A group of state attorneys general and banking regulators predict a devastating acceleration of foreclosures unless policy makers step up efforts to assist homeowners. The State Foreclosure Prevention Working Group has issued a report that cited disturbing trends including a rising tide of delinquent mortgages outpacing servicer outreach and loss-mitigation efforts. The report also offered recommendations for action.
“Despite significant state and federal efforts to assist homeowners, more foreclosures are predicted for this year than occurred in 2009,” Attorney General Rob McKenna said. “Programs to help prevent foreclosure are jammed up, while 60 percent of delinquent borrowers aren’t getting any help. Servicers must do more.”
McKenna encouraged Washington residents facing foreclosure to call The Washington State Homeownership Information Hotline at 1-877-894-HOME (4663) or visit the Attorney General’s Web site at www.atg.wa.gov/foreclosure.aspx for additional resources. Those seeking assistance should also be sure to submit required paperwork in a timely manner and ask for help if they don’t understand the necessary steps.
Findings of the Working Group Report include:
► Six of 10 seriously delinquent borrowers are not even involved in loss mitigation efforts. The federal Home Affordable Modification Program (HAMP) has helped slow down the foreclosure crisis, but current efforts have been insufficient to get ahead of the problem.
► Both loss mitigation and foreclosure efforts appear to be backlogged. The average time to complete a loan modification for some servicers is more than six months. Many homeowners with trial modifications are not yet qualified to transition to a permanent loan modification.
► Most modifications result in payment reductions, but principal reductions remain rare. Given the correlation between negative equity and likelihood of default, the failure to write down principal in connection with loan modifications is a glaring flaw in current efforts.
► Prime loans are increasingly driving the rising delinquency rates. The foreclosure problem is broad-based and not isolated to poorly-written or exotic loan products.
Recommendations of the Working Group Report include:
► Servicers should suspend foreclosure proceedings on any loan involved in the loss mitigation process. In some cases, homeowners have lost their homes while being told they are being considered for a loan modification.
► Loss mitigation programs must be improved to prioritize principal reduction in areas of significant home price declines. Loan modification programs that rely on monthly payment reductions alone will have limited success in creating sustainable homeownership in states where a large percentage of mortgage loans are significantly “underwater” (e.g., loan balance is greater than the home’s market value.)
► Servicers should pay particular attention to reforming payment-option ARM loans. If unaddressed, the payment shock on these loans, coupled with the high proportion that are significantly “underwater,” will push a significant portion of payment-option ARM loans into foreclosure.
► The HAMP program must increase transparency and reduce paperwork in order to reach its potential. While the U.S. Treasury Department has made positive steps in reducing paperwork burdens, we believe more streamlining is necessary to reduce burdens on both servicers and homeowners.
► States should consider expanding homeowner counseling programs or implementing temporary foreclosure mediation programs or other such measures. Given the numbers of homeowners facing foreclosure or likely to face foreclosure in the next 12-24 months, it is likely that many will fall through the cracks of even the best-implemented system for working out mortgage loans.
► Both servicers and the U.S. Treasury should provide better options to keep unemployed homeowners in their homes. Unemployment and loss of income are key catalysts to a mortgage default. While unemployment insurance partially fills a short-term gap in income from job loss, unemployed homeowners face significant hurdles in keeping their homes.
The State Foreclosure Prevention Working Group consists of 12 state attorneys general (Arizona, California, Colorado, Florida, Illinois, Iowa, Massachusetts, Nevada, North Carolina, Ohio, Texas and Washington), bank regulators for New York, North Carolina, and Maryland, and the Conference of State Bank Supervisors. The group was founded in 2007 and has issued three prior reports, available online at www.csbs.org.