Minnesota Home Ownership Center 2008 FORECLOSURE COUNSELING PROGRAM REPORT Karen Duggleby, M.S.W. and Kim Skobba, Ph.D. April 2009 1 P a g e
Acknowledgements The Minnesota Home Ownership Center staff would like to thank the many people who contributed their time and expertise to this project. A special thanks to Jeff Matson, Alyssa Erickson and the late Barbara Lukermann from the Center for Regional Affairs (CURA) for their contributions to this report. Additionally, the Minnesota Home Ownership Center is profoundly grateful for the dedicated professionals working within its counseling network. The many positive results identified in this report would not have been possible without their hard work, patience and compassion for serving families at risk of foreclosure. About the Minnesota Home Ownership Center The Minnesota Home Ownership Center s mission is to promote and advance successful home ownership in Minnesota, with a focus on serving the needs of low- and moderate-income families and emerging markets. At the core of this mission is the belief that lower income households can achieve and recognize the benefits of long-term homeownership if they enter homeownership through the right door prepared to make wise, informed decisions for their families. The Minnesota Home Ownership Center offers a unique approach to homeownership preparedness and sustainability: using a centralized, managed structure. In its centralized role, the Center provides leadership for key initiatives and partnerships that promote home ownership preparedness and sustainable homeownership throughout Minnesota. The Center ensures statewide access to high quality, consistent services by convening a network of agencies that deliver its home ownership education and foreclosure counseling programs. The Center s approach emphasizes: High-quality programming grounded in national best practices Programming that is responsive to the changing environment Consistency of service delivery for consumers regardless of programming location A leadership entity serving as a single point of contact and expertise for industry stakeholders, funders, and the broader community. Mortgage industry stakeholders concerned with affordable, sustainable home ownership founded the Minnesota Home Ownership Center in 1993. Since that time, the Minnesota Home Ownership Center and its network have achieved a strong record of accomplishment across the state in helping primarily economically disadvantaged and underserved households access sustainable home ownership. 2 P a g e
Table of Contents Executive Summary... 5 Introduction... 7 Minnesota s Foreclosure Crisis... 7 Overview of Minnesota s Foreclosure Process... 8 Foreclosure Prevention Counseling: The Minnesota Model... 10 Achieving Foreclosure Prevention through Effective Counseling Services... 10 Leveraging the Minnesota Model to Respond to the Crisis... 11 Report Overview and Methodology... 13 Client Demographic Information... 14 Age... 14 Household Type... 14 Income... 15 Race and ethnicity... 16 Counseling Service Statistics... 17 Counseling Services by Location... 18 Findings: Loans, Affordability and Counseling Outcomes... 21 Analysis by Loan Type... 21 Loan Type by Race and Ethnicity... 23 Loan Status... 24 Reason for Default... 24 Analysis of Loan Affordability... 25 Foreclosures Prevented... 26 Foreclosures Prevented by Location... 27 Use of loans to avoid foreclosure... 29 Appendix... 30 2008 Foreclosure Rate by County... 31 Foreclosure Counseling Program: Households Served by Agency... 32 Common Work-Out Options... 33 List of Maps 2007 to 2008 Households Served Percent Increase by County... 19 2008 Households Served, Rate by County... 20 2008 Foreclosures Prevented by County... 28 2008 Foreclosure Rate by County... 31 3 P a g e
List of Tables and Figures Minnesota Foreclosures by Year & Region... 7 Foreclosure Process in Minnesota... 9 Age of Homeowners Served... 14 Household Types... 14 Homeowners by Percentage of Area Median Income... 15 Race & Ethnicity of Foreclosure Counseling Program Clients and Owner-Occupied Housing in Minnesota... 16 Households Served... 17 Households Served by Month... 17 Loan Type... 21 ARM Loan Types by Region... 22 Percentage of Homeowners with Fixed & ARM Loan Type by Race... 23 Loan Status at Intake... 24 Reason for Default... 24 Percentage of Homeowners by Percentage of Income Paid to Mortgage Payment... 25 Foreclosure Outcomes on Closed Cases... 26 Foreclosures Prevented, by Remedy... 27 Foreclosure Prevention Loans... 29 4 P a g e
Executive Summary The mortgage crisis that has gripped the nation continues to affect Minnesota. The number of foreclosures has risen precipitously over the past three years. Between 2005 and 2008, the number of foreclosures more than quadrupled, with one in every 32 households in Minnesota experiencing foreclosure. During 2008, over 26,000 households lost their home through foreclosure. However, the counseling services provided by the Minnesota Home Ownership Center s statewide network of foreclosure counselors have helped to lessen the crisis in Minnesota. This report provides a summary of findings from an evaluation of the foreclosure prevention counseling program supported by the Minnesota Home Ownership Center. Through this program, local foreclosure counseling services are delivered to consumers through 25 agencies throughout Minnesota. The report summarizes household and loan characteristics, service usage, and outcomes for homeowners receiving foreclosure counseling during 2008. Foreclosure Prevention Outcomes In 2008, the Minnesota Home Ownership Center s network of foreclosure counseling agencies served an unprecedented number of homeowners, providing foreclosure prevention services to 11,809 homeowners a 145 percent increase from 2007. Nearly 5,000 homeowners were able to avoid foreclosure. Preventing these foreclosures translates to an estimated savings of up to approximately $300 million for Minnesota homeowners, lenders, neighborhoods and local governments in 2008 alone. Homeowners are seeking foreclosure prevention services earlier, when more options are available. In 2008, 64% of homeowners were less than 60 days late on their mortgage when they contacted a foreclosure prevention counselor, compared to 37% in 2007. Characteristics of Homeowners Seeking Foreclosure Counseling Over one-third of 11,809 homeowners served in 2008 were between the ages of 35-44. Sixty-two percent (62%) of homeowners were between ages 35-54. This means that many homeowners are faced with starting over at a time when they should be planning for their financial future. Over half of the homeowners receiving foreclosure counseling had dependent children in the home. For children, preventing foreclosure means greater stability and avoiding the potential disruption of their education. The majority of homeowners served were considered either very low-income or low-income, with the vast majority having a household income of less than $50,000. Seven percent (876) of the clients served reported that they had no income at the time of intake. This was typically due to the loss of a job. Homeowners of color were overrepresented among all those receiving counseling services. People of color represent about 6% of all Minnesota homeowners, yet they comprised 29% of the homeowners seeking counseling. 5 P a g e
