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Consumer Behavior in Turbulent Times.ppt

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Consumer Behavior in Turbulent Times.ppt Powered By Docstoc
					A Primer on Foreclosure
     Interventions

                J. Michael Collins
                   jmcollins@wisc.edu
                     608.262.0369

                   20 Jan 2009
 Cooperative Extension Western District Meetings
                  Overview

• History

• Terms

• Consumer behavior

• Interventions

• Public Policies
                           Little History:
                    Old French "dead pledge,"
    why it is called mortgage is that it is doubtful whether the borrower will
      pay at the day or not, and if he doth not pay, then the Land which is
      put in pledge upon condition for the payment of the money is taken
      from him forever, and so dead to him upon condition. And if he doth
      pay the money, then the pledge is dead as to the Tenant.
            - jurist Sir Edward Coke (1552-1634)


        – Until the 1930s – 50% down and 5 year term w/o amortization
        – 1934: FHA established to guarantee loans
        – 1938 FNMA established to buy FHA-insured loans from banks
           • became private in 1968 and role expanded
        – 1984 The Secondary Mortgage Market Enhancement Act
        – 1986 Tax Reform - facilitated securitization of mortgage loans.
        – 1999 Financial Modernization – allowed functions to combine
3
                        Mortgage
• Contract with lien on property
  –   Legal agreement
  –   Contract between mortgagor and mortgagee
  –   Lien placed on property as collateral
  –   Any violation of contract is called ―default‖
       • Foreclosure is reaction to default on agreement


• Lender – made the loan
• Servicer – collects payments for a fee
• Investor – funded and/or ‗owns‘ the loan
     Consumer/Borrower



                                                            • Underwriters (Wall Street)
                                                            • Trustees
                                                            • Custodians (usually banks)
             $   $                                          • Rating Agencies
     $
                                                            • Insurers

  Mortgage Brokers

         $
                      Loans
 Mortgage            Servicer            Issuer
 Originators         Primary and                                  Investors
                        Master
                                     Intermediaries/
                       $$$$$       Aggregators/ Issuers
                                     • Supplies money to
    Originator/Lender
                                            originator
    Supplies money to
                                       • Aggregates and
consumer (often via broker)
                                         sells securities
 The Pitfalls
• Delinquency
     • Payment is ―past due‖
• Default
     • Violation of mortgage contract;
       often = ―seriously delinquent‖
• Foreclosure
     • A legal filing to take a property
• REO
     • ―Real Estate Owned‖ – lender‘s
       inventory of foreclosed assets
Multiple Underlying Causes of
         Foreclosure
                                   Business
                                   Practices
                                   -lax lending
                                       -fraud
                                   -appraisals
      Housing
                                  - inspections
      Market                         -seller grants
    - house prices
   - collateral risks




                             Borrower
                             Behavior
                        -consumer credit usage
                         - income/employment
                        - property maintenance
           Finding Solutions Benefits Families,
                 Lenders & Communities

    • Neither lenders nor investors ―make money‖ on
      foreclosures.
               •    Losses range from 20 cents to 60 cents on the dollar
               •    One estimate: lender‘s cost of a foreclosure averages $58,800 ^
               •    Servicers incur expenses with problem loans
               •    Legal costs and costs of securing/maintaining properties


    • Vacant properties can attract crime and reduce
      neighborhood property values.
               •    One estimate: each foreclosure associated with a 0.9% decrease
                    in values of properties within 1/8th mile ($139,000 on average per
                    foreclosure in Chicago) ^^
               •    Municipal costs estimated as high as $34,199 for worst properties
                    *
               •    Estimate average municipal cost of $6,937 per foreclosure. *
Sources:   ^ Crews Cutts et al, Freddie Mac working paper, 2005
           ^^ Immergluck et al, “There Goes the Neighborhood,” Woodstock Institute, 2005.
           * William Apgar et al “Collateral Damage” Homeownership Preservation Foundation, 2005
      Causes of Borrower Falling Behind

