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Foreclosure Prevention Efforts Falling Flat

Multi-state task force finds little progress to date

February 11, 2008

The State Foreclosure Prevention Working Group is a multi-state task force organized last summer. Its objective is to work with subprime mortgage loan servicers to reduce the number of unnecessary foreclosures by encouraging loan modifications and other sustainable, long-term solutions.

In other words, it is trying to persuade lenders holding subprime mortgages -- many facing the threat of bankruptcy -- to renegotiate better terms with their customers so there will be fewer foreclosures. The group's report, issued by Iowa Attorney General Tom Miller, paints a far from optimistic picture:

• Seven out of ten seriously delinquent borrowers are not on track for any loss mitigation option. The lack of interaction between mortgage servicers and homeowners remains a major problem. While servicers have developed creative outreach efforts and increased staffing, the data shows a large gap between the number of homeowners needing loss mitigation and the number currently receiving assistance. Our data, the group says, suggests that a rising number of loan delinquencies are outpacing the increase in loss mitigation efforts.

• Servicers have increased their use of loan modifications and other home retention options. For those delinquent homeowners in contact with servicers, almost half (45%) are working toward a loan modification. Servicers are increasing their use of longer-term changes to the mortgage loan versus their earlier reliance on short-term repayment or forbearance agreements.

• Payment resets on hybrid ARMs have not yet been a driving force in foreclosures. A significant percentage of subprime adjustable rate loans are delinquent before they experience payment shock from their first adjustment, reflecting weak underwriting or fraud in the origination of the loan. "With so many homeowners struggling to stay afloat prior to rate resets, we need to act quickly to address these hybrid ARM loans before the payment shock due to the rate reset triggers further foreclosures," the group warns.

• Homeowners are helping themselves. Most delinquent loans resolved in October 2007 occurred due to the homeowner catching up on back payments. As of October, actions by homeowners, not servicers, have prevented the most foreclosures. This, however, may be a temporary development.

• The refinance option has nearly evaporated. Historically, serial refinancing was the primary way that the mortgage industry and homeowners managed delinquencies in subprime loans. Despite recent interest rate cuts, the mortgage industry will not be able to refinance its way out of this crisis absent dramatic changes in available loan products or a reversal in home price declines, the report says.

The group, made up of state attorneys general and state banking regulators, collaborated with industry and federal regulators to develop a uniform data reporting format to collect comparative data to measure the extent of the foreclosure problem and the servicers' efforts to respond to it.

Consistent and objective data is necessary to make informed policy decisions and to promote initiatives that could reduce foreclosures, Miller said.

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