Homeownership: Preserving the American Dream
by John C. Dugan, Comptroller of the Currency
Chicago's Home Ownership Preservation Initiative (HOPI) encourages homeowners with financial difficulties to call a 3-1-1 telephone number to receive telephone counseling.
Homeownership in the United States has reached record levels, with the U.S. Census Bureau estimating the homeownership rate at 69 percent in 2005. Moreover, although gaps persist, for the first time the homeownership rate among minorities exceeds 50 percent. Low interest rates, a strong housing market, and innovations in the mortgage lending business have all played a part.
First-time homebuyers are finding that owning a home offers many advantages in building wealth and providing the financial security of having a tangible asset against which to borrow to meet important needs. And homeowners are more likely to become involved and invested in their communities.
But there's a downside. Homebuyers are increasingly relying on non-traditional mortgage products such as "interest-only" mortgages and "payment-option" adjustable-rate mortgages (ARMs), which currently account for an estimated 19 percent of all outstanding mortgages, according to Bear, Stearns & Co., Inc. In fact, non-traditional mortgages represented an estimated 30 percent of all mortgage originations in 2005, according to Inside Mortgage Finance.
These kinds of mortgages expose borrowers to potentially significant cost increases when interest rates rise — and a recent industry analysis projected that $1.5 trillion in ARMs (including traditional ARMs) will reset over the next four years.
For some highly leveraged borrowers, the "payment shock" of a sharp increase in borrowing costs could prove impossible to manage, forcing them into delinquency or default. Some are first-time homebuyers with little experience managing a debt. Others have stretched themselves to the limit to buy a home they could not otherwise afford. In a recent survey of borrowers with adjustable rate mortgages, five percent said they were "not at all confident" about their ability make their mortgage payment if it adjusts upward. An additional 21 percent said they were "not too confident" about their ability to make the payment.
Over the past decade, we've seen a marked expansion of "subprime lending"—risk—based mortgage pricing that has allowed lenders to open the doors of homeownership to borrowers who wouldn't qualify for more conventional loans. An estimated $507 billion in ARMs extended to subprime borrowers are expected to see interest rate increases over the next two years.
This issue of Community Developments focuses on homeownership preservation strategies, a subject as important as homeownership itself. After all, qualifying for a loan to buy a first home won't be cause for celebration if the home is later lost to foreclosure. And losing a home is more than a personal tragedy. Foreclosures can destabilize communities, creating vacancies that mean lost property tax revenues and that can become magnets for crime in addition to lowering adjacent property values.
Lenders have financial incentives to avoid foreclosures as well. According to industry data, servicers generally recover less than 50 cents on the dollar in a foreclosure. Bottom line: it almost always costs less to keep a responsible borrower in his or her home than to foreclose and find another buyer.
Homeowners may need help to overcome not just personal financial challenges — such as unexpected illness or divorce — but also to cope with circumstances that are clearly beyond their control, such as a job loss resulting from an economic downturn or a natural disaster. Getting called up for military service can also put a homeowner in financial jeopardy, and with more than 165,000 men and women now serving in Iraq and Afghanistan, lenders need to be aware of certain forbearance requirements of the Servicemembers Civil Relief Act.
So, in principle at least, there's a clear convergence of interests at work to support homeownership preservation. What is crucial, however, are the tools and initiatives that can convert good intentions into reality.
The articles in this issue explore a range of multi-dimensional strategies that combine creativity, commitment, and technology to successfully help homeowners overcome both personal and general setbacks. Here's a snapshot:
- The secondary market players are committed to homeownership retention. They provide lenders the latitude to work with borrowers, through mechanisms such as forbearance agreements, to help them get back on track when the causes leading to mortgage defaults can be resolved. To assist lenders, automated tools are now available to loan servicers that track payment histories and differentiate problem borrowers from those who pay late but regularly, thereby targeting delinquency tracking and reducing lenders' manpower costs.
- Nonprofit homeownership counseling organizations use an array of strategies to help mortgage borrowers who have run into trouble. Some serve as intermediaries, linking borrowers with loan servicers and participating in loss-mitigation negotiations, while others have created special funds to help refinance borrowers who would otherwise be trapped in inappropriate or predatory loans. And some residential lenders partner with nonprofits, often focusing on early intervention to help families before they dig themselves into financial holes so deep that debt-mitigation strategies won't work.
- A public-private partnership has helped Chicago fight high foreclosure rates and become a proving ground for homeownership sustainability initiatives. The city's Homeownership Preservation Initiative has linked mortgage lenders and nonprofits in an ambitious multi-year campaign to help families avoid foreclosure, reclaim foreclosed properties for affordable homeownership, and strengthen homeownership and property preservation strategies citywide.
- In our "Compliance Corner" feature, we look at questions regarding the Community Reinvestment Act (CRA) consideration for foreclosure prevention and mitigation. We explain, for example, how a bank can receive positive CRA consideration for selling a property acquired through foreclosure at less than market value to a capable community group for a qualified community development purpose.
There is strong evidence that creative homeownership preservation strategies work. As the articles in this issue show, the key is to link advances in technology — which can help lenders anticipate delinquencies and identify opportunities for early intervention — with good old-fashioned community outreach, facilitated by strong partnerships between government, lenders, and nonprofits.
It's true that "there's no place like home" — and improvements in mortgage servicing practices will ensure that more Americans can live out the dream of homeownership instead of watching it turn into the nightmare of foreclosure.