Turning everywhere, getting nowhere: experiences of seeking help for mortgage delinquency and their implications for foreclosure prevention

Abstract

The growing literature on financial, demographic, and institutional aspects of the foreclosure crisis largely neglects the experiences and actions of homeowners. This in-depth account of homeowners' responses to mortgage delinquency and the success of the strategies they employ to prevent foreclosure is based on focus groups conducted in 2006 with low- and moderate-income homeowners, and nonprofit housing professionals in five US cities. The events precipitating mortgage delinquency often set off a cascade of trouble placing multiple demands on homeowners' financial, emotional, and social resources. Homeowners pursued foreclosure prevention assistance from a variety of sources including their lender, social welfare agencies, and nonprofit homeownership organizations, but encountered many obstacles to resolving mortgage delinquency. Their unsuccessful attempts to secure assistance contributed to financial and emotional strain and sometimes worsened prospects of preventing foreclosure. Despite the numerous federal policies developed to address the problem of foreclosure, the experiences described by participants in this study continue, indicating the need for more systematic, enforceable, and preventive policies to address foreclosures in the future.

Keywords:

• foreclosure
• homeownership
• default
• financial institutions
• industry

Notes

¹Including financialization, securitization, subprime lending, and deregulation (Newman, cited in Crump et al. 2008).

²Studies have focused on effectiveness of prepurchase and foreclosure prevention education and counseling in mitigating the risk of default and foreclosure (Collins 2007; Hirad and Zorn 2001; Wiranowski 2003) and the factors involved in the default decision (Deng, Quigley, and Van Order 2000; Elmer and Seelig 1998a, 1998b; Getter 2003; Quercia and Stegman 1992; Vandell 1995). A growing area of research explores the impact of high-cost lending and mortgage foreclosure on families, neighborhoods and urban development in general (Immergluck and Smith 2006a, 2006b; Nettleton and Burrows 2001; Apgar and Duda 2005; Been, Gould Ellen, and Madar 2009; Schuetz, Been, and Gould Ellen 2008; Newman and Wyly 2004).

³The study and research questions were developed in consultation with representatives from NeighborWorks America and community reinvestment officers from a number of local and national banks, as well as a representative from the New York Federal Reserve Bank. The final report presented to this advisory board may be accessed at http://web.gc.cuny.edu/che/hergprojects.html.

⁴Cf. the Homeownership Preservation Initiative (HOPI) in Chicago, a coalition of Neighborhood Housing Services of Chicago, financial institutions, and the city of Chicago.

⁵Efforts successfully challenged by the federal government with claims that subsidiaries of national banks were exempt from regulations by state banking authorities (Morgenthau 2007).

⁶The campaign also partners with local organizations for referrals to housing counselors, foreclosure prevention specialists, credit counselors, and attorneys.

⁷Because this paper concerns a crisis in situ, we draw on journalistic accounts and working papers for current facts and figures (sometimes in lieu of data available only for purchase), but also rely on peer-reviewed journal articles where relevant information is available.

⁸Although it is certainly likely that by 2004 or 2005 the flood of mortgage products and increased access to large amounts of mortgage capital led to more low- and moderate-income borrowers entering homeownership without education or counseling.

⁹The initiative also sought to preserve properties by working with financial institutions to get properties donated or discounted for sale to NHS of Chicago for rehabilitation and resale; expanding partnerships between the city and HUD for NHS of Chicago to reclaim FHA foreclosed properties; and reclaiming vacant and abandoned properties through the city's Troubled Buildings Initiative (Neighborhood Housing Services of Chicago 2004).

¹⁰NeighborWorks Organizations (NWOs) make up NeighborWorks America's national network of community-based organizations. NeighborWorks America is a national nonprofit organization created by Congress to provide financial support, technical assistance, and training for community-based revitalization efforts. Through NeighborWorks's Campaign for Homeownership, participating NWOs provide a range of pre- and post-purchase education and counseling and loan assistance in order to boost sustainable homeownership among women, minorities, and households of modest means. For more information see www.nw.org.

¹¹Homeowners in mortgage delinquency are a particularly difficult group to reach and by definition are experiencing financial difficulty. Recognizing these constraints we reasoned that this population should secure direct benefits as a result of their participation in this research. Given the press for time and money described by participants we feel that $100 was appropriate compensation for their contributions to this study.

¹²We were not always able to ascertain the timing of these financial decisions in relation to the onset of mortgage delinquency.

¹³The concept of radical risk as it applies to homeowners in the current foreclosure crisis and the neoliberalization of homeownership is presented, and its implications more fully discussed, in Saegert, Fields, and Libman (2009).

¹⁴It is important to emphasize that when participants were in communication with their “lenders” about their mortgage delinquency, it is likely that they were speaking with the loan servicer's collections division rather than loss mitigation. The term “lender” can refer to a broad network of services; we were not always able to ascertain who participants were in communication with. Participants were inclined to see their lender as the loan originator, not being aware of the distinction between originator and servicer until being notified that their loan had been sold to another company.

¹⁵See Saegert, Fields, and Libman (2009) for a more in-depth discussion of these issues.

¹⁶The five largest firms controlled nearly half (46 percent) of the residential mortgage servicing market in 2007, where they controlled only 7 percent of the market in 1989 (Cordell et al. 2008). Similarly, less than 20 firms service 88 percent of the subprime market (Cordell et al. 2008).

¹⁷Instead of targeting the large number of borrowers with high-risk loans, such as payment option products, the plan focused only on borrowers who were seriously delinquent on conventional loans in the GSE's loan pools, with the aim of reducing monthly payments on these loans by stretching out the length of the terms, lowering interest rates, or lowering principal, in order to make payments less than 38 percent of a family's monthly income (Andrews, 2008). Whereas loans eligible for the program had a foreclosure rate of about 1.27 percent, the foreclosure rate on subprime adjustable rate mortgages was around 20 percent (Andrews 2008). Under the original, more ambitious plan, up to three million homeowners would have seen reduced monthly payments, while the final plan was projected to benefit several hundred thousand homeowners (Andrews 2008; Streitfeld 2008). A $24 billion plan advocated by FDIC chair Sheila Bair would have used TARP funds to provide assistance to nearly 1.5 million homeowners by refinancing and guaranteeing more than two million risky loans for borrowers with weak credit or who made small down payments, modifying the loans by reducing interest rates or extending loan terms (Duhigg 2008). Her plan didn't find support because critics said it could cost up to $70 billion due to re-defaults, and because of a purported moral hazard problem of distinguishing between those at risk and those who stopped making payments in order to qualify for the program (Duhigg 2008).

¹⁸The FHA's Hope for Homeowners program has become a notorious example of the failings of Bush-era programs. Intended to help 400,000 borrowers, the program received only 200 applications over its first two months, 752 by its seventh, and helped only one household avoid foreclosure (Duhigg 2008; Christie 2009; Herszenhorn 2009).