Loan Type and Affordability Many of the homeowners counseled had mortgage payments that were unaffordable by conventional affordability standards. Nearly half of the homeowners served had a monthly mortgage payment that was at least 40% of their household income. Another 20% were paying between 30% and 40% of their income. Loss of income is the primary reason for default among homeowners seeking foreclosure counseling assistance. Fifty percent of the homeowners served reported that they had either a loss or reduction of their household income. Homeowners with subprime loans sought counseling at a much higher rate than these loans exist in the market. As of April 2008, about 10% of all outstanding loans in Minnesota were subprime. However, 37% of the Minnesota homeowners seeking counseling had this loan type. While the default of subprime mortgages has received considerable attention, 59% homeowners receiving foreclosure counseling had prime, fixed rate loans. 6 P a g e
Introduction Minnesota s Foreclosure Crisis Turn on the evening news or open the daily newspaper and it is easy to see that the foreclosure crisis is continuing in Minnesota and across the nation. Several years of increasing foreclosures have left many wondering if the end of this crisis is in sight. While there is no way of knowing exactly what will happen in the coming months and years, several indicators suggest that the crisis will likely continue for at least two more years. The numbers of foreclosures have been rising precipitously over the past three years. Between 2005 and 2008, the number of foreclosures more than quadrupled, with one in every 32 households in Minnesota experiencing foreclosure 1. During 2008, over 26,000 households lost their home through foreclosure. While the greatest portion of foreclosures occurred in the Twin Cities metro area, many counties in Greater Minnesota experienced very high rates of foreclosure (see map on page 31). Table 1: Minnesota Foreclosures by Year & Region Region 2005 Foreclosures 2006 Foreclosures 2007 Foreclosures 2008 Foreclosures 07-08 Percent Change Twin Cities Metro 3,759 7,039 12,974 17,268 33% Greater MN 2,707 4,777 7,430 8,997 21% Minnesota 6,466 11,816 20,404 26,265 38.6% Source: HousingLink, Foreclosures in Minnesota: A Report Based on County Sheriff s Sale Data. February 26, 2009. More and more Minnesota homeowners face the possibility of losing their homes. During the last quarter of 2008, 54,834 Minnesota homeowners had missed one or more payments 2 and 15% of the subprime mortgages and 6% of all mortgages in Minnesota were at least 30 days past due, but not yet in foreclosure 3. Nationwide, high risk, subprime mortgages have been driving much of the mortgage crisis. Placing mortgages on a continuum based on likelihood of default, prime loans are at one end, representing the lowest risk; subprime loans are at the other end. A third type, Alt-A, are loans are in the middle - more risky than prime loans, but less than risky than subprime loans. Families with nonprime mortgages face substantial risk of foreclosure. These mortgages typically have higher, variable interest rates and are more likely to have prepayment penalties, balloon payments and payment schedules that do not pay down the balance of the loan than conventional mortgages. People of color and those with low incomes are more likely to have used nonprime loans, evidence of which you will see later in this report. 1 HousingLink, Minnesota Foreclosure Report Key Findings, April 2008, updated information received April 2009. 2 Mortgage Banker Association, National Delinquency Survey 3 Minnesota Public Radio, Minnesota s mortgage meltdown, March 5, 2009 7 P a g e
However, there are signs that the primary cause of foreclosures is shifting from the use of higher-risk, mortgages to the loss of jobs or income. According to the most recent Mortgage Bankers Association s National Delinquency Survey, delinquency among fixed-rate loans are continuing to climb while subprime ARM delinquencies are declining 4. For fixed rate loans, delinquency is primarily driven by the loss of income, whereas with subprime ARMs it is the change in loan payments. The effects of a foreclosure are devastating, costly and far-reaching. Beyond the loss of their home, foreclosed homeowners face potential homelessness, destruction of their credit, and drastically limited housing options for years to come. Local neighborhoods and governments also bear the consequences of foreclosures. Neighborhoods left with vacant and unattended homes due to foreclosures face increased vandalism, reduced property values, a decreased tax based, and a host of other social and economic costs. For the financial sector, foreclosures create a reduction of assets held by investors, increased servicing costs, and the opportunity cost of funds tied up in the foreclosure process. An analysis by the Joint Economic Committee of Congress factors in the costs to homeowners, lenders/servicers, local governments and neighboring home values 5. The findings of this analysis places the total cost per foreclosure up to $77,935. Overview of Minnesota s Foreclosure Process Foreclosure is the legal process that allows a lender to take possession of and sell a property because the borrower did not meet the terms of the loan. State laws guide the process of foreclosure, which means that laws pertaining to foreclosure vary from state to state. State laws outline the sequence of events and actions that need to take place for a foreclosure to