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Neighborhood Housing Services of Chicago (NHSC) has begun to work with servicers of subprime loans in the past 18 months to try to jointly assist borrowers who have loans at risk of foreclosure.
Bruce Gottschall, currently a Fannie Mae fellow on leave from his position as executive director of NHSC, said that “Chicago is a laboratory” of pilot partnerships with NHSC, subprime servicers and lenders, and the city of Chicago. The results will be shared by Neighborhood Reinvestment Corporation (NR), which expects to launch a national center on foreclosure solutions by September 2005 and which is exploring ways to do in-depth research on foreclosures.
NHSC wants to prevent foreclosures if possible because they have a substantial negative impact on neighborhoods where it has cultivated homeownership for decades. The servicers, for their part, want to avoid foreclosures if possible because they are costly.
Gottschall said NHSC formed the partnerships in part because it found that “the biggest jump in foreclosures in NHSC’s targeted neighborhoods was in subprime loans.” He added: “NHSC wanted to create new relationships because the subprime market was evolving and we wanted the servicers, most of which did not have a local branch or staff, to understand the local market. So we decided to talk to them.” In talking to the servicers, NHSC realized that “they have a lot of tools and interest in solving the problem,” he said.
Gottschall said that the subprime servicers with which NHSC is working closely include Homecomings Financial Network (HFN) — the servicing affiliate of GMAC-RFC — Citigroup affiliates, and Chase Manhattan Mortgage Corporation.
Prior to the partnerships, a borrower facing foreclosure contacted NHSC, which worked with the borrower and the lender through the lender's 800 telephone number, Gottschall said. Nowadays, NHSC knows the names and phone numbers of individuals servicers who may be contacted by either NHSC or borrowers. Another resource that is now available is a city-operated "311" hotline that can connect a caller with a credit counselor.
Gottschall said that servicers report that more than half of the borrowers who are behind in their payments never talk to their servicers. "The borrowers probably think it's hopeless," he said. Gottschall also said the loan mitigation specialists at the servicers may not know of all the public and private resources available to such borrowers. NHSC itself can make small grants or loans, and one result of the discussions with the servicers is that "we link all the resources," he said.
The partnerships seek to preserve homeownership whenever possible through counseling, loss mitigation, and loan workouts and, if foreclosure is unavoidable, to preserve the vacant properties as neighborhood assets.
NHSC launched a homeownership preservation initiative (HOPI) in 2000 to begin to address rising foreclosures, and nearly two dozen subprime lenders are now represented on a HOPI advisory committee. An NHSC staff member and industry member jointly lead working groups on loss mitigation and outreach, REO disposition, origination issues and foreclosure prevention, capital-market innovation, and public relations and communications.
NHSC, which has 105 full-time staff members and a $7 million operating budget, lends citywide for home purchase, home improvements, rehabilitation, and refinance, provides pre- and post-purchase counseling, rehabilitates and sells houses, owns and manages rental properties, and is involved in community organizing and community development in nine neighborhoods.
In March 2004, NHSC released Preserving Homeownership:Community-Development Implications of the New Mortgage Market, a detailed report on the subprime market. The report discusses NHSC's work with Homecomings Financial Network (HFN), which had a representative based in the NHSC office. HFN and NHSC also collaborated on a financial education workshop attended by 45 HFN borrowers who were residents of four NHSC-targeted neighborhoods and who ranged from those current on their loans to those in foreclosure.
The report explains that "servicing rights are bought and sold regularly, and various aspects of servicing a single loan may be handled by different entities. As a result, should a problem arise, borrowers and their advocates often encounter obstacles simply talking to a person who has the capacity to investigate and resolve the problem."
It adds: "In the subprime market, it is very common for delinquent loans to move into foreclosure without the borrower being made aware in a timely fashion of possible loan modifications and workout options, not to mention publicly available foreclosure avoidance programs."
Similarly, the report says, servicing firms have elaborate systems that determine a loss-minimizing route to cure a default but "ignore information that could change this calculation because they do not have access to a detailed menu of municipal, state, and federal programs" that can assist borrowers.
It recommends that escrow funds become a standard feature of all subprime loans to help borrowers more easily make property tax and other large home-related payments. It also recommends studying the neighborhood impact of foreclosures because foreclosed properties that become vacant or poorly maintained may undermine the appeal and market value of other properties in the neighborhood.
The NHSC report says: "While consumers must be shielded from egregious credit collection practices, in many instances existing regulations have the unintended consequence of limiting the options of servicers trying to arrange early workout options for borrowers in danger of losing their homes."
The report says that subprime servicers and rating agencies are in the early stages of discovering what constitutes best practices in subprime servicing. Ameriquest Mortgage Company is one subprime lender that has developed its servicing best practices.
The report concludes that "the public policy posed by the subprime mortgage industry is how to balance the need to continue to expand access to capital without exposing consumers, neighborhoods, and investors to unacceptably high levels of risk."
For information on NHSC's work with subprime lenders and servicers, contact Bruce Gottschall at firstname.lastname@example.org; www.nhschicago.org.
To see the NHSC report, go to www.nw.org and click on publication, then homeownership and mortgage finance.
The practices may be seen at www.ameriquestmortgage.com.