Reducing Foreclosures Negative Effects on Neighborhoods

1
Reducing Foreclosures Negative Effects on
Neighborhoods

• Prepared for
• The Council of Michigan Foundations
• June 2008
• George McCarthy
• The Ford Foundation

2
The Current National Situation

• Borrowers in distress
• 54 million mortgage borrowers
• 7.1 million subprime subprime delinquency 20X
  higher than prime markets
• 2 million foreclosures in process nationally
• 2 million seriously delinquent loans 1 million
  subprime 1 million prime and Alt-A
• 649,917 foreclosures initiated in Q1-08, up 112
  from Q1-07
• 2 million foreclosures expected in next 12 months
  (2-3 trillion in loans at risk)

3
The Current National Situation

• Servicer logjam
• Need to increase capacity 1000 to meet current
  need for processing loan modifications
• Revenue sources are shrinking
• Fail to reach more than 60 of delinquent
  borrowers
• Only 200,000 loan mods performed this year
• Foreclosures outstripping mods 7 to 1
• In subprime, for each loan mod 13 foreclosures
• Only 1 include principal reduction
• Need to motivate for more and better
  modifications

4
The Current National Situation

• Properties in distress
• Lenders and investors own (REO) 660,000
  foreclosed homes--or one in seven previously
  occupied homes available for sale nationwide--as
  of the end of April, an increase from 493,000 in
  January and 231,000 in January 2007.
• 8.8 million additional homes currently under
  water could double this year

5
Inventory Overhang is Immense
Source Census Bureau, NAR, Zelman Associates
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And Too Much of It Is Vacant
Source Census Bureau, Zelman Associates
7
Nearly 50 of the Housing Inventory Overhang Is
In Just Five States
Excess Unsold Homes for Sale (Percent of National
Total)
49 in 5 States
37 in 3 States
Source Bureau of Census (1996-2004Annual Data,
2005Q12007Q4Quarterly Data) Note
The excess unsold homes were estimated based on
the average vacancy rate from 1996Q1 to 2005Q4
(1.7).
8
The Current National Situation

• Declining prices in 42 states, nominal prices
  falling 15 in six states CA, AZ, IL, MI, FL,
  OH
• The SP/Case-Shiller home price index for 20
  cities fell 12.7 in February versus last year,
  the largest decline since its inception.
  Seventeen of the 20 metro areas reported record
  annual declines.
• "There is no sign of a bottom in the numbers,"
  David Blitzer, chairman of the index committee at
  SP, noting that all 20 metro areas have declined
  for six straight months.
• Half of the cities saw home values plunge by
  double digits led by Las Vegas at 22.8 percent
  and Miami at 21.7 percent.
• According to OFHEO, price declines are
  accelerating

9
Home Price Bubble Points to Tough Times Ahead
Source Zelman Associates
10
The Current Local Situation Detroit News April
29, 2008

• As of April 2007, Michigan now enjoys fifth place
  among states with the highest foreclosure rates
  with 1 foreclosure for every 455 households.
• In Q1-08, the state was in fourth place in number
  of foreclosures with 29,467 households in some
  stage of foreclosure.
• Metro Detroit posted the eighth-worst one-year
  price decline in the nation prices fell 16.5
  percent in the past year.
• Detroit is the only city to have its home prices
  dip below the mark they were at in January 2000.

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Median sales price in Detroit for SF residence
20,800 (Apr 2008)
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Other Key Facts

• Homeowners could lose 356 billion in home value
  due to nearby foreclosures
• One in 33 current homeowners could face
  foreclosure in next two years
• 10 states alone will lose a total of 6.6 billion
  in tax revenues as a results of foreclosures

Sources Pew Charitable Trust, Center for
Responsible Lending, Global Insight, MBA.
13
Delinquency/Foreclosure Process
Bankruptcy Process
Delinquency
Foreclosure
Real estate Owned (REO)
Modification
15-25
Forbearance, Payment plan, Etc.
Resolution Deed in lieu Short sale Short refi
Resolution
_at_ 50
18 24 Months
Up to 3 Years
14
The Logic of Response What We Know

