Our_weekly_cover_on_subprime_2By Cynthia E. Griffin
OW Staff Writer

If you break it down to the very simplest terms, what is happening in the subprime mortgage crisis is “payment shock.”

That’s how John Hope Bryant describes the situation. “. . . People bought houses like they buy cars, and they buy cars like they buy an Ipod, by not asking what the interest rate was but asking what the payment was,” said Bryant, founder, chairman, and CEO of Operation Hope, a Los Angeles-based financial services non-profit organization.

It was simple financial illiteracy on the part of many consumers and greed on the part of some in the home mortgage business. Whatever the cause, the numbers are staggering:

* An estimated 2 million home foreclosures will result from the subprime lending crisis.
* According to a recent report released by the Congressional Joint Economic Committee, approximately $71 billion in housing wealth has been directly destroyed through the foreclosure process, and another $32 billion indirectly destroyed by the spillover effect of foreclosures.
* State and local governments will lose more than $917 million in property tax revenue as a result of the destruction of housing wealth caused by subprime foreclosures. And California in particular could lose $110 million in property tax revenues.

The crisis involves so-called subprime borrowers—people who could not qualify for conventional home mortgages typically offered through banks. As a consequence mortgage brokers created innovative loans called Adjustable Rate Mortgages (ARMs) to put eager homebuyers into their dream homes.

According to Bryant, these products (negative amortization, low/no documentation, for example) were just not appropriate for low- and moderate-income borrowers. And many lenders failed to properly disclose exactly how these products worked. The potential homeowners, who were just so excited to get into a home, often did not read contracts they signed.

In addition to pulling in more borrowers, some lenders offered loans with a low initial interest rate for two years that would rise (or reset) each subsequent year. The problem here, said housing officials, is that while many people could afford the “teaser” rate, when the mortgage reset, they struggled to pay. Bryant hastens to add that subprime borrowing is not bad if done responsibly, but that has not happened.

On the financial side of the coin, subprime loans were bundled up into one package, turned into an investment security and sold. This allowed banks to reduce losses from potential bad loans, but at the same time subsequently made it much more difficult for an individual borrower to make changes in the loan, because it was no longer owned by the originator. The subprime situation has become a national emergency, and recently, President George W. Bush and Secretary of the Treasury Henry M. Paulson Jr. introduced nationwide relief measures that they project will help about 1.2 million homeowners.

Under the new guidelines called “Streamlined Foreclosure and Loss Avoidance Framework for Securitized Subprime Adjustable Rate Mortgage Loans,” created by the American Securitization Forum (www.americansecuritization.com), borrowers are divided up into three different segments. Those people whose home mortgages were originated between Jan. 1, 2005 and July 31, 2007, and will reset in the next two years may be eligible to participate in the relief efforts.

The first segment of borrowers will be able to refinance their adjustable rate loans into any available loan products including private, Federal Housing Administration (FHA) and FHA Secure, that offer lower interest rates. In order to qualify, the mortgage must be current and not have had more than one 60-day delinquency in the last 12 months. There also must be sufficient equity in the home to qualify for refinancing.

Those in the second group of mortgage holders may be eligible for a fast-track loan modification, if they are current but have poor credit scores, low or no equity in their homes, or a history of delinquent payments. These people may be eligible to have their interest rate frozen at the introductory amount for five years.

The third category of borrowers are those not current on their loan payments at the existing introductory rate and who do not qualify to refinance into any available mortgage product. In this case, their loan servicer will determine on a case-by-case basis a loss mitigation approach that may include interest rate or principle reduction, forbearance, extension of the loan maturity date, and more.In order to find out what they qualify for, homeowners should contact their loan servicer or a national housing counseling hotline, call Hope Now (888) 995-HOPE.

While the federal government estimates that the relief plan could help as many as 1.2 million people, Bryant of Operation Hope thinks the number will be a lot smaller (about 20 percent of the estimated 2.5 million loans that are expected to reset). “In order to qualify, you have to have a good stable payment history at the time you qualify for the program, and a lot of people have a problem because they have already missed payments and that has negatively impacted their credit score. And if your credit score is too good, it won’t help either. So it’s a double whammy.”

Although Bryant applauds the plan as a step in the right direction, he does not think it is enough to stem the flood of foreclosures that are predicted. But the Operation Hope CEO said the action by the federal government does send a key message to the country.

“Because the President of the United States is doing it. . . it’s a big step because it sends a message to the mortgage industry and the banking industry that national policy makers, starting with the chief executive of the nation, are paying attention. That they have taken action and want you to take action,” said Bryant, adding that this is a powerful motivator that could create a movement.

But Bryant would have liked a plan with much more bite in it, for example something like what Sheila Bair, chair of the Federal Deposit Insurance Corporation, called for—freezing the interest rates indefinitely. “Her plan would cover 80 percent of the people except for those who are engaged in fraud, are real estate speculators, or just made a “dumb decision,” said Bryant, who also made his own suggestion before a Congressional hearing about a month ago.

