FACT S H E E T Foreclosure Prevention Beyond a Policy-by-Policy Foreclosure prevention programs help homeowners who have TALKING POINTS defaulted on their mortgage and are in danger of foreclosure or a forced sale that will strip them of hard-earned equity. By providing Approach:Developing a Coordinated Response Strategy In states, cities, regions and suburban these families with counseling and access to attractively priced communities across the country, task refinancing options and other assistance, foreclosure prevention can forces and coalitions are forming to coordinate and improve local responses keep families affordably in their homes while preserving home values to the foreclosure crisis. This coordination and stability in the surrounding community. is an essential part of the development and execution of an effective and strategic response to the challenges of TALKING POINTS What Policies Can Help Prevent Foreclosures? foreclosure prevention and the States and localities have adopted a range of short- and long-term educational, financial, stabilization of neighborhoods affected legal and regulatory policies for preventing foreclosures and protecting affected families by foreclosures. The basic steps include: and communities. Foreclosure prevention strategies often include immediate assistance such as 24-hour hotlines, short-term loans, flexible refinancing programs and legal assis- Getting organized by bringing together tance. Some communities also have extended the foreclosure timeline to give borrowers stakeholders into a task force or more time to assess their options or find new housing if foreclosure is inevitable. Addi- coalition tional policies, such as predatory lending restrictions, go a step beyond immediate assis- TALKING POINTS tance and aim to reduce the risk of foreclosures in the future. Strengthening the policy and regulatory environment The foreclosure prevention approaches covered in this fact sheet can be broadly grouped as follows: Developing a local action strategy by Information and counseling assessing neighborhoods’ needs and Financial assistance housing market conditions, and Legal assistance Assessing progress through monthly or Extensions of the foreclosure timeline quarterly reports on relevant factors, Future foreclosure risk reduction, such as predatory lending restrictions such as the number of foreclosure notices and the timely disposition of foreclosed properties. Information and Counseling An important early step in foreclosure prevention is linking borrowers with reliable infor- A coordinated response strategy can help mation and counseling. Communities can help borrowers understand their situation and communities craft and implement a assess the options by expanding outreach by reliable nonprofit assistance organizations comprehensive foreclosure response plan and providing 24-hour foreclosure prevention hotlines. Although federal funding is avail- that incorporates a broad spectrum of able to support foreclosure prevention counseling, many housing counseling agencies high-impact policies, such as those still struggle with insufficient resources to meet local needs. States and localities can help discussed in this fact sheet. by using a portion of their CDBG allocation or other locally controlled resources to fund expanded outreach, education and counseling by reputable homeownership education and counseling organizations. States and localities can also help borrowers get connected with reliable information and counseling by establishing or promoting a foreclosure pre- vention hotline or other one-stop resource, such as using a local 311 service to connect families with foreclosure prevention counseling or promoting the Homeownership Preservation Foundation’s nationwide hotline at 1-888-995-HOPE. States and localities can use their voice to share information with their residents about federal foreclosure prevention programs – perhaps by including information on state and local foreclosure prevention websites, providing information in direct mailings or referring NHS OF CHICAGO to federal resources in press releases related to foreclosures. Homeowners may be able to access refinancing or loan modification assistance through federal programs such as the Homeowner Affordability and Stability Plan (www.makinghomeaffordable.gov), Hope for Homeowners (www.hud.gov/hopeforhomeowners), and FHASecure – and states and lo- A housing counselor from Neighborhood Housing Services calities can help get the word out. of Chicago provides one-on-one assistance to a client. Financial Assistance By connecting families with low-cost refinance loans, silent second mortgages and emergency loans, state or local housing finance agencies can help homeowners avoid foreclosure and stay in their home at a monthly mortgage payment that they can afford. Some jurisdictions help families access financial assistance by collaborating with lenders and servicers to obtain better terms and more sustainable loan modifications for existing borrowers, while others offer refinance products and emergency loans to help prevent foreclosures. Refinance products and emergency loans may NEIGHBORHOOD DEVELOPMENT ALLIANCE be tailored to different levels of need, such as a temporary financial crisis, unsustainable mort- gage terms paired with moderate refinance barriers or unsustainable mortgage terms paired with serious barriers to refinance. In addition to offering their own financial assistance products, states and localities can help connect homeowners with federal financial assistance options, such as the Homeowner Affordability and Stability Plan, Hope for Homeowners and FHASecure. 