happen. The primary method of foreclosure in Minnesota is referred to as non-judicial foreclosure, also known as foreclosure by advertisement. This means that most foreclosures in Minnesota occur without court intervention. The foreclosure process typically begins after the fourth missed mortgage payment (see Figure 1, page 9). At this time, the loan transfers from the lender s collections department to an attorney. Working on behalf of the lender, the attorney begins the foreclosure process by first notifying the homeowner that they are handling the foreclosure and then scheduling a sheriff s sale date. The sheriff s sale is part of the foreclosure process in which the home is put up for sale at a public auction and sold to the highest bidder, usually the lender. Once the date of the sheriff s sale auction has been set, the law dictates that a notice of the sheriff s sale date must be published in a local newspaper for six consecutive weeks. The occupant of the property is served a notice of foreclosure at least four (4) weeks prior to the foreclosure sale. A formal redemption period follows the sale, which typically lasts six (6) months, during which the borrower can redeem the property by paying the amount of the foreclosure sale plus any accumulated interest, taxes, liens, or fees. For more details on the laws that govern Minnesota non-judicial foreclosure go to: www.revisor.leg.state.mn.us/stats/580. 4 U.S. News & World Report, Mortgage delinquency rate record high, March 5, 2009. 5 Joint Economic Committee of Congress, Sheltering Neighborhoods from the Subprime Foreclosure Storm." Special Report from the Joint Economic Committee. April, 2007. 8 P a g e
New Pre-Foreclosure Notice Law On August 1, 2008, Minnesota s new Pre-foreclosure Notice law went into effect. Under this law, a lender foreclosing on a mortgage must first provide notice to homeowners about the availability of foreclosure counseling services in their area. The notice may be sent along with the lender s Notice of Intent to Foreclose and it must be sent before the sheriff s sale is scheduled. In addition to notifying homeowners, the lender must also provide the counseling agencies with the contact information for homeowners who have received a Pre-foreclosure Notice. In response, the Minnesota Home Ownership Center implemented protocol for utilizing Pre-foreclosure Notices as an outreach tool, and counseling agencies have been using the notices as an opportunity to reach those at imminent risk of foreclosure. The Pre-foreclosure Notice law has helped raise awareness about the availability of foreclosure counseling services statewide. Because of these notices, lenders and the Center s network reached out to more than 19,000 households with information about counseling services between August 1 and December 31, 2008. Figure 1: Foreclosure Process Chart 9 P a g e
Foreclosure Prevention Counseling: The Minnesota Model Over a decade ago, the Minnesota Home Ownership Center implemented an innovative foreclosure prevention model. This model, which grew from a small neighborhood effort to a statewide system, is built upon three essential components. First, the model utilizes a highly trained network of community-based foreclosure counselors. Second, it is supported by a strong partnership between the state s housing finance agency, philanthropic foundations and the lending industry. Finally, it is guided by a nonprofit that provides leadership and service coordination. The Center s foreclosure counseling program grew out of the desire of local communities to minimize the multiple problems associated with foreclosures by reaching families before they lost their homes. A pilot foreclosure prevention program was developed in 1989 and soon after adopted by the cities of Minneapolis and St. Paul. By 1993, the program, bolstered by funding from the state legislature, evolved into a statewide foreclosure prevention program in Minnesota. Today, homeowners in Minnesota have access to foreclosure prevention services in each of the state s 87 counties. Using a community-based service delivery model, services are provided locally through a network of 25 organizations. These organizations represent a mix of community-based non-profit and government organizations that are involved with some aspect of housing as part of their mission. Most of the organizations have been offering foreclosure prevention services for the past decade. The Minnesota Home Ownership Center provides leadership and key services to these community-based agencies, including training, technical expertise, data collection and evaluation, program marketing and outreach, policy leadership and fundraising. The program is funded through a variety of sources, with Minnesota Housing, Minnesota Home Ownership Center, Family Housing Fund, and Greater Minnesota Housing Fund serving as the primary funders. In addition to funding the program, these four organizations work together to make decisions about who will receive funds, ensuring that services are available across the state of Minnesota and avoid duplication of services. Achieving Foreclosure Prevention through Effective Counseling Services Foreclosure prevention counselors work with homeowners facing foreclosure and help them to understand how they got into their current situation. Then, they help these homeowners develop a plan to move forward. Often, this includes asking a difficult question Can you afford your home over the long-term? For those who can, counselors work through a series of steps to help the homeowner get back on track with their mortgage. First, they examine if there are any personal resources available, such as savings or possibly loans from family or friends. Counselors also help connect homeowners with resources available in the community. Some local governments and non-profits offer emergency assistance funds available to homeowners facing foreclosure. Next, the counselors work with the mortgage company to explore loss mitigation options. Loss mitigation can include an array of solutions that help the homeowner to stay in the home. These solutions often include extending the loan to make up missed payments, temporarily lowering payments or lowering the interest rate to make the loan more affordable. In cases where homeowners are in a bad loan, the counselor will work with the mortgage company to change the terms of the loan. If necessary, counselors also help the homeowner access a lawyer to explore legal options if necessary. 10 P a g e
