Avoiding foreclosure: Giving defaulting homeowners extra time
09/05/12-Springfield-Staff Photo by Dave Roback-People gather on the steps of Springfield City Hall on Wednesday at the start of a community march to protest the foreclosure policies of Fannie mae and Freddie Mac.
SPRINGFIELD — A state foreclosure prevention law that takes effect next month is expected to help keep defaulting homeowners in their homes, provided they can still offer their lenders more value than the home would sell for after a foreclosure.
“It’s hard to say until it is fully implemented,” said Charles H. Rucks, executive director of Springfield Neighborhood Housing Services.
The law’s effectiveness still hinges on the homeowner’s ability to keep on paying something, Rucks said.
“Well that’s a challenge, especially here in Springfield where the unemployment rate is higher than it is in the rest of the commonwealth,” Rucks said. “But the new law at least encourages the lenders to look at a modification.
Barbara T. Anthony, the state undersecretary of Consumer Protection and Business Regulation, explained the new law on a recent interview with The Republican’s editorial board. Anthony’s responsibilities include regulating the state’s banking industry, among other things.
One of the law’s requirements is that lenders look at the net present value condition, Anthony said. What that means is the lender must figure out what the house would be worth sold as a distressed, bank-owned property and how much it would cost them to foreclose on the home. If the homeowner can beat that net present value, the lender has to take the modification and let the homeowner keep the home.
“We are making the banks take the best deal for them and the best deal for the community,” Anthony said.
Peter A. Gagliardi, executive director of HAP Inc., a Springfield housing -advocacy agency, gave a practical example. The bank gave a $350,000 mortgage eight years ago at the top of the market. It place is now worth more like $150,000 and the bank might be able to get $10,000 for it at auction.
“But it costs money to foreclose, so they’ll get $100,000 and spend $50,000 to do it,” Gagliardi said.
Gary J. Grodzicki vice president and chief lending officer at Freedom Credit Union, said that Freedom has always worked with its members to modify loans and avoid foreclosure. “The requirements of this law are not new to Freedom Credit Union,” he said. The law also requires lenders to accept offers from non-profits who buy homes that are in arrears at short sales, that is for less than what is owed on them, and then resell those homes at the current market price back to the original homeowner with a 30-year fixed-rate mortgage provided by the nonprofit.
One such group, Boston Community Capital, has done 16 such short-sale deals in Western Massachusetts, said Elyse Cherry, Boston Community Capital’s CEO.
Since its launch in late 2009, the SUN Initiative (the initials stand for “Stabilizing Urban Neighborhoods”) has prevented the eviction of more than 200 residents statewide by helping them repurchase their homes and reducing average monthly housing payments by more than 40 percent. “It’s not like anybody is going to pay them the bubble price,” Cherry said. “That price doesn’t exist anymore. No one else is going to pay more for the home. No one is going to lose on this deal. I think this law aligns the best interests of the banks along with the best interests of the homeowner and of the community.”
But Boston Community Capital has seen its deals fall through when banks balked at the deal, even though the banks knew Community Capital was offering more money then they’d get at a foreclosure sale. One of those cases was in Springfield and involved federally backed Freddie Mac. Freddie Mac makes a national policy to reject such deals, saying if a homeowner gets to keep the house after not paying the mortgage, no one will pay on the mortgage.
Cherry said the short sale still destroys the family’s credit. They suffer enough. “As near I can figure out, this idea of a moral hazard is still around,” she said. “There is very little evidence that it happens. Not paying on a mortgage is economic suicide. Only a fool would do it.”
Gagliardi said some banks just don’t see taking modifications or short sales that allow homeowners to stay in the homes as a good business strategy. But it is a good strategy to help keep homes occupied and children in schools. It is a good strategy to keep neighborhoods stable, he said.
Anthony said the new law also gives homeowners a longer “right-to-cure” period, of 150 days instead of 90. But that’s only if the homeowner responds to the first notice within 30 days.
Rucks said he’s constantly preaching the need for homeowners who are in arrears to act quickly. Too many people wait until many of their options have dried up.
Even without the law, Rucks said, he’s seeing more homeowners get mortgages modified with lower payments as an alternative to foreclosure. He thinks the lenders are under federal pressure and under pressure from a $103 million settlement state attorneys general reached with lenders. Massachusetts received $72.6 million from that settlement.
But according to the Boston Business Journal, some criticize the Massachusetts settlement because it emphasizes short sales rather than loan modifications where the bank just cuts the interest payment or principal on a loan.
Gagliardi said Springfield has seen its ups and downs in terms of numbers of foreclosures.
“The banks held off for a while so we saw a decrease,” Gagliardi said. “Now we are afraid it might be headed back up again.”
As of August, there have been 305 foreclosure deeds filed in Springfield in 2012, according to data released by The Warren Group, a Boston-based provider of mortgage data. That is up 2.01 percent from the 299 deeds field in the first nine months of 2011.
For Hampden County a whole, deeds are up 10.02 percent from 549 to 604. In Hampshire County, deeds fell slightly from 76 in the first nine months of 2011 to 75. In Franklin County, the number of foreclosure deeds fell 5.19 percent from 77 to 73.
The number of early stage petitions has been rising statewide and in Hampden and Hampshire counties, The Warren Group said.