May 4, 2002
Lenders Trying an Alternative to Foreclosure
By DAVID LEONHARDT
ICHMOND, Va. — As the recession of the last year caused a sharp increase in the number of people falling behind on their mortgage payments, the nation's lenders decided to take a risk.
Adopting an approach that economists say has led to one of the most important changes in the housing market in recent years, mortgage lenders significantly reduced the rate at which they repossessed homes. In place of foreclosure, many altered the schedule of loan payments in the hope that the drop in borrowers' income would turn out to be relatively brief.
Now, as the economy continues to show signs of recovery, the bet seems to be paying off. Mortgage delinquencies have begun to fall, suggesting that many homeowners are getting back on their feet. That should help lenders — particularly, Fannie Mae and Freddie Mac, the large government-created companies that have driven much of the change — avoid the staggering losses that their newfound flexibility could have caused if the economy had deteriorated further.
Despite a sharp rise in the number of homeowners who have fallen behind in payments, foreclosures nationwide have barely changed. As a result, the share of past-due loans that ended up in foreclosure has fallen from a peak of about 30 percent in 1998 to roughly 20 percent at the end of last year, one of the lowest levels on record and far below what has occurred in past recessions.
Perhaps most important, analysts say, the decline in the foreclosure rate has helped solidify the progress that many struggling urban neighborhoods have made in recent years. Here in Richmond, a four-block patch of the Swansboro neighborhood had only only one homeowner a decade ago, said James W. Middleton, the executive director of a nonprofit housing corporation active in the area.
It now has about 30, living on blocks where dozens of boarded-up homes once stood and that today are brightened by new yellow, beige or baby-blue houses with well-shorn, narrow front yards and even a few white picket fences.
As in many places around the country, the change in lenders' foreclosure policy, along with low mortgage rates, has helped keep the homeownership rate here climbing. Across the Richmond metropolitan area, it rose to 76.1 percent last year, from 62.1 percent just five years earlier. That represents one of the four largest increases in the country over that span, according to Economy.com, a consulting firm in West Chester, Pa., that follows regional trends.
For many people, the policy shift has had intensely personal consequences and brought a happy end to a stressful time.
When Patricia M. Lane picked up the phone in the bedroom of her ranch-style home last month and heard from her mortgage company that it would approve her alternative repayment plan, she jumped in the air, she said, and yelled, "Thank you, Jesus!" Then she started to cry and, after hanging up, prayed for a full half-hour.
"I just said thanks for the opportunity to make good on my loan," said Ms. Lane, 47, who lives alone and, after losing her $15-an-hour job at United Parcel Service, had fallen four months behind on her payments.
The solution devised by her lender and a counselor at Housing Opportunities Made Equal, a community group here, is typical of the recent changes. Ms. Lane is about to resume her regular payment, and her lender, Countrywide Mortgage, will add the missed payments — with interest, they come to about $3,000 — to the end of her mortgage.
"Back in the old days, these programs didn't exist," said Steve Rotella, chief executive of Chase Manhattan Mortgage, one of the country's biggest lenders. "It was more of a pay-or-pack mentality."
The Department of Housing and Urban Development, Fannie Mae and Freddie Mac have caused most of the change, housing experts say. Believing that many delinquent mortgages can be saved, the three institutions have given banks, which service many of the loans, a variety of financial incentives to work out new terms and avoid foreclosure.
"It is good for everyone," said Eric Belsky, executive director of the Joint Center for Housing Studies at Harvard. "A foreclosure results in an even more tarnished credit history for the borrower and, for the lender, it results in much greater costs."
Last year, Freddie Mac foreclosed on only 9,600 loans out of its portfolio of 9.8 million. In 1997, when the economy was far stronger, the company foreclosed on 18,000 of its 6.7 million loans, it said.
In Virginia, even as the delinquency rate on all mortgages rose to 4.6 percent late last year, from 4.2 percent in 1997, the foreclosure rate dropped by half, to 0.5 percent, according to the Mortgage Bankers Association. Across the country, the trend was similar.
Still, predatory loans — those with high interest rates, confusing terms, or falsely based on inflated values — continue to be a problem in many low-income neighborhoods, especially those with large minority populations. In some parts of Brooklyn and Queens, for example, foreclosures have risen sharply in recent months because of the city's slumping economy, its broad dependence on multifamily houses and widespread predatory lending. Some state legislatures are now considering bills to clamp down on lending abuses.