Finally, if the resources available to the homeowner are not enough to bring the mortgage current, the Minnesota Home Ownership Center s foreclosure prevention program will make no-interest, deferred loans up to approximately $10,000. To qualify for this loan, the homeowner needs to show that the cause of the delinquency is addressed and that they can afford their home after the financial issues are resolved. Leveraging the Minnesota Model to Respond to the Crisis The Minnesota Home Ownership Center is providing leadership for the state's response to the foreclosure crisis. Its provider network is the definitive source for foreclosure prevention services. When the foreclosure crisis emerged, the Minnesota Home Ownership Center had the leadership, experience, and infrastructure in place to provide a coordinated response to the crisis and meet the increased demand for services. During the Foreclosure Counselors Work With Homeowners To: Understand the foreclosure process Develop a customized plan to address their unique situation Improve financial management skills Know their mortgage product and communicate with their mortgage company Identify options for preventing foreclosure, including negotiating with the mortgage company for loss mitigation Avoid predatory practices Find alternative housing solutions if foreclosure is inevitable. first six months of 2008, the Minnesota Home Ownership Center conducted a rapid and extensive organizational ramp-up. The Center improved its service delivery model, increased its foreclosure prevention service capacity, and developed and implemented a large-scale public awareness and outreach campaign. The result of this effort is a statewide foreclosure prevention system that responds to consumer demand in the most efficient and effective way possible. An efficient and effective service delivery model Recognizing the need to adapt in response to the foreclosure crisis, the Minnesota Home Ownership Center adjusted its foreclosure counseling program model. The revised program structure emphasizes immediate, barrier-free access to services for all consumers meaning that all homeowners receive at least the minimum level of counseling services. It also implemented a triage assessment process, prioritizing intensive services for those consumers most likely to avert foreclosure. The Minnesota Department of Commerce supported this effort by improving access to loan servicers for foreclosure counselors working with distressed homeowners. The Commerce Department established a counselor hotline to identify and work with unresponsive lenders and servicers. When counselors encounter difficulties with lenders/servicers, they report the incident on the hotline. Commerce staff members then intervene with the lender. The hotline has proven to be extremely effective. Counselors report timely, effective response from lender/servicers when Commerce is involved. Increase counseling capacity to meet consumer demand The Minnesota Home Ownership Center more than tripled the counseling capacity among its network providers during 2008. The increase in counselor capacity means more families are served and the wait is shorter. Prior to the increase, counselors reported that distressed homeowners were waiting two to four weeks for a counseling appointment. Counselors are now able to return phone calls (and conduct triage) within one business day and schedule counseling appointments in three to five business days or less. 11 P a g e
Increasing public awareness of foreclosure prevention services During the first half of 2008, the Minnesota Home Ownership Center developed and began delivering a coordinated statewide outreach and education campaign. The primary goal of this campaign is to convey consistent messages to help a broad group of stakeholders recognize the availability of services and the potential for solutions. The Center has developed a set of marketing and communications tools, including bookmarks, flyers, posters and press releases, designed to be easily adapted for use by local agencies. The communication tools, available in English and Spanish, are designed to deliver the following key messages: Take action early, before you get behind in your payments. Understand your mortgage recognize whether you have an adjustable rate. Talk to your servicer or lender. Don t ignore their calls or mail. Pursue loss mitigation. Make your mortgage payment a priority. Help is available. Using these tools and key messages, the Center partners with local counseling agencies, other organizations and communities to get the word out to consumers that help is available. 12 P a g e
Report Overview and Methodology This report provides a summary of evaluation results for the foreclosure prevention counseling program supported by the Minnesota Home Ownership Center. Through this program, local foreclosure counseling services are delivered to consumers in 25 agencies throughout Minnesota. The report summarizes household and loan characteristics, service usage, and outcomes for homeowners receiving foreclosure counseling during 2008. This report includes data collected by foreclosure counselors at the 25 agencies (see below) providing foreclosure counseling services through the Minnesota Home Ownership Center s network. The report presents data and findings for all homeowners who went through a triage assessment and received either phone or in-person counseling. The triage assessment enables counselors to assess the homeowner s situation and identify possible solutions. The process includes gathering information from the homeowner including mortgage status, reason for delinquency, mortgage product and other housing expenses, affordability and their commitment to stay in the home. Overall, 60% of the clients served went through the triage assessment and received basic counseling and another 40% received more in-depth counseling. The report does not include data on homeowners who received information and referral. It also does not include data on homeowners who received one-time counseling services at Borrowers Workshops sponsored by the Minnesota Home Ownership Center. Program data was tracked using a central online reporting tool called CounselorMax. The data for this report is based on client data from 2008 unless otherwise noted. The data was downloaded from CounselorMax and analyzed using