560 State Street Townhomes, St. Paul, Minnesota. Short-Term Emergency Loans for Families Experiencing Temporary Setbacks In cases of temporary financial hardship, perhaps caused by a sudden loss of income, a small Silent Second Mortgages amount of assistance may make a large difference for a family. Housing finance agencies can craft short-term emergency loans to meet local needs and economic realities, for example, by for Foreclosure Prevention giving borrowers repayment timelines of anywhere between a few months to two years and in Minnesota offering loan levels and terms that are feasible for the housing finance agency while still offering enough assistance to help families weather temporary hardships. Small and/or short-term loans are clearly not capable of preventing foreclosure for every family, but they The Minnesota Home Ownership Center play an important role in a community’s overall foreclosure prevention strategy by helping oversees the statewide Mortgage Foreclo- families stabilize their finances before delinquencies get out of control. sure Prevention Program. This program Low-Interest Refinance Loans for Families offers deferred payment, zero percent with Moderate Refinance Barriers interest loans as a last resort for families Many housing finance agencies offer low-cost loans to help homeowners refinance mortgages who could not otherwise prevent foreclo- with high interest rates or other nontraditional terms. Typically, state or local refinance loans offer financial assistance for borrowers who have relatively good credit, are not seriously sure. These silent second mortgages must delinquent on their mortgage and do not owe more than the value of their home (a situation be repaid upon sale of the home or payoff known as negative equity). The moderate level of financial assistance provided by most refinance loans can be a strong tool for preventing foreclosure among credit-worthy families of the first mortgage, with exceptions for who ask for help in the early stages of their mortgage affordability problems. Unfortunately, cases of mortgage refinancing to get many families facing foreclosure are further behind on their mortgages or have damaged credit better loan terms. Repayment of the loans and will therefore need more flexible assistance as a last resort before losing the home. goes back into a revolving loan fund to Flexible Refinance Loans and Silent Second Mortgages help additional families. for Families with Substantial Refinance Barriers Many families facing foreclosure are unable to refinance since the drop in home values has Since funds are limited, the Home left them owing more than the current value of the home (a situation known as negative equity); in addition, late or missed mortgage payments will have negatively affected Ownership Center first helps families borrowers’ credit. To prevent foreclosures among families in deep financial distress, access a broad range of information and communities may wish to seek innovative solutions that go beyond standard refinance loans resources and develop an individualized and short-term emergency assistance. foreclosure prevention plan. Case Increasingly, communities across the country are offering refinance loans for foreclosure managers also work with lenders to prevention that have flexible underwriting standards so that they can reach borrowers with lower credit scores — including scores in the mid or low 500s — provided that mortgage negotiate the most affordable workout delinquency is the borrower’s most serious credit problem. Some programs have no minimum option. Homeowners are only considered credit score for borrowers and consider instead the number and length of delinquencies. for silent second mortgages if they are Another innovative approach to addressing these problems is to refinance the family in a unable to avoid foreclosure through other traditional mortgage at a level that is affordable to them and supportable by the home’s current means. Funding comes from the state, city property value and then issue a silent second mortgage to cover the difference between that amount and the current mortgage balance. With a silent second mortgage, the family makes no and county governments. payments of principal or interest on the second mortgage while they are living in the home; repayment is due only when they sell or refinance. A silent second mortgage allows the family to continue living in the home and make affordable monthly mortgage payments on their refinanced first mortgage, while also ensuring that the loan provided by the community is repaid if the property sells for more than the first mortgage amount at the time of eventual resale. Shared Appreciation Second Mortgages as a Foreclosure Prevention Tool Communities looking for a financial assistance option that can sales proceeds, rather than making separate payments of help prevent foreclosure among families with negative equity principal and appreciation. or damaged credit may wish to