U.S. foreclosures keep coming - and for many, it's the second time around
This article first appeared in the St. Louis Beacon, Dec. 23, 2008 - U.S. foreclosures keep coming - and for many, it's the second time around
As 2008 ends, St. Louis housing counselor Eric Madkins, who counsels troubled borrowers facing foreclosure, says his phone is still ringing, and he's seeing firsthand evidence of a troubling trend: homeowners in trouble for a second time.
"We're seeing now people who may already be in a forbearance plan, but we're finding that we have to go back in and renegotiate with the lenders. Their financial circumstances may have changed again,'' said Madkins, director of housing and foreclosure intervention for the Urban League of Metropolitan St. Louis.
In many cases, these homeowners didn't have the assistance of a housing counselor and agreed to terms they cannot sustain, Madkins said.
On Monday, even as Hope Now -- a private-sector alliance of mortgage lenders, servicers and counselors -- was announcing in a media conference call that the industry had prevented 2.2 million foreclosures in 2008, the federal Office of the Comptroller of the Currency released its own bucket of ice-water statistics. Among them: 37 percent of loans modified in the first quarter of 2008 were 30 or more days delinquent after three months, and 55 percent were 30 days or more delinquent after six months.
"This trend of increasing delinquencies underscores the need to understand why these modifications have not been sustainable,'' noted comptroller John C. Dugan in the report.
Some of the re-defaults are simply the chickens coming home to roost, say industry critics who have been pushing lenders to negotiate real modifications that make long-term differences to homeowners, instead of demanding workout repayment plans that simply rearrange debt with terms that homeowners can't sustain.
The Urban League is one of the local HUD-approved nonproft agencies that provide free counseling to homeowners in the St. Louis region. While the agency's six counselors focus on St. Louis city and county, they also assist clients in the metro-east and have helped homeowners in St. Charles and Jefferson counties.
Madkins estimates that 35 to 40 percent of his clients have already worked out a plan with lenders that is not working. Sometimes, it's a case of homeowners who lacked the savvy to negotiate good deals in a complex financial maze. And some homeowners, he says, are so desperate to keep their homes they tell lenders what they think they want to hear.
Madkins says housing counselors are trained to ferret out accurate and realistic numbers.
"If homeowners are working with us, for example and they say they spend $50 a month on utilities, I know that can't be right. We get realistic numbers. The numbers and financials have to be realistic. We try to drive that home," Madkins said. "If we see a budget - and a huge deficit - we see that this is why this person is struggling. Payments need to be adjusted. We make their case on the actual information we're given."
Good news, bad news
Foreclosure numbers released by the federal comptroller confirm what private fact-finders, such as RealtyTrac, have already been reporting: While delinquencies, foreclosures in process and other actions leading to home loss continue to rise, newly initiated foreclosures dropped by 2.6 percent between the second and third quarter of 2008. But delinquencies are now evident across all loan categories -- prime, subprime and alt-A, a category that encompasses a variety of "creative" adjustable rate mortgages.
The good news: Nine out of 10 U.S. mortgages remain current, according to the Office of the Comptroller of the Currency.
The bad news: One in 10 is in trouble.
Madkins isn't surprised by any of the end-of-year foreclosure statistics being released by national agencies.
The Urban League, which accepts referrals from the national hotline, can often provide troubled homeowners with local resources not available nationally, Madkins said. In limited cases, that might mean short-term monetary assistance, but it can also include help with home sales, employment assistance, or relocation, when a home can not be saved.
Increased media coverage of foreclosure has prodded some reluctant homeowners to step forward and ask for assistance, he said.
"They seem more confident now than in the past. Now, they see that it's not just them, it's other people -- and it's a nationwide problem,'' Madkins said. "Don't get me wrong. It's still hard to come forward, but now they're starting to see they aren't alone.''
Modifications and re-defaults
The Hope Now alliance says the mortgage industry has been responding to calls for more loan modifications, citing a 29 percent increase, during the third quarter. The group's survey of re-defaults -- about 30 percent -- is lower than the federal number.
