Reducing Foreclosures Through Nonprofit Partnerships
by Heidi S. Coppola, vice president, public policy & issue management, Citigroup
No one wins in a foreclosure. The borrower's credit is damaged, the servicer loses money, and the community suffers. Citigroup recognizes the economic and social costs of this action and, despite a foreclosure rate of only 0.54 percent on the mortgages we service, constantly searches for methods to bring this rate even lower. Our research, supported by the studies of others in the mortgage servicing business, has shown us that the earlier we make contact with a troubled borrower, the greater our chances of preventing foreclosure. Unfortunately, up to half of homeowners in foreclosure don't have a meaningful conversation with their servicer until it is too late.
Early Contact is Key
Approximately 30 percent of borrowers who are reached will maintain their homes through loss mitigation programs.
We have learned that a number of borrowers believe a call from their loan servicer is the first step before foreclosure. This is a significant impediment to early contact. To mitigate this fear, Citigroup recently began working with nonprofit intermediaries to establish a bridge of trust between the borrower and us. We rely on the nonprofits to deliver more personalized services and put together loss mitigation packages that work for everyone.
Many times, when we make contact with a borrower, we find solutions to keep them in their homes. We do this by working out repayment terms that borrowers can afford. This is a win-win solution for both the borrower and the lender. The goal is simple: get more borrowers who are facing a serious delinquency or foreclosure to discuss the situation and find a solution that works best for all involved. The results of our activities show that approximately 30 percent of borrowers reached will retain their homes by taking advantage of available loss mitigation programs. These results hold true, generally, for both the prime and subprime mortgage businesses.
Once the homeowner is contacted, we explain the various foreclosure prevention options that may be available to a borrower. Our loss mitigation teams have three principal tools:
- Approval of extended term repayment plans.
- Approval of retention options where the borrower has minimal or no down-payment ability.
- Full or partial forgiveness of arrearages, accrued late charges, and fees.
These can be attractive choices for homeowners in trouble, but we had to find a way to reach those borrowers who we were unable to reach before.
One of the ways is to partner with a nonprofit. Although our mortgage servicing units send letters to borrowers who are in financial trouble, and many of them respond to the letters and resolve their problems without third-party intervention, a significant percentage continue to avoid us, thereby exacerbating their situation. For many reasons, borrowers simply refuse to respond to contacts from their lender, believing that all the servicer wants is to collect the amounts due or to take possession of the property. They don't realize that it is generally not in the best interest of the servicer to foreclose. The servicer would much prefer to consider other options available to assist the borrower. Consider this industry statistic that tracks our own experience: servicers typically recover less than 50 cents on the dollar in foreclosure. So there is a clear financial incentive to do all that is possible to help a borrower remain in his or her home. In 2004, Citigroup mortgage servicing units processed more than 27,000 workouts from a portfolio of about 3 million accounts. The company exceeded this amount in 2005 with 32,394 workouts.
The nonprofit's relationship within the community and third-party status as a go-between can help both the servicer and the borrower. The experience of nonprofit organizations with whom we worked suggests that many homeowners who are in trouble tend to ignore a seriously delinquent mortgage until it is practically too late. Even then, they don't see how calling their lender or servicer can help.
We believe that working with a trusted nonprofit intermediary that recognizes this borrower behavior, and is willing to work with the servicer to move a troubled borrower into a better position, can prove to be a successful strategy. Towards this end, we began working with the Consumer Credit Resource Center (CCRC) in January 2005, after participating in a pilot foreclosure prevention initiative in Chicago. The Chicago initiative created a "financial emergency" hotline number - 311, as part of its "Every Minute Counts" campaign. Homeowners and others could call the line and be put in touch with a counselor from one of the four organizations that comprise the CCRC.
