclosures, similar to the one enacted in Massachusetts last spring, which gave victims of predatory lending a 60- to 90-day moratorium after a complaint.
The mortgage banking industry opposes moratoriums and changes to the bankruptcy law. Lenders such as Chase Home Lending say they have ramped up hiring and are now able to modify far more loans than they did last spring. “We are geared up and able to meet the demand,” says Chase spokesman Tom Kelly. Chase has modified 17% of its subprime ARMs that were scheduled to reset by March 2008, in most cases lowering the rate on loans, Kelly says.
Since last year, it has begun calling its ARM customers to warn them that their rate was going up and to inform them of their new payment amount and where to call if they were not going to be able to make that new monthly payment.
“We are trying to talk to them ahead of time before we get into problems,” Kelly says.
By Melinda Fulmer, MSN Real Estate
