$1 Billion Pledged to Help Fend Off Foreclosures
Thursday, April 12, 2007
Neighborhood Assistance Corporation of America, an 18-year-old housing advocacy group, yesterday announced it would commit $1 billion to refinancing the loans of lower-income people at risk of losing their homes.
The financing will come from CitiGroup and Bank of America, which have been lending money for years to borrowers screened by the nonprofit group. NACA, of Boston, said it had helped put 50,000 people in homes since its creation.
"If we put people in the front door and they're being forced out the back door, then we're not stabilizing neighborhoods, which is part of our mission," said Bruce Marks, the group's chief executive.
The announcement comes as lawmakers, lenders and others with a stake in the housing sector scramble to stave off a wave of foreclosures. Foreclosures and delinquencies are rising largely because of problems in the subprime segment of the mortgage market, which caters to people with blemished credit records, little money for a down payment or other factors that put them at greater risk of default.
In recent weeks, minority advocacy groups, which say their constituencies have been hit hardest by the crisis, have called for a six-month moratorium on foreclosures. Lawmakers have vowed to take action to ameliorate the housing problems but haven't offered details. And lenders, eager to avoid foreclosures, say they have modified loans for some troubled homeowners, with mixed success.
"The great balancing act is to make sure we preserve homeownership opportunities while at the same time not delaying the inevitable," said Larry B. Litton Jr., chief executive of Litton Loan Servicing.
Whether any of these measures will forestall a national housing disaster, with many people being forced out of their homes, has yet to be seen. But as the 2008 presidential election approaches, the pressure is on to make progress.
Mark Zandi, chief economist at Moody's Economy.com, recently culled data collected by Equifax, one of the nation's major credit bureaus. He found that 2.87 percent of residential mortgages were at least 30 days delinquent as of the last week of March. That's the highest rate since the two companies began collecting the data in 2000. The Mortgage Bankers Association has found the rate is considerably higher for subprime loans, exceeding 13 percent in the most recent survey.
In recent years, with the housing market booming, subprime loans grew rapidly as many people rushed to buy homes anyway they could. But many of them are now having trouble making the payments, and the softening market has meant they cannot easily sell their homes or refinance their loans.
Experts advise borrowers who have trouble meeting their payments to contact their lenders immediately to work out a plan. Lenders say they have a financial interest in cutting a deal because the alternative, foreclosing on homes, is costly to them and their investors.
A report released yesterday by Congress's Joint Economic Committee said that each home foreclosure imposes an average $78,000 in costs on homeowners, lenders and local communities.
The effects are compounded as foreclosures multiply in some neighborhoods, dragging down property values and slashing local government revenues through unpaid property taxes, utility bills and other fees, the report said.
Foreclosures also add to the inventory of homes, further softening real estate values in areas already suffering from an oversupply. As values drop, more borrowers get in trouble.
Sen. Charles E. Schumer (D-N.Y.), the committee's chairman, plans to propose legislation that would provide "hundreds of millions of dollars, maybe more," in federal money to help borrowers avoid foreclosure by refinancing mortgages they cannot afford.
That money should reach borrowers primarily through community nonprofit groups that are already helping homeowners refinance burdensome mortgages, Schumer said. But he has not worked out the details of whether banks and other groups would be conduits for the aid or where the money would come from. Schumer has said it might come from a federal appropriation or perhaps the Federal Housing Administration or mortgage financiers Fannie Mae and Freddie Mac.
NACA, the housing advocacy group, applauded the proposal, saying it has a better track record of keeping people in their homes than subprime lenders, whom it characterized as predators that mislead borrowers into taking on loans they cannot repay.
NACA requires that people who ask for its help attend intensive housing counseling workshops. It also assesses the person's ability to own and maintain a home. It then helps the person obtain a mortgage with one of its partner lending institutions, the biggest ones being CitiGroup and Bank of America.
In 2003, Citigroup made available $3 billion in mortgage loans to NACA through 2013. Bank of America, which has worked with NACA since 1995, committed at least $6 billion through 2015.
The group traditionally found the money was best used to finance new home loans for low- and moderate-income buyers. But with the mortgage crisis unfolding, it decided that $1 billion should be used to refinance the loans of people preyed upon by abusive lenders. The group expects to refinance about 7,000 mortgages -- a small number, given estimates that more than 1 million homeowners nationwide could be at risk of foreclosure.
Lenders and other companies that manage mortgages say they're trying to do their part to remedy the foreclosure mess. They say their hands are sometimes tied because many mortgages have been packaged into huge bonds and sold to investors, so that the terms are not easily altered.
But rules on that have been relaxed a bit, which has allowed EMC Mortgage, a Texas subsidiary of Bear Stearns, to create a 50-person "mod squad" to work with troubled borrowers to modify their loans, sometimes by reducing the interest rate.
Litton Loan Servicing said it too is modifying a record number of loans.
Litton's chief executive said his company modifies about a thousand loans a month versus about 200 a year ago. About one in three of those loans ultimately fails, but the tradeoff is worth it, he said.
"If we foreclose, we lose 50 cents on the dollar generally, and the cost to restructure the debt is typically a heck of a lot lower than that," Litton said. "That's our motivation."