Steve Bartlett, president of Financial Services Roundtable, an alliance member, says the re-defaults are the product of a worsening economy, which, he says, is even forcing up the rate of default among prime loans, considered the safest segment of borrowers.
"Every single mortgage we re-modify and every single payment plan is designed to be permanent for the circumstances of that borrower at that time, based on their income,'' Bartlett said. "What we have discovered -- and this is more true now -- is the borrowers' circumstances change after they modify the mortgage, which is a way of saying, they lose additional income or lose their jobs. Then we have to go back and modify again.''
Hope Now members in June agreed to a set of guidelines to streamline foreclosure prevention and also worked with Fannie Mae, Freddie Mac and the Federal Housing Agency to create the Streamlined Modification Program that took effect Dec. 15, said Faith Schwartz, executive director of Hope Now.
Madkins says the new guidelines are helpful to borrowers whose mortgages are held by a single lender but still don't address the loans that have been sold multiple times and divided into complex pools of mortgage securities. Those negotiations can take several months, which is crucial in a non-judicial state, such as Missouri, where the foreclosure process can take as little as 60 days.
"When there are multiple investors, that's when the turnaround times get longer,'' he said. "It really slows you down. The best reassurance we can give the borrower is when they suspend collection activity. As long as we know the sale date has been postponed, and they're going to review.''
John Courson, chief operating officer of the Mortgage Bankers Association, an alliance member, acknowledged the complexity and limitations of modifying loans held in what he termed "private label securities."
"There is no question that private label securities are covered by contract. If you can structure something that is a deferral as opposed to an absolute, outright loss of principal, you have a greater chance of meeting the structure of the agreement,'' Courson said. "I think as we get more of a standardized modification program, generally accepted throughout the country, that we will see more servicers able to deal with loans inside those pools.''
Calls for a moratorium
With the foreclosure crisis projected to last into 2010, Madkins says a national moratorium on foreclosures should be considered. Such action would give homeowners time to renegotiate loans, particularly when the mortgages are caught up in the complex web of securities pooling. Some states have taken the initiative and instituted their own moratoriums.
Although Fannie Mae and Freddie Mac made headlines when they announced a holiday moratorium on foreclosures, the majority of Madkins' clients weren't covered because the action didn't include private lenders.
"It should be across the board,'' Madkins said. "But it's going to take a change in public policy to slow things down.''
Some critics have called for even more drastic efforts, including a ban on foreclosures similar to the action taken by the federal government during the Great Depression.
Bartlett dismissed that idea as no solution, adding that modifications won't work in every case.
"A mortgage modification for someone with income solves the problem. But someone who doesn't have any income, unless they have some other means of paying their mortgage, they can't keep their home,'' Barlett said. "This is a mortgage, not a gift. That is as it should be.''
Courson noted that temporary moratoriums can give housing counselors the opportunity to work out solutions, but he added that growing unemployment is taking its toll.
"There are some situations that just can not be resolved, and we have to come to that reality and deal with that through the real estate and solving the issue for these borrowers,'' he said. "An outright ban on foreclosures is, frankly, not a permanent solution to what we're seeing.
Madkins estimates that his agency keeps 25 to 30 percent of clients in their homes.
"Income is the hurdle,'' he said.
By the numbers
2.2 million - number of foreclosure preventions for 2008 claimed by members of Hope Now, a private-sector alliance of mortgage lenders, servicers and housing counselors
1 million - estimated number of calls to the national Hope Hotline, operated by Hope Now, in 2008
7,000 - average calls a day to the hotline
950,000 - number of loan modifications completed in 2008, as projected by Hope Now members
133,000 - loan modifications completed in the third quarter of 2008, as reported by the Office of the Comptroller of the Currency
55 percent - number of loans that were modified in the first quarter of 2008 that were 30 or more days delinquent after six months, according to the federal Office of the Comptroller
Sources: Hope Now, Office of the Comptroller of the Currency and Office of Thrift Supervision