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Ways of the World

Carol Stone, business economist & active Episcopalian, brings you "Ways of the World". Exploring business & consumers & stewardship, we'll discuss everyday issues: kids & finances, gas prices, & some larger issues: what if foreigners start dumping our debt? And so on. We can provide answers & seek out sources for others. We'll talk about current events & perhaps get different perspectives from what the media says. Write to Carol. Let her know what's important to you:

Monday, October 27, 2008

HOPE NOW: A New Organization To Help with Your Mortgage

Today's economy presents so much to talk about! How do we pick a topic? Very arbitrarily. We just dive into the middle and see what comes up. Whatever it is, there's no shortage of commentary and data to feed on. And it's all worth our attention: U.S. Treasury capital investments in banks, Federal Reserve purchases of "commercial paper" debt notes directly from the borrowing companies, and the extraordinary intra-day volatility of stock prices, just to name a few.

A news story catches our eye about a Dallas, Texas, woman attending the foreclosure auction for her house. Her visible grief over losing it moved the successful bidder to sympathy, and that person actually returned it to the woman. The "foreclosure sale" is an unfortunate sign of the times, but the generosity of a total stranger takes away some of the sting. Some conventional wisdom seems to suggest that once a borrower gets into trouble, foreclosure is the only possible outcome, that efforts by lenders to help the borrower in preventing it are nonexistent or trivial in the overall scheme of things.

In fact, though, since the beginning of 2007, loan workout plans that keep people in their homes have been far more numerous than foreclosure sales. There were almost three times as many workouts as there were foreclosure sales last year, 1.535 million to 514,000. Brand new data published just this morning show that such efforts in the first nine months of 2008 already numbered 1.598 million, even more than the total for all of last year. At the same time, the number of foreclosure sales also rose, reaching 713,000.

Handling delinquent mortgages is -- as nearly every aspect of the current economic calamity -- highly complex. We've touted subprime loans here for the benefits they bring to neighborhoods. But we also have to face the fact that many people got loans who had no business taking on such commitments. More recently, as well, the delinquency rates on prime mortgages have escalated, reaching nearly 4% in the second quarter, compared to a long-run average of about 2.5%. So rapidly increasing numbers of homeowners are starting down the road toward dispossession.

The monthly bookkeeping and payment processing on a mortgage loan are called "servicing". In the old days, when banks and thrift institutions made nearly all of the mortgages and kept them to maturity, the servicing and the loan relationship were local and much more personal. If there was a problem in the borrower's family, for instance, the friendly local banker might be available to figure out some way to work around the payment obligations until the situation cleared up.

Now, with the dominance of mortgage-backed securities (MBS) that are sold to disinterested third party investors, there is much less personal attention. "Servicing" is an industry to itself. Sometimes, borrowers have been unable to contact servicers, they have told Federal Reserve and other survey-takers. It's also the case that some borrowers have been unresponsive to calls from servicers, and by some measurements, as many as half of mortgage foreclosures have occurred without any contact between servicer and borrower.

So let us introduce you to "HOPE NOW", a federally encouraged alliance of servicers, lenders, community organizations and industry associations, which was formed in July 2007. The membership list is quite extensive, and the federal government's Department of Housing and Urban Development, HUD, along with the Fed and the FDIC, stand behind their efforts. It is HOPE NOW data we cite above about the number of loan workouts and foreclosure sales. They provide a hotline: 1-888-995-HOPE. If you are in trouble on your mortgage and can't get a response from the phone number on your monthly payment bill, call these people. They'll help. If the problem is much more involved and you really need to cobble together a whole plan, call these people. Their services are absolutely free to the borrower. See their website:

The data on workouts do show that of the types of workouts, so-called repayment plans are more widespread than "loan modifications". A repayment arrangement is a schedule of enlarged payments that intend to bring the borrower up to date; this approach is clearly more burdensome for the borrower and can be unrealistic, given that the borrower was having trouble keeping up with the original payments in the first place. The loan modification approach is one advocated in particular by community groups and legislators; it makes a permanent change in the basic terms of the mortgage: the amount of the principal, the final maturity data and/or the determination of the interest rate. This kind of fundamental change to the loan is clearly intended to make it more manageable for the borrower.

Today's new data from HOPE NOW highlight a dramatic increase in "loan mods": in the third quarter of 2007, there were just 75,000 of these around the country. This year's third quarter saw more than three times that many: 257,000.

So does the lender or servicer engage in a workout solution or do they foreclose? This is determined by a "net present value" calculation on the mortgage. The total value today of the entire modified payment schedule (with reduced payments and/or longer term) is compared with the amount that is likely to be recovered in a foreclosure sale. The costs of foreclosing are actually quite high. FDIC and Federal Reserve studies indicate that they can eat up as much as half of the principal amount of the mortgage, taking account of harm that comes to the property value due to its foreclosed status. Very often, then, workouts do indeed pay, relative to foreclosure. To say nothing of the social value of keeping the original homeowner in their own home.

This issue has many more facets: the often deleterious effect of investor-owners who don't live in the house, the impact of new legislation further emphasizing the loan workout environment, the relationship of delinquencies and home prices in general, and so on. One glimmer of hope might be seen in the September data on home sales. The U.S. Census Bureau today reported a small uptick in sales of new houses, from 452,000 in August to 464,000 last month. Sales of existing homes, compiled by the National Association of Realtors, gained 5.5% to 5.18 million in September, the largest volume since August 2007. These increases were both accompanied by lower prices, so we can't conclude there's a genuine advance in demand, just some "bargain-hunting". Still, getting those inventories of unsold homes off the market and into buyers' hands is a necessary first step to any renewal of growth.

Finally, if you yourself are struggling with your own mortgage or you know someone who is, where do you call? That's right: HOPE NOW: 1-888-995-HOPE. Begin to get it worked out. The sooner that gets started, the better off everyone will be – especially you!


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