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Cascade: No. 82, Winter/Spring 2013

PHFA Takes Pro-Active Steps in Loan Servicing to Keep Borrowers in Their Homes*

The Pennsylvania Housing Finance Agency (PHFA) was created 40 years ago by the state legislature to expand affordable housing options for the state’s residents. It does so through a number of programs that include funding the construction of multifamily rental units, providing affordable home mortgages, supporting housing counseling at no cost to prospective homeowners, and engaging in foreclosure prevention efforts. This article focuses on the PHFA’s servicing of its home purchase mortgages to Pennsylvania residents and the pro-active steps taken by the agency to help keep borrowers in their homes when they are in danger of default or foreclosure.

The PHFA has been servicing all of its mortgages in-house since 1999. The decision to bring loan servicing in-house was made for a number of reasons, including to have greater control over the quality of service provided to our customers, to be able to respond in a more timely manner to delinquencies, to provide a more hands-on approach in working with our customers, and to expedite loss mitigation on delinquent accounts. The PHFA has 46 employees who service performing mortgage loans.

A Conscious Decision to Help Consumers

A foreclosure results in an average loss of between $8,000 and $16,000.1 But the motivation to prevent foreclosure goes beyond the dollars. Given the PHFA’s public service mission, the agency feels an obligation to help its borrowers stay in their homes. The goal is to help Pennsylvanians find, finance, and retain affordable, quality housing. The agency also realizes that foreclosed homes in neighborhoods can drive down home values, which provides another incentive to avoid foreclosure.

Even though delinquency rates may be higher than the state average in some cases, the agency has been successful in its efforts to keep borrowers in their homes as reflected in its low foreclosure rates. This shows the agency’s willingness to work with borrowers and to employ various loss mitigation efforts. Data contrasting the experiences of the PHFA and national and FHA lenders are provided in the table.

Strategies Used by the Agency to Keep Foreclosures Low

The steps taken by the PHFA to help borrowers are not complicated; in fact, many are low-tech and simply involve increased, targeted communications with the customer. The cost to the agency primarily involves staff time, since considerable effort is needed to reach and interact with customers.

The first six months of a home mortgage loan are seen as an important period for preventing bad habits from forming. If a homeowner falls more than 12 days delinquent during the six-month period after the loan closes, the PHFA staff will reach out to the customer prior to the 15th of the month. This is to determine if the missed payment was an oversight or if the homeowner expects to have trouble with future mortgage payments. It is noteworthy to mention that this practice is followed with all mortgage loans that are serviced by the agency.

Customized Communications Get a Response

In addition to personal phone calls, the staff sends letters to get the homeowner’s attention. That, in itself, is not unusual, but the agency takes extra steps to try to ensure the correspondence is actually read. The staff acknowledges that some borrowers will be averse to official-looking correspondence in white envelopes with printed addresses. The objective is to avoid a borrower’s fear of opening or responding to such correspondence. Too frequently, distressed and delinquent borrowers simply discard official-looking correspondence without even opening it.

Over time, the PHFA staff has adapted its customer outreach approach to address this situation. When attempting to reach unresponsive homeowners, staff members will handwrite addresses and use colored envelopes to avoid a formal business look. Postage is also applied by hand and not processed through the office mail machine. Additionally, the messages inside are handwritten in a friendly, informal tone and address borrowers by their first names. This not only raises the odds that the message will be read, but it also increases the likelihood that the borrower will not be intimidated by the correspondence and will contact us. The goal is to let the borrower know that the staff cannot help them if they ignore the situation.

Lowering Loan Rates Is an Option

In 2003, the agency began lowering a borrower’s interest rate as a last resort to avoid foreclosure. This tactic is employed in extreme cases when no other loss mitigation alternative is a viable option. In most cases, the borrower has experienced a life-changing situation, thereby causing his expenses to exceed his income. Each borrower’s situation is unique and is therefore reviewed as such. Decisions are based on the borrower’s ability to pay, and the goal is to put the borrower back into a positive cash-flow position to avoid a re-default. This approach reflects the PHFA’s position that it is better to keep the borrower in his or her home whenever feasible, thereby helping the borrower, as well as his or her local community.