Microsoft Excel and GIS software. The following agencies provided client data for this report: ACORN Housing Arrowhead Economic Opportunity Agency Anoka County Community Action Program Bi-County Community Action Program Carver County Community Development Agency City of St. Paul, Planning & Economic Development Community Action Partnership of Suburban Hennepin Community Housing Partnership Community Neighborhood Housing Services Dakota County Community Development Agency Inter-County Community Council Heartland Community Action Program LSS Financial Counseling Minneapolis Neighborhood Housing Services Neighborhood Development Alliance (NeDA) Northwest Community Action Program Ottertail-Wadena Community Action Council PRG, Inc. Southwest Minnesota Housing Partnership Tri-Valley Opportunity Council Twin Cities Habitat for Humanity Washington County Housing and Redevelopment Authority West Central Community Action Program Wright County Community Action Program CCCS of The Village Family Service Center 13 P a g e
Client Demographic Information Age The client data collected in 2008 suggests that many homeowners are faced with starting over at a time when they should be planning for their financial future. Over one-third of 11,809 homeowners served in 2008 were between the ages of 35-44. Sixty-two percent (62%) of homeowners were between ages 35-54. Facing the loss of a home midway through life is particularly challenging. It requires a rebuilding of finances and creditworthiness. It also diminishes one s ability to think about the future. The majority of these families had dependent children in the home. For children in these families, foreclosure means the loss of stability and potential disruption of their education. Household Type Figure 2: Age of homeowners served 4% 11% 22% 28% 34% 18-34 35-44 45-54 55-64 65+ Over half of the homeowners receiving foreclosure counseling had dependent children in the home. Of the families with dependent children, 38% were married couples and another 18% were single heads-of household. About 40% of the homeowners served had one adult in the household; nearly one-quarter of the homeowners served were single adults. Relative to families with two working adults, single adults face a particular challenge in preventing foreclosure when the mortgage delinquency stems from the loss of a job or income. Table 2: Household Types Type of Household Percent Married with Dependents 38% Single Adult 23% Female-Headed Household 14% Married without Dependents 13% Male-Headed Household 4% Two or More Unrelated Adults 4% Other 4% 14 P a g e
Income The majority of homeowners served were considered either very low-income or low-income. The vast majority of homeowners receiving foreclosure counseling services had a household income of less than $50,000. Thirty percent had a household income of $25,000 or less. Comparing the household income by family size and location, slightly less than half of the homeowners served were considered very low income, having household incomes at or below 50% of the area median income (AMI). Over three-quarters of those served had household incomes at or below 80% of the AMI, categorized as low-income. Of the 11,809 clients served, 876 reported that they had no income at the time of intake. This was typically due to the loss of a job. Figure 3: Homeowners by Percentage of Area Median Income 50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% 46% 31% 10% 12% 0-50% AMI 51-80% AMI 81-100% AMI 100+% AMI Note: Households with no annual income reported were removed from data. 15 P a g e
Race & Ethnicity Homeowners of color were overrepresented among all those receiving counseling services. People of color represent about 6% of all Minnesota homeowners, yet they comprised 29% of the homeowners seeking counseling. This contrast is most striking for Black and Hispanic homeowners, who make up less than 4% of all homeowners combined, but represented 22% of all the homeowners seeking counseling during 2008. This is not surprising, given that research suggests that racial and ethnic minority households are more likely to use high cost, sub-prime loans to finance and refinance their homes which puts them at a higher risk of foreclosure. Details about loan status by race and ethnicity are located on page 23 in the findings section. Figure 4: Race & Ethnicity of Foreclosure Counseling Program Clients and Owner-Occupied Housing in Minnesota. *Native Americans represent less than 1% of homeowners in Minnesota and.3% of homeowners served. 100% 94% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 63% 10% 12% 4% 1% 1% 3% 1% 2% Asian Black or African Two or More Hispanic or White, not American Races Latino Hispanic or Latino FC Program US Census Owner Occupied Housing (estimate) Data source: American Community Survey, 2005-2007 16 P a g e
Counseling Service Statistics In 2008, the Minnesota Home Ownership Center s network of foreclosure counseling agencies served an unprecedented number of homeowners. Prior to 2008, the number of homeowners served had never exceeded 5,000. In 2008, the Center s network served two and half times the numbers served in the previous years providing foreclosure counseling services to 11,809 homeowners. The demand for services continued to grow during 2008, with numbers served exceeding 1000 per month for each of the last five months of the year. Table 3: Households Served Year Total Households Served 2005 4,245 2006 4,757 2007 4,828 2008 11,809 Figure 5: 2008 Households Served by Month 1600 1400 1200 1000 800 600 564 571 1,008 890 846 938 812 1,179 1,211 1,445 1,093 1,252 400 200 0 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 17 P a g e
Counseling Services by Location While counselors in the Minnesota Home Ownership Center s network began to see an uptick in demand beginning in late 2007, they were unable to meet this demand by early 2008. Funding became available in early 2008 that enabled the Center to increase the number of foreclosure counselors in its network. As a result, counseling capacity of the Center s network increased from 20 to 72 full-time equivalents (FTE) statewide. Thirty-five new foreclosure counselor FTE s were added to the Twin Cities metro area and 17 were added to Greater Minnesota. Mapping of the percentage change in households served between 2007 and 2008 (page 19) shows that all counties had an increase in the number of households served. For some counties, the change in households receiving foreclosure counseling services is profound, with some counties seeing increases exceeding 175%. For metro area counties, this translates to thousands of additional homeowners receiving foreclosure counseling compared to 2007. A map of the households served divided by the number of owner occupied households in each county (page 20) shows the relative saturation rate of counseling. A housing unit is owner-occupied if the owner lives in the home. The Center s provider network serves owner-occupant households only. Within several counties throughout the state, the Center s network reached nearly one to 2 percent of the owneroccupied households. 18 P a g e
