Mortgage Foreclosure Trends and Responses

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Mortgage Foreclosure Trends and Responses

• Prepared for
• NeighborWorks Creating Hope Promoting
  Foreclosure Solutions
• June 2007
• George McCarthy
• The Ford Foundation

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Talking points

1. What is the current context in foreclosure
   prevention?
2. What are the implications of the current context?
3. How does the current situation differ from past
   episodes of high foreclosures?
4. What solutions are available and likely to
   succeed?

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1. Current context

• Delinquencies/foreclosures exploding
• Mostly in subprime, Alt-A, FHA
• In most local markets 250 of last years volume
• Just the tip of the iceberg
• Most recently closed affordable products have
  not reset (8 of mkt)
• House prices have not yet responded

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1. Current context (2)

• Lenders and lending markets have been impacted
• Dozens of subprime mtg banks closed
• Major impact on hedge funds and other securities
  backed by CDOs
• Lots of attention(domestic and international)
  paid to mtg market performance

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2. Implications

• Devastating consequences for borrowers, nhoods,
  cities and regions (OH, IN, NC)
• Potentially devastating consequences for domestic
  economy and world financial marketscredit
  crunch, recession

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3. How is current situation different from past?

• Mortgage characteristics
• Higher PITI LTV
• Higher proportion of non-prime
• Economic context
• Low interest environment
• Relatively healthy macro economy
• Greater reliance on housing mkts globally and
  domestically

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3. How is current situation different from past?
(2)

• Ability to respond
• Field-tested methods for response
• Technology to support response
• Maybe? Ability to broker collective response with
  key stakeholders

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4. What are the solutions?

• Old model
• Work with families one-by-one to resolve
  foreclosures on a case-by-case basis
• Can be done through non-profit intermediaries or
  by servicers
• Problems
• Not scalableno revenue source to support service
  delivery
• Not sustainable
• Key stakeholders did not pay

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4. What are the solutions? (2)

• Next generation model
• Develop national capacity to provide outreach and
  screening of clients
• Work with families one-by-one to resolve
  delinquencies through servicer
• Or, refinance customers out of problem loans
• Problems very expensive, not sustainable or
  scalable

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4. What are the solutions? (3)

• Third generation model
• Develop national capacity to provide outreach and
  screening of clients
• Develop standardized approaches with lenders and
  servicers so that workouts can be streamlined
• Maintain efficient connection b/t intervener and
  servicer
• Unless standardized workouts set in advance,
  wont be cost effective.
• Need a revenue source to support program

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4. What are the solutions? (4)

• Fourth generation model
• Develop new intermediary (RTC) to purchase
  non-performing loans at deep discounts
• Develop standardized approaches for workouts to
  cure and resell loans
• Develop efficient ways to resolve REOs to
  minimize loss severity
• Use program earnings to cover program costs and
  resettle families who lose homes

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What will it take?

• Lots of capitalshort term, not nec subsidized
• Ability to purchase non-performing loans at steep
  discount
• Increased capacity of sector to respond
  quicklythrough technology and scaling up local
  counselors
• Improved ability to manage REOs and reduce loss
  severity
• Willingness to resell performing loans

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Where to start?

• Assemble capital pools to finance purchase of
  loans
• Select areas in which FC prevention capacity is
  good, build it where it isnt
• Work with portfolio lenders to purchase
  non-performing loans
• Develop good REO processes that reduce loss
  severity when foreclosures occur

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Where to start? (2)

• Work with GSEs to purchase loans that can be
  substituted out of pools
• Work with IRS and others to reform REMIC rules
  for removing non-performing loans from pools
• Standardize permissible loan modification and
  tools to do them