consider shared appreciation second mortgages. Shared appreciation refers to the The shared appreciation approach has several benefits for repayment agreement for the loan. Upon re-sale of the home, foreclosure prevention. First, it allows families to stay in their the family pays back a predetermined portion, or share, of the home at a monthly payment they can afford. Second, it provides a net sales proceeds. In some cases, the family first pays back means for reimbursing the government or the lender for the 100 percent of the principal balance of the shared costs associated with providing the second mortgage. Third, it appreciation mortgage, and then pays a set share (for preserves the incentives for the family to keep up the property example, 25 percent) of any additional home price and realize as high a sales price as possible. Finally, by basing appreciation. In other cases, to preserve the family’s incentives repayment of the second mortgage on a share of the sales to maintain the home and maximize the home sales price, the proceeds, rather than a set interest rate, one avoids the problem family simply repays a share (e.g., 75 percent) of the net home of having the family owe more than the value of the home. Legal Assistance SOLUTIONS IN ACTION Legal assistance can be a critical resource to help families stay in their homes and prevent finan- cial losses by negotiating alternatives to foreclosure. Legal assistance also provides representa- tion for families who have been taken advantage of by predatory lenders. Foreclosure Prevention Outreach in As the number of home foreclosures continues to rise, the work of local and state legal assis- tance agencies can be effective in combination with, or as an extension of, housing counsel- Cuyahoga County, Ohio ing services. Whereas housing counselors might lay out the various options available to In 2007, the Cuyahoga County, Ohio, prevent foreclosure, offer budget advice and assistance, provide information and referral Commissioners partnered with several services or help to negotiate a “workout” with the lender, legal assistance tends to be more county offices to initiate coordinated specific in navigating the legal issues homeowners may face as they try to avoid foreclosure. foreclosure prevention efforts. They In many cases, a housing counselor might recommend that a client seek legal assistance to established an Office of Foreclosure meet their particular needs. States and localities can help by providing funding for foreclo- Prevention to centralize all related efforts sure-related legal services and offering training sessions to help pro bono attorneys become and provide outreach and education about more knowledgeable in topics related to foreclosure. predatory lending practices. The county commissioners allocated general funds to Extensions of the Foreclosure Timeline increase staff capacity for foreclosure prevention counseling and to hire an Another approach to helping families avoid, or better manage, foreclosure is to delay the investigator in the county prosecutor’s foreclosure process through a temporary moratorium. Slowing the foreclosure process may office to build cases against criminal allow homeowners additional time to settle their debts, refinance their mortgage, modify mortgage fraud activity. The county was their loans or sell their property to reduce the financial damage of foreclosure. A similar out- also able to secure state legislation for a come may be achieved by lengthening the notice period required before a lender may initi- pilot rescue fund program that would use ate foreclosure proceedings. However, if a longer foreclosure timeline is not linked to other Temporary Assistance for Needy Families programs that can help families and communities appropriately use the additional time they (TANF) funds to provide financial support are granted, families may still face the same underlying affordability problems and end up for housing counseling and one-time losing the home to foreclosure despite the additional time. mortgage payment assistance for families who were able to re-negotiate their Future Foreclosure Risk Reduction mortgage and obtain affordable terms with the help of a certified housing counselor. Foreclosure risks are often identifiable and preventable many years in advance – notably, by minimizing or preventing the issuance of mortgages with unsustainable terms. Governments can counter these risks through targeted outreach, regulations to prohibit the riskiest loans and enhanced consumer awareness to help families make better mortgage decisions. By adopting or strengthening anti-predatory lending laws and guidelines, governments can For more information shield consumers from unsustainable or unbeneficial terms and reduce the likelihood of foreclosure. In addition, states can increase the oversight of mortgage brokers and lenders by on foreclosure prevention visit coordinating with other states and sharing information on enforcement activities. Expanding www.housingpolicy.org/ pre-purchase homeownership education and counseling programs can also help reduce the factsheets.html risk of foreclosures by teaching prospective homeowners about the home-buying process and the responsibilities of homeownership that follow.
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