                     Initial Cause of Delinquency

                                                           Income <$30k
         Othe r
                                                           Income >$30k    Borrowers in Default:
                                                                           • 32% are in bankruptcy
Both He a lth
 a nd Job
                                                                           • 69% 1st time buyers
                                                                           • 55% 1st time refinance
   He a lth                                                                • Average of 2.1 refinances
 Proble m &
  De a th in
   Fa mily
                                                                           • 11.6 years in home
                                                                           • 22% retired seniors
   Job or                                                                  • Unpaid mortgage: $91,213
Income Loss



                   0%          10%           20%           30%    40%     50%




Source: Chicago Mortgage Default Counseling Survey, 2005
      Incidence of Foreclosure Varies
              by Loan Type
          25%




          20%




          15%
                                                                                                                US
                                                                                                                WI

          10%




            5%




            0%
                            All               Prime FRM             Prime ARM   FHA   Subprime   Subprime ARM




Source: National Delinquency Survey, Mortgage Bankers Association, 2008 3Q
      Small Share of all Loans Are Subprime

             14%



             12%



             10%



               8%



               6%



               4%



               2%



               0%
                                                  US                         WI

Source: National Delinquency Survey, Mortgage Bankers Association, 2008 3Q
             Foreclosure Filings
• Some borrowers don‘t focus on their problems
  until the filing
      • Find resources: family; other debt; sell assets
      • Sell home

• Some borrowers may qualify for special loan
  workouts and other means to avoid foreclosure
• Also may sell home

• Only a portion of filings end with an auction or
  loss of home
    Understanding Borrowers in Default

•    The majority of borrowers (historically) will self-cure

•    Lenders/Servicers have wide array of tools
          • ―workouts‖ – 6 – 24 months
                – Budgeting
                – Forbearance – lower payment and tack on end of term
          • ―Loss mitigation‖ – legal renegotiation of contract
                – Loan modifications: rate, term, balance, fees
                – Short Refinance (principal reduction)
                – Pre-foreclosure sales
                     » Short sale
                     » Deed in Lieu
                     » Marketing assistance
But
•    …Borrowers don’t trust their lender
          • And confident they can solve own problems
•    …Borrowers are under great stress
          • Financial, health, employment, family effects
•    …Lenders are overwhelmed
          • Long waits in call cue, limited staff capacity
                     Making Contact
• Early contact – within first 15 days of
  missing payment best
    – Requires a referral from lenders

• Can provide education counseling in
  advance of delinquency
    – But must be targeted – need incentives

• In early stages borrowers are triaged:
    –   Budgeting problem
    –   Short-term income problem
    –   Long-term disruption
    –   Property problem

• But as many has half of borrowers are
  NOT in contact with lenders
    – ―Head in the sand‖
Roadblocks to Connecting with Borrowers

 • Feelings of regret, embarrassment & fear
 • Stress from physical/emotional problems
 • Avoid all bill collectors
 • Little differentiation between
   lender/servicer & nonprofit
 • Distrust
    – especially related to their failing loan
 • Reluctant to talk about their problems
 • May have medical problems—adding to
   challenges
                       Borrower Voices

• Borrowers are under a great deal of stress, leading them to
  avoid help.
   – ―I was always week to week. I get paid, I pay my bills. I get
     paid, I pay my bills. Then it‘s not there. Then you‘re in
     trouble. I didn‘t know which way to turn. I didn‘t know there
     was help out there.‖

• Borrowers feel little sympathy from their lender (although
  borrowers dealing with loss mitigation staff were more
  favorable)
   – ―They make you feel like a deadbeat…the way they
     interrogate you, they seem like they want to catch you in a
     lie because the questions are repetitious…the only thing I‘m
     going to say is blah, blah, blah. I‘m not lying. I need help.‖
   – They want us to lose our homes. They don‘t care.‖
Source: NHS Chicago Inc, HOPI Borrower Focus Groups, May 2006
            Why Did You Not Contact Your Lender?