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Findings: Loans, Affordability and Counseling Outcomes Analysis of Loan Type The findings indicate that Minnesota homeowners holding subprime 6 loans are seeking counseling at a much higher rate than these loans exist in the local market. As of April 2008, about 10% of all outstanding loans in Minnesota were subprime 7. However, 37% of the Minnesota homeowners seeking counseling had this loan type 8. A greater portion of subprime loans had adjustable rates. Of those who held subprime mortgages, 65% had adjustable rate loans and 35% had fixed-rate loans. Adjustable rate, subprime loans pose considerably higher risk for homeowners than fixed-rate prime loans because the interest rate is higher and the payments increase substantially over time. While the default of subprime mortgages has received considerable attention, it is important to note that the majority of homeowners seeking counseling had prime, fixed rate loans. Sixty percent (60%) of the homeowners served by the Minnesota Home Ownership Center s counseling network had prime mortgages. Among those with prime mortgages, 73% had fixed-rate loans and 27% had adjustable rate loans. Figure 6: Loan Type ARM Prime, 15% Fixed Subprime, 12% Fixed Prime, 44% ARM Subprime, 25% Other, 3% Fixed Prime Fixed Subprime ARM Prime ARM Subprime Other 6 This report uses the National Foreclosure Mitigation program (NFMC) program proxy measure - interest rates of 8% and higher - as a proxy to indicate subprime loans. 7 Freddie Mac, Housing and Mortgage Statistics Minnesota, LP Core Logic Data 2008 8 NFMC Program Congressional Update, February 25, 2009. 21 P a g e
The portion of homeowners served with prime and subprime loans was the same for the Twin Cities metro area and Greater Minnesota. However, comparing the share of fixed-rate and adjustable rate loans by location shows that a larger portion of homeowners with adjustable rate loans lived in the Twin Cities metro area had an adjustable rate loan ( Table 4). Seventy-five percent of homeowners with adjustable rate loans lived in the metro areas, compared to 25% in Greater Minnesota. However, the vast majority of homeowners served in Greater Minnesota with ARMs had a subprime loan. Table 4: ARM Loan Types by Region Region Total Percent ARM Loan Types Percent ARM Prime Percent ARM Subprime Greater MN 25% 19% 78% Metro Area 75% 43% 52% 22 P a g e
Loan Type by Race and Ethnicity A higher proportion of homeowners of color with subprime loans accessed foreclosure counseling services. African Americans and Hispanic/Latinos comprise a relatively small percentage of all Minnesota homeowners; however they make up 25% of all homeowners with subprime loans seeking foreclosure counseling. Twelve percent (12%) of African American homeowners served had a subprime mortgage. Thirteen percent (13%) of the Latino homeowners served had a subprime loan. Examining fixed and adjustable rate loans by race shows that homeowners of color receiving counseling services had higher proportions of adjustable rate mortgages than white homeowners. Of all races, Hispanic/Latino homeowners have the highest percentage of ARM type loans, 57%. White homeowners have the highest percentage of fixed rate type loans, 60%. Figure 7: Percentage of homeowners with Fixed & ARM loan type by race 60% 50% 48% 52% 40% 60% 57% 43% 51% 49% 40% 30% 20% % ARM % FIXED 10% 0% Black White Hispanic Asian Studies examining the prevalence of high cost lending among minority communities suggest that people of color have a significant risk of receiving high cost loans, and thus, have an increased risk of foreclosure. In his study of high cost lending among minority communities in the Twin Cities, Crump (2007) found that the likelihood of receiving a high-cost subprime loan was significantly higher among minority borrowers, regardless of income 9. Subprime loans have higher interest rates and are more likely to have unfavorable terms such as prepayment penalties and balloon payments than conventional mortgages. A longitudinal study of mortgage loans in two Ohio counties found that the strongest predictor of foreclosure was the loan status as a high cost, subprime loan 10. The authors of this study concluded that after holding other factors constant, high cost subprime home purchase loans had an 816% higher chance of going into foreclosure than other loans. 9 Crump, J. (2007) Subprime lending and foreclosure in Hennepin and Ramsey Counties. Cura Reporter. 10 Coulton, Chan, Schramm, Mikelbank (2008), Pathways to foreclosure: a longitudinal study of mortgage loans, Cleveland and Cuyahoga County, 2005-2008. 23 P a g e
Loan Status One of the more significant changes between 2007 and 2008 is in the number of homeowners who are seeking help either before they miss a payment or after missing one or two payments. Forty-three percent (43%) of homeowners were less than 60 days late on their mortgage when they contacted a foreclosure prevention counselor, and 21% were current on their mortgage. During the previous year, only 32% of homeowners had been less than 60 days late on their mortgage and 5% were current. This finding is particularly encouraging. In general, homeowners who seek help early have a greater chance of averting foreclosure than those who wait until a sheriff s sale is pending. It also suggests that homeowners are responding to the Minnesota Home Ownership Center s marketing and outreach campaign, which emphasizes the importance of taking action for homeowners who are worried about foreclosure. However, slightly less than one-third of the homeowners accessing foreclosure counseling were over 120 days late on their mortgage payments. This is slightly higher than for those accessing counseling in 