Since 2003, the PHFA has helped nearly 1,100 borrowers who would have otherwise certainly lost their homes to foreclosure. The typical household helped by this program is a family of three with a remaining loan balance of about $70,000. A recent review of these loans shows that 59 percent remain current with payment, 38 percent are delinquent, and 3 percent are in foreclosure.

Table: National, State, and Pennsylvania Housing Finance Agency (PHFA) Comparative Delinquency and Foreclosure Report
March 31, 2012
 
Number of Loans
30 Days Past Due
60 Days Past Due
90+ Days Past Due
Totals
Loans in Foreclosure
National Conventional
42,843,704
2.81
1.08
3.05
6.94
4.39
State Conventional
1,534,491
3.33
1.17
2.64
7.14
3.76
PHFA Conventional
22,358
4.03
0.64
0.70
5.37
0.82
National FHA
6,716,854
4.23
1.64
5.15
11.02
3.83
State FHA
272,483
4.66
1.60
4.07
10.33
3.03
PHFA FHA
29,358
6.71
1.83
3.45
11.99
1.56
June 30, 2012
 
Number of Loans
30 Days Past Due
60 Days Past Due
90+ Days Past Due
Totals
Loans in Foreclosure
National Conventional
42,506,797
3.14
1.17
3.04
7.35
4.27
State Conventional
1,519,958
3.81
1.38
2.66
7.85
3.85
PHFA Conventional
21,395
5.08
1.09
0.94
7.11
0.79
National FHA
6,827,727
4.93
1.84
4.77
11.54
4.23
State FHA
278,171
5.73
2.03
3.89
11.65
3.59
PHFA FHA
29,494
9.33
3.29
4.23
16.85
1.69
September 30, 2012
 
Number of Loans
30 Days Past Due
60 Days Past Due
90+ Days Past Due
Totals
Loans in Foreclosure
National Conventional
41,774,048
3.43
1.25
2.96
7.64
4.07
State Conventional
1,512,202
4.07
1.49
2.74
8.30
3.82
PHFA Conventional
22,220
6.13
1.46
1.52
9.11
0.99
National FHA
6,770,134
5.36
1.95
4.45
11.76
4.08
State FHA
280,309
5.99
2.20
4.05
12.24
3.76
PHFA FHA
29,533
9.33
3.28
5.31
17.92
1.89

Source: The PHFA

Comments from the PHFA: The PHFA’s conventional and FHA loans have relatively high 30-day past-due levels because the agency was established to serve low- to moderate-income homebuyers purchasing their first homes. Customers at these lower income levels, and with limited homeownership experience, are simply more likely to fall behind on their mortgage payments. The fact that these loans show much better performance after 90 days is a testament to the staff’s efforts to inform and educate these customers about the responsibility of homeownership. The PHFA’s percentages for conventional and FHA loans have generally risen during the three-month periods for 30/60/90 days past due and loans in foreclosure, as the data indicate. The PHFA believes that this reflects the rise in home loan delinquencies and foreclosures nationally.

Extended Repayment Plans for Delinquent Loans

Another practice adopted by the PHFA has been to extend repayment plans over longer terms than are typically found within the industry. Experience has shown that some borrowers need more than the industry standard of six to 18 months to bring their account current. In response to this, and based on the borrower’s ability to pay, the PHFA has extended repayment plan terms for as long as 36 months in an effort to avoid foreclosure.

Obviously, not every case can be solved with a lower interest rate, an extended repayment plan, or extensive communications outreach efforts. But by embracing the concept of working with homeowners to seek out viable solutions, the agency has been able to service its loans in a way that benefits its customers, neighborhoods around the state, and the agency. The end result is an approach to loan servicing that faithfully mirrors our public service mission to help consumers in Pennsylvania find affordable housing solutions.

For information, contact Scott Elliott, director of communications, PHFA, at 717-780-3916 or selliott@PHFA.org E-Mail; www.phfa.org/about/ External Link.

  • * The views expressed here are those of the author and do not necessarily represent the views of the Federal Reserve Bank of Philadelphia or the Federal Reserve System.
  • 1 These figures are per internal calculations by the PHFA’s staff.