Since establishing this relationship with CCRC, we have referred customers who are 90 or more days delinquent on their mortgages to CCRC for counseling at no cost to them. Approximately 55 troubled homeowners contact the nonprofit each month and try to work out a mortgage solution with us. This is not a large number, but without the CCRC initiative, it's likely that those borrowers would not have contacted us. We are hopeful that the success of this relatively new strategy will increase over time as free counseling offered by lenders or servicers becomes recognizable to borrowers as a tool that can help them.
A number of borrowers view phone calls or letters from the servicer as collection inquiries. But these borrowers are less wary to call a nonprofit that they have seen in their communities, or one that seems to be on their side.
The main priority of CCRC and most other nonprofit housing and consumer credit agencies is the borrower. But within that priority is a shared objective: find the best solution for the borrower and the servicer. Every case is different and because nonprofits can deliver more personalized services, they are well suited to help put together loss mitigation packages that work for everyone.
Most of us in the loss mitigation business have experience assessing a borrower's ability to repay, but the counseling that nonprofits provide go further. For example, when CCRC staff interview homeowners, they ask holistic questions about the borrower's total financial situation, not only those associated with the delinquent mortgage. This approach helps to take the homeowner down a path that results in a comprehensive plan to get homeowners back on their feet, and this generates more trust from the homeowner.
Specifically, nonprofit counselors can help the homeowner establish a budget that is within their means; work with the homeowner to arrange better terms with other creditors; and in some cases, even assist in obtaining legal help if there is some situation in the homeowner's life that needs that kind of professional assistance. The homeowner is able to have an objective fair and open discussion about his or her options without the pressure of the mortgage company jumping to any conclusions. They can also be more open with a third party, especially if the best result for the homeowner is the sale of the home.
When a Property Is Taken Back
Loan servicers typically recover less than fifty cents on the dollar in foreclosure.
Nevertheless, we realize that not everyone who begins the foreclosure process can keep his or her home. When home retention is not feasible, we endorse strategies that reduce the frequency of lengthy foreclosure actions to minimize losses to the servicer and to help the defaulted borrower minimize the negative impact to his or her credit history. These strategies include: cooperative sales efforts with the defaulting homeowner; short sale arrangements; and deeds-in-lieu of foreclosure. In addition, cash incentives have been used to motivate certain borrowers to vacate a property they have no interest in continuing to own. By shortening the foreclosure process and getting a new owner into the home, our strategy helps stabilize a neighborhood.
Neighborhood stabilization is one reason we work with nonprofits post property acquisition. Partnering with nonprofits at this stage can also help to promote first-time homeownership. One way we do this is through occasional donations of REO properties to nonprofits. When a property is donated, the organization typically has property rehabilitation experience and has the ability to tap into federal or other funds to finance the renovation of the empty shell and sell it to an owner occupant. Donating a property, however, isn't typical. More often it is sold at a steep discount, usually in the range of 20 percent of market value.
To date, we've donated, or sold at steep discounts, properties in Chicago, Indiana, Michigan, Kentucky, Maryland, and Los Angeles.
We have partnered with Neighborhood Housing Services of Chicago, and Neighborhood Assistance Corporation of America, in the marketing of our REO to low- to moderate-income homebuyers. These organizations and other nonprofits, including National Training Institute Center, also market REO properties they acquire from us to low- to moderate-income homebuyers. All of these nonprofit partners provide financial education and pre-mortgage counseling, among other services, that help better position people for home ownership.
We also look to real estate brokers to help with the disposition of REO. In these cases, we remain focused on finding ways to stabilize neighborhoods and foster first-time homeownership. Our real estate broker initiative can involve incentive payments as high as $1,000 per property, under certain criteria.
Our loss mitigation activities seek to reduce the cost of default and foreclosure, while simultaneously minimizing the impact on homeowners and their neighborhoods. Teaming up with nonprofit organizations that homeowners can trust is a worthwhile investment of time and resources.
For more information, please contact Heidi Coppola at firstname.lastname@example.org ; www.citigroup.com