                                    Why did you not contact your lender/servicer?

60%



50%



40%



30%



20%



10%



0%
      Afraid the lender   Embarrassed to talk   Afraid lender would     Did not think the   Assumed I/we could    Did not know the
      would charge a       about problems     foreclose on us faster   lender would care    make the payment in   lender might be
       penalty or fee                                                                           a few days             helpful




                   Source: Chicago Mortgage Default Counseling Survey, 2005
              3rd Party Counseling Can Help

     Typical Borrower                                     Impact of an Additional Hour of Counseling
         Counseling:                        45%
    •    2.2 counseling                     40%
         sessions                           35%                                         % increase in
    •    1.9 hours total                                                                rating of
         time                               30%                                         counseling
    •    Phone 1.3                                                                      % less likely
         hours                              25%                                         to complete
    •    Face-to-face                       20%                                         foreclosure
         2.2 hours                                                                      % more likely
    •    Health and                         15%                                         to follow up
         death in family
         take longer -
                                            10%
         2.7 hours                             5%
                                               0%
Source: Chicago Mortgage Default Counseling Survey 2005
Time                  Intervention Timeline
 slow pay
              • Preventing problems with targeted counseling, phone calls,
                workshops
 15-30 days
  late        • Making contact with delinquent borrowers (sooner is better)
                      • Hotlines are helpful, but not enough
              • Managing expenses to pay mortgages
 30-90 days           • Often consumer just needs help prioritizing
  late
              • Restructuring consumer debt
                      • Debt management plans can help free up cash flow for mortgages
 60-120       • Repairs to the home
  days
                      • Unexpected costs of repairs are frequent problem

              • Modifying the loan
                      • If partnership with lender is in place, mods are possible and very helpful

 90+ days
              • Bridging an income shortfall (short-term)
              • Exit strategies if ownership is unsustainable (e.g. health crisis,
                divorce)
              • Managing REO properties to avoid vacancies
 180 days+            • Maintaining a stable neighborhood
                      • Turning over homes to new buyers
                      Four Dimensions of Delinquent Borrower Circumstances

                                            DURATION OF INCOME LOSS
Temporary Income Crisis                                    Long-Term Income Loss
  Job loss                                                   Disability
  Income reduction                                           Family health crisis
  High potential to be able to resume payments in 12         Death in family
   to 24 months                                               Divorce
                                                   CREDIT QUALITY
Good Credit History/Low Debt-to-Income Ratio               Poor Credit History/High Debt-to-Income Ratio
  Qualify for refinance loans                                Past history of foreclosure or bankruptcy
  Ability to restructure debt and savings                    Missed payments
  Potential to reduce expenses                               Unqualified for most refinance loans
                                                              Reducing expenses or selling home only options
                                    QUALITY OF PROPERTY AND COLLATERAL
Good Home Value/Condition                                  Poor Home Value/Condition
  Well maintained                                            Significant code or structural problems
  High possibility of sale prior to foreclosure              High levels of deferred maintenance
  Positive net equity                                        Negative equity results in low possibility of sale prior
                                                               to foreclosure
                                     BORROWER KNOWLEDGE AND BEHAVIOR
Strong Knowledge and Personal Financial                    Poor Knowledge and Personal Financial Management
    Management                                                Lack of understanding succession of mortgages
   Understand their mortgage                                  borrowed
   In contact with lender                                    Avoid contact with lender
   History of savings and management of expenses             No history of savings and expense management
           Policy Responses
•   Moratoria
•   Mediation
•   Mandated Referrals
•   Outreach Campaigns / hotlines
•   Grant / Loan Pools
•   Facilitated modifications
•   Bankruptcy proposals ‗cram downs‘
       J. Michael Collins
University of Wisconsin-Madison
        jmcollins@wisc.edu
          608.262.0369

				
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