In Richmond and in many other cities, the new efforts to avoid foreclosure have helped prevent a vicious cycle, in which widespread foreclosures pull down the economy as laid-off workers lose their homes and banks sharply tighten lending standards. After a decade when banks became far more aggressive about lending to people with low incomes or little credit history, the new policy has come at an important time, economists say.
"If the recovery turns out like people expect, we'll have skirted a real serious housing problem," Mr. Belsky said.
To accomplish the changes, lenders have used software to analyze enormous sets of customer data and help them predict which delinquent borrowers are suffering only a temporary financial problem. They then conduct a kind of triage, deciding which homeowners are more likely to benefit from forebearance.
In the past, by contrast, "people had a short-term horizon," said Phillip E. Comeau, vice president for loss mitigation at Freddie Mac. "The industry stepped back and said, `We're shooting ourselves in the foot.' "
This approach is not without risks. Ralph B. Karrigan, an executive vice president of SunTrust Mortgage, a division of one of the biggest banks in Richmond, estimates that Fannie Mae and Freddie Mac lose about $12,000 on a typical foreclosure here. They spend about $2,000 trying to coax late borrowers back to their payment schedules, Mr. Karrigan said.
If unemployment fails to improve by the end of this year, numerous delinquent loans might turn from a $2,000 cost into a $14,000 cost.
"Many of these tactics are stall tactics," Mr. Karrigan said. "If they can't make the payments, you're doing nothing more than deferring the inevitable foreclosure."
But Ms. Lane, like many others, already feels that the reprieve has largely solved her own housing problem.
When she took out a loan to buy the $61,000 tan-and-brown cinderblock house in the eastern part of Richmond, the first she ever owned, her job managing corporate accounts for U.P.S., the parcel delivery service, seemed safe. At the end of 2000, however, she was laid off after 13 years at the company, just as the unemployment rate in the United States was beginning to climb from a 30-year low.
For a year, temporary jobs and help from family and friends allowed Ms. Lane to meet her $560 monthly mortgage payment. But by the end of last year she could no longer keep the patchwork solution together, and she missed her first payment in November.
As other bills piled up this year, Ms. Lane said the pressure became so intense that she could not sleep. She lay awake worrying that she would lose her own home and again have to rent.
The call from Countrywide Mortgage calmed her down, and a recent promotion at a pipe-making company has increased her hourly wage to about $13. That is still a few thousand dollars less than U.P.S. paid her over the course of a year but enough to cover her bills, she said.
"Luckily, things are working out," she said.
Other homeowners have been helped by low interest rates that have allowed them to refinance their mortgage, lowering their monthly payments. And rising home prices in most parts of the country have enabled a small portion of people who had fallen behind on their payments to sell their homes at a profit, pay off their mortgage and find less expensive housing.
Compared with the Richmond region as a whole, relatively few people in long-struggling neighborhoods like Swansboro own their homes, but these are the places where change is most evident.
In Randolph, a neighborhood that was sliced in half by a highway a few decades ago, brick homes with nice-size yards are luring new residents. In Church Hill, home to the church where Patrick Henry declared "Give me liberty or give me death" in 1775, the number of boarded-up homes has decreased by about 60, to roughly 350, according to T. K. Somanath, who runs another nonprofit development company. Some blocks in Church Hill are now dotted with flags hanging above new doorways.
"You see houses filled in, you see new houses, and you see people coming into the community," said Mary White Thompson, who moved to the Fairmount part of Church Hill as a teenager in 1953.
Ten years ago, she said, about half of the 21 houses on her block sat empty. Today, the only empty houses are three new homes still being built and one dilapidated house on the corner. "We are replenishing the stock," she said.
In other neighborhoods, many of the new homes sit across the street from old ones that are still boarded up, and the drug dealers in some places have simply moved a few blocks. But most residents and housing experts here say the small number of foreclosures and the continued building of new homes, even during a year and a half of economic turmoil, have left them optimistic.
"There's been a lot of progress made," said Arthur N. Bowen III, director of public policy at the Virginia Housing Development Authority, which lends mostly to low- and moderate-income borrowers. "There's still certainly room to make a lot more progress."
[Harry: I am not sure this is a good thing. Indication right now are that we are in for a protracted recover that will not be able to achieve the same economic level of the late 90's. Given the a housing bubble is building, the fall will be more painful if they are subsidize some of the weaker participatant.] |
