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Foreclosure Efforts Lacking, States Find

Homeowners need more help to stave off foreclosure

April 24, 2008

The report, issued by a coalition of state attorneys general and state bank supervisors, finds that foreclosure prevention continues to fall short, despite widely-publicized campaigns to encourage homeowners in trouble to seek help, and initiatives by servicers to fast-track loan modifications.

"Foreclosures are costly, further reduce real estate values, and harm not only borrowers, but also neighborhoods and communities," said Massachusetts Attorney General Martha Coakley. "In most cases, and particularly where mortgage loans contain payment terms that were not structured to be sustainable in a real estate downturn, loan modification and other loss mitigation should be done much more actively.

"The number of borrowers in loss mitigation has increased but those gains have been matched by an increasing level of delinquent loans," Coakley said.

The states' report, which summarizes data from a group of the largest mortgage servicers for the period of October 2007-January 2008, outlines several key findings. Major findings of the Foreclosure Working Group included:

• Seven out of ten seriously delinquent borrowers are still not on track for any loss-mitigation outcome. The number of borrowers in loss mitigation has increased, but it has been matched by an increasing level of delinquent loans; thus, the relative percentage has remained about the same. "Given creative servicer outreach efforts and increased public awareness of the HOPE Hotline during this time period [October 2007—January 2008], this large gap suggests a more systemic failure of servicer capacity to work out loans," the report says.

• Data suggests that servicers' loss-mitigation departments are severely strained in managing the current workload. The report noted that almost two-thirds of all loss-mitigation efforts started are not completed in the following month.

• Homeowners who do receive loss-mitigation help are most likely to receive some form of loan modification. The Group said such modifications are a solution that seems to offer better long-term prospects for successful resolution of problem loans. Many servicers are replacing their use of repayment plans in favor of loan modifications.

The report noted "in major respects, the subprime servicing data for January 2008 is nearly unchanged from October 2007."

Congressional legislation

Meanwhile, some members of the U.S. House of Representatives have introduced legislation that would provide up to $300 billion in new guarantees to help refinance at-risk borrowers into viable mortgages.

The Federal Housing Administration (FHA) Housing Stabilization and Homeownership Retention Act of 2008 would allow homeowners to refinance their principle residence provided that their mortgage was originated prior to December 31, 2007, the borrower has a mortgage debt-to-income ratio of no less that 35 percent as of March 1, 2008, and the existing lender agrees to waive any penalties or fees associated with the existing mortgage and accept a substantial write-down.

"This legislation represents a fair, common sense solution that will allow homeowners to stay in their homes, and help stabilize the housing market," said Rep. John Dingell (D-MI), a co-sponsor of the bill. "The lenders will not get a bailout, but their losses under this program will be far less than if these properties go into foreclosure."

Dingell said the federal government provided similar leadership during the New Deal using a program run by the Home Owners' Loan Corporation. Dingell said the HOLC saved over a million homes from foreclosure, while at the same time returning a profit to the government.

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