2007. One reason for this slight increase may be the new Pre-Foreclosure Notice law in Minnesota (see page 8) which informs distressed homeowners of the availability of counseling services. The law went into effect in August 2008. The notice is typically sent when homeowners are delinquent on their payment by 120 days. Reason for Default Table 5: Loan Status at Intake Loan Status Percent Current 21% 30-60 Days Late 22% 61-90 Days Late 15% 91-120 Days Late 12% 120+ Days Late 31% The data continues to show that loss of income is the primary reason for default among homeowners seeking foreclosure counseling assistance. Fifty percent of the homeowners served reported that they had either a loss or reduction of their household income. Reduction in Income refers to situations in which total household income has decreased, typically because hours available for work have been reduced, a reduction in government assistance, or loss of a part- time job. Loss of income refers to homeowners who have become unemployed and have temporarily lost all sources of income. Counselors report that many clients are seeking assistance as they have become unemployed or have seen a loss in hours. Table 6: Reason for Default Reason Percent Reduction in Income 35% Loss of Income 15% Poor Budget Management Skills 12% Medical Issues 10% Increase in Loan Payment 9% Divorce/Separation 6% Increase in Expense 4% Death of Family Member 1% Business Venture Failed 1% Other 6% 24 P a g e
Among homeowners seeking assistance when their mortgage was current, 17% indicated their primary reason for anticipated default was an increase in their loan payment. When comparing this to all homeowners only 9% reported their primary reason for default as increase in loan payment. For homeowners seeking assistance when their mortgage was 91-120 days late, 42% indicated that their primary default reason was loss of income, compared to 35% of all homeowners reporting their primary default reason was loss of income. Analysis of Loan Affordability Many of the homeowners counseled had mortgage payments that were unaffordable at the time they sought counseling. In some cases, this resulted from a loss of income due to unemployment or reduced work hours. In other cases, increasing loan payments put a previously affordable loan payment out of reach for the family. Nearly half of the homeowners served had a monthly mortgage payment that was at least 40% of their household income. Another 20% were paying between 30% and 40% of their income. Slightly less than one-third of the homeowners had payments that were at or below 30%, the level considered to be affordable. In 2008, the median monthly mortgage payment among the homeowners receiving counseling services was $1,325, about 20% higher than the median payment in 2007. The highest monthly mortgage payment recorded in 2008 was $8,510 and the lowest Defining housing affordability In the United States, a commonly accepted guideline for housing affordability is a housing cost that does not exceed 30% of a household s gross income. Housing costs considered in this guideline generally include taxes and insurance for owners, and usually include utility costs. When the monthly costs of a home exceed 30% of household income, the household experiences housing cost burden. Cost-burdened homeowners are at increased risk of foreclosure. payment was $110. About one-quarter of the homeowners served had a monthly payment of $1,000 or less. Nearly 75% of the homeowners had monthly payments that exceeded $1000. Over one-third had monthly payments that exceeded $1,500. During 2008, the average mortgage balance was $159,713. The previous year the average mortgage balance was $146,400. Figure 8: Percentage of Homeowners by Percentage of Income Paid to Mortgage Payment 35% 30% 25% 20% 15% 10% 5% 0% 31% 20% Note: Households missing either annual income or mortgage payment information were removed from data. Households with more than 100% income paid to mortgage were trimmed from data as erroneous. 17% 23% Less than 30% 30% -40% 40%-50% 50%-75% More than 75% 9% 25 P a g e
Foreclosures Prevented It often takes many months to identify the outcome of foreclosure counseling. As of early 2009, outcome data was available for 72% (9,034) of the homeowners who first sought counseling in 2008. Twenty-eight percent (3,306) of cases opened during 2008 are still receiving counseling with outcomes pending. Fifty-five percent (55%) of the homeowners receiving counseling services were able to avoid foreclosure. Among those who averted foreclosure, 86% were able to stay in their home and 14 % were unable to stay in their home. While a variety of strategies were used to avoid foreclosure, the most common among the homeowners served in 2008 were by bringing their mortgage current, mortgage modifications and forbearance agreements. Some of the strategies used to prevent foreclosure result in the homeowner leaving the home. Of the 14% who avoided foreclosure but were not able to stay in their home, most prevented foreclosure by selling their home. Table 7: Foreclosure Outcomes on Closed Cases Foreclosure Outcomes Count Percent Foreclosures Prevented 4,957 55% Foreclosure Occurred 2,594 29% Outcome Unknown 1,483 16% TOTAL 9,034 100% *Based on data as of 2/27/09. Foreclosure Prevention Success Story A single father with a nine-year old son fell behind on his mortgage after losing his job. Though he had been looking for work, his unemployment had just run out and he received no child support from his son s mother. He contacted one of the agencies in the Minnesota Home Ownership Center s network. A foreclosure prevention counselor at the agency provided him with information about the foreclosure process, but explained that little that can be done when a homeowner has no income. Two months later the client, now employed, called back. The sheriff s sale on his home was scheduled to take place in four weeks. The counselor worked with him and was able to get the lender to modify the loan, avoid the sheriff s sale so the man and his son were able to stay in their home. 26 P a g e
