Foreclosure Prevention: State and Federal Update

August 13, 2009

Author: Kirsten E. Keefe

It’s not like anyone needs to read another article these days about foreclosures and what they are doing to our economy. New York State, however, has taken unprecedented steps to address the problem, as has  President Obama’s administration. This article is intended to be a general update for folks not entrenched in these issues. If you are working on foreclosures, there are several channels for receiving information. Please contact Kirsten Keefe at kkeefe@empirejustice.org to get connected.

New York Action

Funding:  In 2008, thanks in large part to efforts of the Assembly, the State allocated $25 million in funding for direct services by non-profits to provide assistance to homeowners with “subprime” and “non-conventional” home loans. The Division of Housing and Communal Renewal (DHCR) did an excellent job getting the RFP out quickly and allocating grants.  Sixty-four awards were made to agencies across the state, the majority of grants encompassing subgrantee agencies. In total, over 120 organizations received funding through the NYS Subprime Foreclosure Prevention Services program.

The result has been palpable and now distressed homeowners in every county of New York have increased access to counseling and legal services. The grants are for a two-year contract period. DHCR also provided funding to NeighborWorks America and to the Empire Justice Center and partner organizations to provide training to housing counselors and lawyers. (Since December 2009, with the assistance of multiple partner organizations, Empire Justice has conducted two webinars on developing foreclosure prevention programs, five two-day intensive basics trainings, and more than ten trainings for pro bono lawyers to represent folks in settlement conferences.)  To the best of my knowledge, no other state has allocated such significant resources to fund direct services to homeowners.

An additional $25 million (once again, thanks to the efforts of the Assembly) has been allocated in this year’s budget to continue funding assistance by non-profits to homeowners in default and foreclosure. DHCR is preparing a new RFP which it expects to be out this summer.

Increased Notice and Settlement Conferences: On the judicial front, changes in the law last year through New York’s Foreclosure Prevention and Responsible Lending Act 1, have translated into an increased number of homeowners settling their foreclosure cases and remaining in their homes.  The first change was a new requirement that homeowners with subprime and nontraditional home loans be sent a notice at least 90 days prior to the initiation of a lawsuit, referring them to a   local housing counseling agency. Though we do not have definitive numbers or a good tracking system, we do know that some homeowners are finding their way to early counseling because of this notice.

Also with the new law came the advent of mandatory settlement conferences for homeowners with subprime and nontraditional home loans, to be held within 60 days of the initiation of the lawsuit. The Office of Court Administration (“OCA”) has  afforded the thirteen judicial districts around the state deference to develop their own systems for handling these conferences. Some districts have elected a single court, judge or referee to handle the conferences and in other counties, the judges to whom the cases are assigned are handling the conferences themselves.  More often then not, when a homeowner appears, the conference is adjourned to allow the parties time to exchange information and work out a loan modification or other resolution. This process has taken more time than anticipated as mortgage servicers’ case loads have ballooned nationwide so it is not unusual for conferences to be adjourned more than once.

Though early numbers reported to OCA by some of the hardest hit counties are lower than ideal, there is no question that the settlement conferences (combined with the increased resources) have resulted in more homeowners getting representation and filing answers to foreclosure cases, and in more homeowners getting settlements rather than losing their homes.  Advocates also report that the existence of the settlement conference itself has incentivized some servicers to negotiate ahead of time.

Better tracking of the results of these conferences is needed across the state. It appears that the conferences are working better in districts where the judges have had an opportunity to be trained on foreclosure issues for homeowners, as well as where they are connected with local housing  counseling and legal services programs to which they can refer homeowners who show up unrepresented.  Our hope going forward is to have more training and resources available for courts, as well as to identify best practices and share this information among courts statewide.  Empire Justice Center is looking at how best to collect this information.

Housing counseling and legal services organizations also are seeing a steep increase in the number of folks who are in default not as a result of a subprime or nontraditional loan. 
Agencies in upstate counties in particular report that more than fifty percent of the homeowners they see are in default on a conventional loan because of a loss of job or other economic hardship.

Federal Action

Making Home Affordable Program: On March 4, 2009, President Obama announced the federal government’s Making Home Affordable Program. Empire Justice has prepared a detailed explanation, including program eligibility and requirements. The program includes a refinance component that essentially allows homeowners who are “underwater” (owe more than current value of home) on loans with Fannie Mae or Freddie Mac to refinance their loan in some instances.

The Home Affordable Modification Program (“HAMP”) has been much more the focus of the program and provides for modifications that reduce monthly payments to 31% of the borrower’s gross income.  Modifications are configured based on a waterfall approach which first reduces the interest rate incrementally to a floor of 2%.  If that does not produce a 31% debt-to-income ratio, then the loan may be amortized over a period of 40 years, and the servicer may forbear a portion of the principal balance. The proposed loan modification must be run through what is called a “net present value” (“NPV”) test which compares the loss to the investor as a result of the loan modification to the loss the investor would likely incur if the loan were to go into foreclosure.  If the proposed modification passes the NPV test, the homeowner enters a three month trial period and then automatically gets the loan modification.  Homeowners in default or foreclosure, as well as those in imminent risk of default are eligible so long as their loan is owned by Fannie or Freddie and/or if their mortgage servicer voluntarily signed a contract with the Treasury Department to participate.

In April, the President announced new provisions regarding second liens and that HUD should be updating the FHA program to provide similar assistance to their borrowers. Financial incentives imbedded in the program have encouraged servicer participation to an extent that the majority of loans in the United States are covered under this program. Compliance continues to be a problem, however.  Servicers are still not fully up and running with the program and advocates have had to educate themselves on the specifics of the program to be able to counter misinformation often provided by mortgage servicers denying HAMP assistance.

OCA organized trainings of judges and court personnel in New York to teach them about HMP’s criteria.  The HAMP loan modification structure can be a useful tool on which courts can base settlement conference discussions.  Though this model may not be workable for some of the most aggrieved homeowners who were sold expensive loans that were unaffordable from the start (in which case the court may need to look to the underlying claims in the case), HAMP offers a good starting point for discussions.

Empire Justice Center along with the Neighborhood Economic Development Advocacy Project (NEDAP) in NYC has convened a statewide settlement conference workgroup to share information and address ongoing issues regarding the mandatory settlement conferences and HAMP.  To join the working group, contact Kirsten Keefe at kkeefe@empirejustice.org.

What the Future May Bring

The next significant wave of foreclosures is anticipated to come from defaulting payment option adjustable rate mortgages.  (Though as indicated above, the initial wave never really ended and has only grown larger with folks losing jobs as a byproduct of the subprime/financial crash.) These loans were underwritten for homeowners to afford a minimum payment, often which does not cover even the interest portion of a fully-amortized principal and interest payment. Though no one knows the number of payment option loans made in New York in the last three years of the subprime boom, advocates have seen their existence throughout the state so we know they are out there.  It is expected that once the bulk of these loans adjust in the next year or so, capitalizing accrued interest and principal into the balance, monthly payments will reset at unaffordable levels.

Hopefully, though, by then we will be well-positioned to deal with this next wave.  With the state funding, New York for the first time has a strong cadre of advocates who are well-trained and extremely capable to help homeowners through the servicers’ processes.  Many economists, academics and advocates believe that principal reductions are the next necessary step to keeping people in their homes.  This may be true especially as property values continue to decline despite the concerted efforts to avert the worst on the state and federal levels.  One idealistic hope is a return to more affordable housing levels in New York.

Footnote      

1  Chapter 472 of the Laws of New York, 2008.