Foreclosure Alternatives

We have reached a turning point in the foreclosure crisis. People are saying that foreclosures are now being driven as much by unemployment as by dangerous mortgage products. Unemployment is almost 10 percent across the country.  It is as high as 14.2 percent in Michigan. The problem is not going away, even as its underlying forces change. The OCC and the OTS, in a joint report published last week, confirmed the troubling expansion of the foreclosure crisis. Fewer mortgages are performing than ever before (just 86.4 percent) and the share of delinquincies has now risen for the seventh straight quarter.

What can we do about it?

Principal reduction is suddenly in vogue.  Bank of America has come to the conclusion that a lower principal balance is still better than the expected return from a foreclosure or a short sale.  For the borrowers that are lucky enough to get their balance reduced, it will be a significant opportunity.   B of A says that they will offer a forbearance on as much as 30 percent of outstanding principal balances if that is what it takes to reduce debt service to 31 percent of borrower income.  There are still some significant collars on the depth and breadth of this effort. For one, it only applies to option-ARM mortgages. Second, it is only a five year forbearance.

Since last spring, tenants have been given more protections when their landlord loses his or her property to foreclosure. Unless the new buyer intends to reside in the foreclosed home, tenants with on-time rental payment histories get 90 days before they have to vacate their home.

On the ground, plenty of the buyers of formerly foreclosed rental properties are not extending new leases to former tenants. This is hard for tenants, because it is very hard to prove your rent payment history to a new landlord if the old landlord (s) is a servicer.

We don’t have to wait on the banks. There are other ways to make sure that foreclosure is avoided.  Remember, no one wins in a foreclosure.  I like what the Detroit Office of Foreclosure Prevention and Response is trying with its Retaining Occupancy On Foreclosures program. This is a group that gets funding from a variety of foundations. ROOF is a short-term intervention that puts owners into a in-between status. They must pay utilities.  There is some expectation of a mortgage payment, based upon a sliding-scale, as well.  For that, the homeowner gains three months of protection from being pushed out of their home. The servicer can sell the home after three months, but the program also sets up an option for the temporary arrangement to continue.

This is something that borrower and servicer must agree to do, so it stands to reason that it will have to be fair in order to work. I think the outcome is most satisfying for neighbors. It keeps one more home off of the market.  That supports prices for the rest of the housing market.  It puts a break on tax values and helps to sustain the tax base of municipalities.  Fewer homes are vacant.  Even better, the lights are on and the homes are being maintained.

It is still good for the key players.  It does keep one more family in a home. Is it better than a permanent modification? Probably not. If the NPV supports a modification, the borrower might want to pursue that option first. Then again, this is a risky path. Servicers can still initiate a foreclosure and the evidence suggests that they are more than willing to do so even during the negotiation period. A servicer isn’t going to take this deal if they can get a fairly high price for the home through foreclosure. This will only hold appeal when homes are significantly underwater.

Today, a lot of states are wishing that they had done something on their own to address foreclosures. It seems highly unlikely that North Carolina got $159 million by accident. They got the money because North Carolina has a track record on this issue. North Carolina has had a Home Protection Program for years. The North Carolina Housing Finance Agency (NCHFA) has funding to provide short-term interest-free loans of up to $24,000 to qualifying homeowners that have lost their jobs.