• Millions of borrowers face increasing mortgage
  burdens as payments adjust up, incomes fall
• Significant, and growing, portion of mortgages
  are under water
• Subprime is only first wave, next wave is Alt-A

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The Logic of Response What We Know

• Majority of families who go into foreclosure
  never have contact with lender/servicer
• In vast majority of cases that go to foreclosure
  courts, families are not represented

16
The Logic of Response What We Know

• An avg foreclosure costs lenders/investors
  50,000, or avg severity of loss 48 and rising
• While servicers are using loss mitigation more
  frequently, it is still the exception, not the
  rule
• Hundreds of thousands of properties piling up in
  REO

17
The High Cost of Foreclosures
Excerpted from "Sheltering Neighborhoods from the
Subprime Foreclosure Storm." Special Report from
the Joint Economic Committee.
18
The Logic of Response What We Know

• Incidence and outcome of foreclosures vary
  dramatically from place to place e.g. local
  context really matters
• And, within local areas, experience of
  foreclosure varies dramatically

19
The Logic of Response What We Know
20
Foreclosure Intervention Strategies

• Prevention strategies
• Counseling, forbearance, repayment plans,
  catch-up loans, regulation of lenders and
  servicers
• Intervention strategies
• Loan modification, legal assistance, bankruptcy,
  refinancing at reduced cost
• Community stabilization strategies
• Facilitating reuse of vacant, foreclosed
  properties

21
Potential Responses?

• After lunch

22
First Line of Response Borrowers

• Get borrowers in touch
• HOPE Hotline
• Ad Council
• Flood the streets with counselors
• Federal govt support 180MM provided in Dec 2007
• Numerous local efforts
• But, just getting borrowers in contact with
  lenders isnt solving the problem

23
Loan Modifications in Bulk

• CCCSA establishing mechanism to link non-profit
  credit and mortgage counselors directly to
  automated mortgage servicing mechanisms to
  construct effective loan modifications
• CCCSA scaling up to reach 500,000 borrowers
  nationally by Q3-08, expect to reach 1 million
  client annual volume by 09 w/other centers
• Data on mortgage outcomes processed through the
  facility can build a case for more aggressive
  loan modifications by servicers.

24
Second Line of Response Mortgages

• States attempted to build refinance funds, but
  limited success because of
• Limited ability of borrowers to pay (capacity)
• Damaged credit of borrowers (credit)
• under-water mortgages (collateral)
• Nobody wants to hold the loans

25
Federal Effort (Frank/Dodd)

• National facility that would purchase
  non-performing loans from lenders and investors
• 300 billion would be made available in federal
  guarantees (FHA)
• But, lenders/investors must agree to write down
  loan balance to 85 of current appraised value

26
Third Line of Response Properties

• No matter how successful borrower- or
  mortgage-based strategies are, a significant
  portion of homes (1MM) will end in REO
• Likely that Congress will make 5-20 billion
  available locally to deal with problem
• National Community Stabilization Trust is forming
  to facilitate acquisition of REO centrally
• Very little capacity at the local level

27
Every Communitys Goals

• To minimize collateral damage on families and
  communities by
• Keeping as many current owner-occupants in their
  homes as possible
• Accelerating the reuse of foreclosed properties
  before they damage local communities
• To link with and complement efforts being
  undertaken by others (govt, non-profit, etc)

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How Can Local Funders Help?

• Help to tell the local story
• Help convene local organizations to shape
  response that is consistent with context
• Build capacity that is consistent with likely new
  resources that will be made available
• Do not fall prey to old solutions to old problems

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The Biggest Question

• Can we find something good out of this disaster?
• e. g. seize the opportunity offered to acquire
  housing that can be kept permanently affordable
  through shared equity arrangements?