Jaime and Juana Coronel’s push to buy back the home they lost to foreclosure was featured in a Washington Post article on Sunday, which detailed the challenges the California couple faced because their loan was backed by mortgage finance giant Fannie Mae.
Fannie and its smaller rival Freddie Mac are banned by their regulator (the Federal Housing Finance Agency) from engaging in loan modifications that reduce the size of a mortgage. The agency fears that such “principal reductions” will entice borrowers to default on their mortgages in a bid to get cheaper loans.
The buy-back the Coronels want amounts to a principal reduction. They’re asking Fannie to sell them the home at its current market value, which would leave them with a smaller mortgage. These arrangements are useful to people who are underwater because they owe more on their mortgages than their homes are worth.
Borrowers whose mortgages are not backed by Fannie and Freddie stand a better chance of negotiating principal reductions with their lenders, as the chart below shows. And a group in Boston is devoted to making buy backs work.
The nonprofit group Boston Community Capital buys homes in Massachusetts, Maryland and Rhode Island that are in foreclosure or close to it, and then resells or rents them to the former owners at a price that reflects the property’s current market value. Some housing experts say the group's initiative -- known as Stabilizing Urban Neighborhoods (SUN) -- offers an interesting model for buy-back programs. Massachusetts Attorney General Martha Coakley has singled it out as a way to address blight in hard-hit neighborhoods.
The initiative has kept about 500 families in their homes since its launch in 2010, said Elyse Cherry, the group’s chief executive. It has foreclosed on three homes since then, and its default rate is below the national average at under 5 percent, Cherry said. Borrowers who are late on their mortgage payments due to hardship or in some stage of foreclosure are eligible to apply if they have a steady income. The program generally reaches out only to people who are in their homes, and works to keep them there.
Lauren Barrett met all the criteria when she applied.
Barrett’s in-home day-care business went bust after she was put on bed rest during her second pregnancy in 2007. She and her husband, Phil, fell behind on their mortgage payments, and could not secure any mortgage relief for the three-bedroom house they purchased for $335,000 in a rural community south of Boston.
The home was close to foreclosure when the couple turned to BCC for help.
The group purchased the home for $158,000 in a “short sale,” meaning the bank allowed it to buy the home for less than the Barretts owed on it. BCC then resold the house to the Barretts for $226,500. Some of the difference is applied toward a reserve that the group sets aside to cover losses should the loan go bad.
The family’s new mortgage is 34 percent smaller than what was owed on the original loan, and their monthly mortgage payment is 17 percent lower. “They even gave us extra money to fix our deck, which was falling apart,” said Lauren Barrett, who is now a school bus driver. “They tacked the cost onto the mortgage.”
The Barretts got a 30-year loan with a fixed interest rate from the program, but the interest is higher than the average rate was when they were approved for the mortgage. That's because most of the program's money is borrowed from individuals and foundations, and it's borrowed at rates that are higher than what a typical bank could borrow for, Cherry said. And a typical bank typically would not grant a mortgage, at any rate, to the population of borrowers that BCC serves.
The Barrett’s house still isn’t worth what they paid for it in 2005, the group said.
But if they decide to sell, and the home sells for a profit, they can’t take all of it.
Here’s how that would work, as the group explained on its Web site: "SUN is entitled to a percentage of the profits equal to the reduction in the original mortgage amount. For example, if your original mortgage was $400,000 and your SUN mortgage is $200,000, your new mortgage represents 50% of your original mortgage. If you sell your house for $250,000, SUN is entitled to 50% of the proceeds over $200,000, or $25,000. Boston Community Capital will reinvest its share of any potential profits in projects that benefit the community, keeping the equity where it belongs — in our neighborhoods."