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Helping Third District Communities Deal with Foreclosures

ForeclosureHousing counselors in early 2008 were telling the Federal Reserve Bank of Philadelphia that homeowners in the region were in trouble. The number of foreclosed properties was increasing rapidly in Philadelphia and elsewhere in the Third District.

Bringing the District's first responders — counselors and loan servicers — together was critical to addressing the deepening subprime mortgage crisis. Dede Myers, vice president of Community Affairs, and her staff brought together more than 100 housing counselors with seven of the District's top 10 loan servicers. Her staff had been conducting foreclosure-prevention meetings to address issues in the Third District, but this program was remarkable. "Every counselor left with a lender's phone number and the confidence that they could help homeowners," Myers said.

One regional housing advocate who attended the meeting credits the Bank's event with prompting a vision that would lead to more opportunities to help people save their homes. In the spring of 2008, he and others launched Philadelphia's pilot program for mortgage-foreclosure diversions. This novel approach has saved homes from sheriff's sales or postponed sales because lenders may not foreclose on a property until the borrower meets with a housing counselor and lender. Essentially, the program requires lenders and their attorneys to work with housing counselors to restructure the loan before allowing foreclosure actions to proceed.

But what could the Philadelphia Fed do for borrowers to help them ward off foreclosure? Myers approached the Philadelphia Daily News to create a guide geared to helping troubled homeowners understand their responsibilities as well as their options. Homeowners needed to know about resources available to prevent foreclosure, whether that meant finding a housing counselor, negotiating a modification of their loan terms, or getting help to pay the legal costs to stop a sheriff's sale.

"Lenders, servicers, and consumer advocates were distressed that many people were walking away from their homes without even talking to their lender," Myers said. Sometimes they were talking to the wrong people. Homeowners, frightened by the threat of losing their homes, were falling prey to scams.

Subprime Mortgage ForeclosuresTo help disseminate information, the Philadelphia Fed and the Greater Philadelphia Urban Affairs Coalition's Foreclosure Prevention Task Force worked with the Daily News editorial board to produce the "Foreclosure Survival Guide," published in February 2008. Community Affairs distributed 10,000 copies to agencies battling foreclosures in the Philadelphia region and shared this guide with other Federal Reserve Community Affairs offices nationwide.

Throughout 2008, the Philadelphia Fed reached out to the housing counselors serving on the frontlines of the crisis to provide more training. The Bank sponsored events with the Pennsylvania Housing Finance Agency (PHFA) and the Federal Housing Administration (FHA), which is the largest insurer of mortgages nationwide. Both the PHFA and the FHA offered training on their different loan products and helped counselors understand options available to troubled borrowers.

The Bank also hosted a two-day event that helped counselors earn certification as delinquency and default counselors. This training not only benefits borrowers buried in debt, it also positions the counseling agency to be eligible for federal funding. The national nonprofit NeighborWorks America, in conjunction with the Pennsylvania Housing Finance Agency, conducted the training. Once the training was completed, participating agencies became eligible for a portion of $360 million in federal funds that Congress asked NeighborWorks America to distribute to housing counselors helping borrowers prevent foreclosure.

The Federal Reserve's response to rising foreclosures also made the agenda during the Bank's 2008 conference on "Reinventing Older Communities: Does Place Matter?" Sandra F. Braunstein, director, Division of Consumer and Community Affairs, Federal Reserve Board of Governors, discussed the Fed's creation of new rules that provide additional protection to consumers against higher-priced mortgages under the Home Ownership and Equity Protection Act and the Truth in Lending Act. She also explained how the Federal Reserve has collaborated with regulators, community groups, and policymakers to help prevent or mitigate the effects of mortgage delinquencies and foreclosures.

One of the Federal Reserve's major undertakings was launching an online Foreclosure Resource Center on each Reserve Bank's external website. This Bank's center provides information for homeowners, prospective homebuyers, and community groups to prevent foreclosures and lessen their negative influence on neighborhoods. The center features research, regional and national resources, policy and regulation, as well as news and events. For example, the center offers a mitigation toolkit to help communities assess the foreclosures in their area, reach troubled homeowners, and provide support for displaced homeowners.

Rehabilitating and redeveloping foreclosed and abandoned properties was the purpose of the Neighborhood Stabilization Program, created by the Housing and Economic Recovery Act of 2008. It entitles states, cities, and counties to receive a total of $3.92 billion. The Philadelphia Fed asked Community Affairs' visiting scholar Alan Mallach to prepare a paper on how governments, developers, real estate agents, and others should ensure the effective use of these funds. Mallach created a blueprint outlining 11 principles communities should follow in spending the program's funds. Mallach is a nonresident senior fellow in the Metropolitan Policy Program at the Brookings Institution in Washington, D.C. His research, which is available on the Bank's website, was praised by Housing and Urban Development officials and gained widespread recognition after it was presented at the Federal Reserve's conference "Confronting the Neighborhood Impacts of Foreclosure" in Washington, D.C., in October 2008.

Community Affairs' collaborative approach to identifying, understanding, and addressing urgent problems has always been a strength, one that has helped the Third District meet its constituents' needs during this unprecedented crisis. The Philadelphia Fed will continue to respond to the ongoing effects of the subprime mortgage crisis on Third District communities through its partnerships, outreach, and research. The Bank's Community Affairs Department plans to examine the mortgage crisis and the obstacles and opportunities it presents for reinventing communities at its 2010 conference.