“I think they should model what happened after the riot in 1992. All the banks stopped lending in South Los An
geles, so the FHA Bank in San Francisco made money available (to banks) at three percent interest, if banks would lend for homeownership in South L.A. That plan resulted in $3 billion in homeownership being lent back into South Los Angeles by major (private) banks. FHA also helped us raise minority homeownership from 35 to 42 percent.”

Bryant also thinks the idea of a 40-year fixed interest rate will help solve some of the problems and stimulate the homebuying market in a responsible way. So far, although officials have given his ideas positive feedback, Bryant said they are too focused on the current crisis to give much thought to down-the-road solutions like a longer-term loan.

Wilbur McKesson, senior vice president and chief loan officer at Broadway Federal Bank, said he too is glad that the President has come out with a potential solution, but feels that government really cannot solve all the problems out there.

“Because the mortgage business model has so many different parts to it, it’s difficult to find a solution that helps everyone without putting one of the lenders or investors at substantial risk. The other part of it is that in all likelihood, there are a number of folks who probably should not have purchased a home with the financing they did. It’s much more house than many could actually afford. And they are the ones who will be hurt the worst.”

McKesson does not believe these homeowners will be helped by the government, but must work with their loan servicer on an individual basis.Other efforts to help out have also been stirred into the mix. “In April, we announced under the Home Stay Initiative a few underwriting flexibilities we thought would help the market. They include a product we call Expanded Approval. We opened that up to all our lenders. We also introduced into Expanded Approval a 40-year fixed mortgage. And the third thing we did was change our policy on outstanding debt collection to be more liberal,” according to Jeff Kenny, vice president of innovation development at Fannie Mae.

Fannie Mae is a shareholder-owned company that operates in America’s secondary mortgage market to ensure that mortgage bankers and other lenders have enough funds to lend to homebuyers at low rates. Kinney said the agency has also given out about $8 million in grants to various non-profits to help them focus on foreclosure prevention counseling.

In California, Governor Arnold Schwarzenegger reached an agreement with four major loan servicers—Countrywide, GMAC, Litton, and HomEq—designed to keep more subprime borrowers in their homes. According to the Governor’s office these four companies service more than 25 percent of these loans.

The companies have agreed to reach out to subprime borrowers whose loans are expected to reset in the next 12 to 24 months to see whether there is a likelihood they will have problems paying the mortgage, when the price adjusts. If so, they have agreed to work on solutions that will vary according to the servicer. The Governor’s office estimates this could help up to 500,000 homeowners in the state.

Additionally, Schwarzenegger announced Friday the creation of a new fund to help local homeowners facing foreclosure keep their homes. Called the OneCalifornia Foundation Bridge Loan Fund, the program will provide financing to assist homeowners in the Oakland area who cannot qualify for other help. The reason why so many people are concerned about stopping the flow of subprime foreclosures is because there is a residual impact on non-subprime borrowers, communities, government coffers, and the American economy as a whole. Multiple vacant homes in neighborhoods decrease property values, yield less property tax revenue which leads to less money for community services and thus a declining quality of life.

Families could face the lose of an inheritance that may have taken decades to accumulate. And, there is also a loss of security when foreclosed homeowners are forced to move into different or even less secure but affordable neighborhoods. While most people are dealing almost exclusively with the current crisis there are other people like Lori Gay of the Los Angeles Neighborhood Housing Services (LANHS) who are looking down the road at helping the families who have lost their homes.

“We work with families that are losing their homes and families that want to buy a home and try to provide a soft landing (by connecting the two groups),” said the LANHS CEO. She said her organization is also providing relocation assistance to families whose credit is shot, because of the foreclosure. That help might range from assisting with move-in fees to talking with landlords.

Gay said they also want to work to get former homeowners back into the market in a reasonable way, by making homes available from investors and banks to offer to homeowners through programs such as lease-to-own.

Bryant is also looking at the future, and what worries him is that once the subprime mortgage crisis has eased, people who have suffered through foreclosure and are looking to re-enter the market will be at the mercy of predatory lenders charging double-digit interest because others are too leery to get involved in the market. Additionally, those who cannot refinance their homes may resort to more expensive high-interest credit cards.

“If you can’t get money anywhere else, I’m concerned that people will go to 25 and 28 percent interest credit cards and pull money out of that, thus robbing Paul to pay Peter. That makes a bad situation even worse.”

Getting into a home in the future is also going to require a different mindset and expectations, pointed out McKesson, who said one of the options potential homeowners are going to have to look at is living in an apartment or rental property longer until they save sufficient money.

“People are also beginning to rethink urban living. They are coming back into (the city) and living in condos or townhome complexes. Condo projects are being developed through downtown Los Angeles, and in other locations. Those may be the more realistic opportunity for folks.”

While all of the solutions and many others that have been and will be proposed are on the table, officials stress one key first step homeowners should keep in mind. There are solutions. If you are having problems, contact your loan servicer immediately or contact the Hope Now housing hotline (888-995-HOPE) and ask for help.

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