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Homeownership Preservation Summit Addresses Home Loss Issue - 2007-06-23 |
I regret that I am mostly cynical when it comes to congressional hearings on any subject related to real estate. They usually produce a lot of prepared statements and a lot of hot air, and nothing else much seems to come from them.
But last month, the Senate Banking Committee held a series of meetings with major bank-owned lenders to address the growing problem of Americans losing their homes through foreclosure. And they actually came up with some good ideas.
In case you missed it, the problem is huge here in Georgia. In the 13 county metro Atlanta area, there were 4,827 properties advertised as going into foreclosure in January, a new record. And it looks like the problem is going to get worse rather than better.
Literally thousands of homes are financed with loans which are set to change rates in the next couple of years. In almost every case, the rate will be up rather than down, given the run-up in short term rates we have today.
The goal of the summit was to recognize that no one wins when a homeowner loses their home to foreclosure, and to agree on a set of principles which lenders could follow to help minimize the likelihood of home loss and give homeowners every possible chance of staying in their home if possible.
Here are some of their best ideas:
* Early Contact & Evaluation: Lenders are encouraged to contact borrowers well in advance of adjustable rate reset dates and attempt to identify those borrowers most likely to face financial distress as a result of the payment increase.
Lenders have traditionally been reactive to signs of financial distress rather than proactive. In addition, it is not unusual for a lender to allow a borrower to miss several months of payments before beginning an active collection effort. By then, the back payments may be too massive to overcome.
* Loan Modification: If it is determined through early contact that the owner will be unable to make the new higher payment, the lender should modify the rate or terms to create a permanent solution rather than allowing a default to occur.
Modifications might include a reduction in interest rate, a change from adjustable to fixed rate, or a one-time reduction in principal balance. In addition, the lender should have the ability to re-amortize the loan, meaning that the new terms and conditions might become effective immediately and that the term of the loan could be extended to make the payments more affordable now.
Another adopted principle encourages lenders to begin collecting monthly escrow payments for taxes and insurance in an effort to help the borrower have funds for these expenditures when the payments become necessary. Most home loans today already have escrow accounts as a requirement of the loan, but for those that don't, adding them is a good idea, especially for those at risk of default. An unexpected tax bill can easily push a financially strapped owner into default and begin the process of home loss.
Dedicated Teams: The group agreed that each lender should adopt a modification policy, so that the process and its goals would be clear. Further, they agreed to have specialized teams of loan counselors with resources to work with borrowers before a loan problem develops. Several non-profit groups, such as AARP, have an interest in seeing alternatives exist to foreclosure and home loss. These groups might partner with lenders to provide intervention and counseling.
Low-Cost Refinancing: Some borrowers originally took out subprime loans with terrible terms because that's all they could qualify for at the time. For those now eligible, the opportunity to refinance at more attractive prime rates should be made available in a streamlined and low-cost fashion.
This is a smart idea, because it can benefit all involved. The theory in a "streamline refinance" is that the lender already has a full file on the borrower from the original application, and is now relying on the borrower's improved credit score to simply change the terms of the existing loan. If the borrower qualifies, this can be a "win-win" solution as the owner receives a much lower interest rate, while the lender keeps a good customer and avoids the possibility of loss on the property.
Credit Availability: The statement of principles called on FHA and Fannie Mae to step up to the plate and participate in the purchase and resale of these modified loans.
Inclusion of these market-makers is important to lenders. It would theoretically make the modified loans saleable to investors who are used to buying from these sources. A loan which can be sold is a much more attractive investment to lenders.
Minimize Damage: In cases where a solution can not be found, the group agreed to minimize the damage to borrowers and their neighborhoods they represent when the home loss occurs. Lenders have a dismal record of caring about the community when they take ownership after a foreclosure, and this is an area in which they can improve.
The problem of subprime ARM loans is going to get worse before it gets better, but if lenders work within these guidelines, I believe it will help more owners stay in their homes.
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BUYING FORECLOSURES IN GEORGIA
NEW for 2008: Bank-Owned Home Bonanza
This seminar has been updated and revised for 2008 to reflect the dramatic changes in the Georgia foreclosure marketplace. We are literally facing a flood of foreclosure properties, and there is profit to be made in each and every one of these homes.
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