Table 8: Foreclosures Prevented, by Remedy Foreclosures Prevented Count Brought Mortgage Current 2,291 Initiated Forbearance Agreement 544 Mortgage Modified 917 Remained In Home Unable to Remain In Home Bankruptcy 185 Mortgage Refinanced 81 Received Second Mortgage 23 Partial Claim 16 Entered Debt Management Plan 59 Referred to Legal Assistance 145 Pre-Foreclosure Sale (Short sale) 403 Sold Property 259 Executed Deed-in-Lieu 36 TOTAL 4,957 (55%) Foreclosures Prevented by Location Mapping the foreclosures prevented by county shows, not surprisingly, that there were more foreclosures prevented in areas with higher populations. Hennepin and Ramsey Counties had the highest number of foreclosures prevented among all counties. Other counties within and surrounding the Twin Cities metropolitan statistical area (MSA) also had relatively high numbers. A moderate to high number of foreclosures were prevented in the counties that contain the St. Cloud, Duluth and Rochester metro areas. The following page shows a statewide map of foreclosures prevented by county for 2008. 27 P a g e
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Use of Loans to Avoid Foreclosure As a last resort, foreclosure counselors may provide a deferred 0% interest loan to a family to help them prevent the foreclosure. Overall, loans were used to avoid foreclosure less frequently than in the previous year, despite a marked increase in the number of people receiving foreclosure counseling services. In 2008, 97 of the nearly 12,000 homeowners served by counseling services used a loan to prevent foreclosure. This is down from 117 loans given among the 4,828 homeowners served in 2007. In 2008, the average loan amount was $4,594, the largest loan was $10,000, and the smallest loan amount was $1,360. One reason for the decrease in loan usage is that lenders and servicers are now more forthcoming with options to resolve delinquencies than in the past, eliminating the need for loans. Loans are used once all other options have been exhausted. To be eligible for the loan, at least one borrower must have resided in the property at least 6 months prior to applying for the loan and must regularly reside in the property as his/her principal residence for at least 9 months each year. A committee determines whether the family meets the loan criteria. In addition, to be eligible the following criteria must be satisfied. It must be determined that the loan will, either as the sole assistance or in conjunction with other assistance, stabilize or improve the Borrower s financial situation and enable the Borrower to remain in the home; and, Crisis must be resolved, not ongoing concern, Homeowner must have stable and sufficient income to cover expenses. The foreclosure counseling program loan dollars can be used for the mortgage payments, property taxes, utilities, hazard insurance, mortgage insurance, association dues, home improvement repairs, closing costs for refinancing, and to redeem the property post Sheriff Sale. Table 9: Foreclosure Prevention Loans 2008 2007 Loans Written 97 117 Average Loan Amount $ 4,594 $ 4,765 Total Amount Loaned $ 464,934 $ 545,173 29 P a g e
Appendix 2008 Foreclosure Rate by County... 31 Foreclosure Counseling Program: Households Served by Agency... 32 Common Work-Out Options... 33 30 P a g e
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Foreclosure Counseling Program: Households Served by Agency Agency 2007 2008 ACORN Housing (added Oct 07) 18 521 Arrowhead Economic Opportunity Agency 112 248 Anoka County Community Action Program 164 906 Bi-County Community Action Program 12 102 Carver County Community Development Agency 388 771 City of St. Paul, Planning & Economic Development 629 850 Community Action Partnership of Suburban Hennepin 349 1,282 Community Housing Partnership 66 189 Community Neighborhood Housing Services --- 253 Dakota County Community Development Agency 401 892 Inter-County Community Council 37 50 Heartland Community Action Program --- 110 LSS Financial Counseling 1,223 2,471 Minneapolis Neighborhood Housing Services --- 73 Neighborhood Development Alliance (NeDA) 177 1,027 Northwest Community Action Program 13 84 Ottertail-Wadena Community Action Council 40 98 PRG, Inc. --- 102 Southwest Minnesota Housing Partnership --- 44 Tri-Valley Opportunity Council 27 44 Twin Cities Habitat for Humanity 992 591 Washington County Housing and Redevelopment Authority --- 515 West Central Community Action Program 60 217 Wright County Community Action Program 120 358 CCCS of The Village Family Service Center (added Oct 08) --- 11 Total 4,828 11,809 Denotes new provider 32 P a g e
Common Work-Out Options Workouts are special arrangements to bring a loan current and prevent foreclosure. Forbearance Agreement: If a homeowner has the resources to bring the loan current but needs some time to get the total amount, a lender may approve a forbearance agreement to temporarily reduce or suspend mortgage payments. Forbearance is often combined with a reinstatement if a homeowner knows they will have a lump sum of money available at a future date to pay the total amount owed. Loan Modification: With loan modifications, homeowners typically pay some of the amount owed, and then the rest of the past due amount is added back into the loan. This may result in a change in monthly payment. Some loan modifications involve changing the interest rate from an adjustable rate to a fixed rate, or extending the number of years to repay the loan. Homeowners may need a short-term forbearance before a loan modification is approved; during this time a homeowner would save money for the loan modification to demonstrate that the situation has stabilized. Partial Claim: If the mortgage is insured, homeowners may qualify for a low interest or interest-free loan to bring the loan current through the insurer (usually FHA). This loan is repaid later, usually when the first mortgage is paid off or the home is sold. Pre-Foreclosure Sale or Short Sale: If a homeowner can no longer afford the home, this option involves selling the house to prevent foreclosure. If more is owed on the home than its value, the lender may agree to accept less than what is owed on the mortgage. Selling a home usually takes between three to five months, depending on the housing market. There may be income tax consequences with a short sale. Deed-in-lieu: With a deed-in-lieu of foreclosure, a lender agrees to forgive the debt owed if the homeowner signs over (gives back) the property. Typically, a homeowner would first have to try to sell the home for 90 days before the lender would consider this. If a homeowner has a second mortgage or judgment on the property, a deed in-lieu may not be an option. There may be income tax consequences with a deed-in-lieu. 33 P a g e