Looks like people are finally starting to take the mortgage situation
seriously, and by people we mean the federal government and major industry players.
There were several major and minor developments in the subprime
arena this week that indicates that the people who can actually do something
are now paying attention.
Maybe the most significant is the announcement that a group consisting of banks
and major lenders has been formed under the name "Hope Now"
to head off what is expected to be a tsunami of foreclosures by expanding and
improving assistance to troubled mortgagors.
The new group was announced by the federal government and participating lenders
on Wednesday. 11 lenders are involved in the project including Citigroup, Option
One Mortgage (a subsidiary of H&R Block), and First Horizon National Corp,
Treasury Secretary Henry Paulson, who, along with HUD Secretary Alphonso Jackson
represented the government in the announcement, said that the Hope Now participants
were all major mortgage servicers which among them handle 60 percent of the
mortgages in the U.S. Also contributing to the alliance are several approved
credit counseling organizations.
The group has established a website (www.hopenow.com)
which, at present, is not particularly helpful. It informs debtors how to ID
their servicers (i.e., look on your mortgage statement), and recommends several
approved credit counselors and provides links to other foreclosure information.
However, according to Secretary Paulson, participating lenders will be sending
out direct mail to borrowers to help them understand the available services
and the companies have been asked to establish a model which includes a toll-free
phone number, email address, and fax number.
The second indication that the situation is being taken seriously
came in a speech by Eric S. Rosengren, the newly minted President of the Federal
Reserve of Boston before the Portland (Maine) Chamber of Commerce.
President Rosengren gave the Chamber a mini-tutorial about the background and
mechanics of the current subprime mortgage situation but then provided some
interesting new insights into the market, at least as it exists in New England.
The Federal Reserve of Boston, he said, has been studying available public
information from the Registries of Deeds in the six New England states and has
found that multi-family housing is disproportionately represented in the subprime
mortgage market. For example, in Middlesex County, Massachusetts which encompasses
Cambridge, Somerville, and several other dense urban areas but also some extremely
wealthy suburbs, multi-family housing comprises about 10 percent of the housing
stock but 27 percent of the subprime mortgages. This, Rosengren said, may reveal
a potentially serious problem for tenants "who may not have known that
the owner might be in a precarious financial position."
The study also showed that people do not keep their subprime mortgages
over a long term. Of those used to purchase a home between 1999 and 2004, two-thirds
were prepaid within two years and almost 90 percent within three years. Thus,
it is possible that many borrowers who used subprime mortgages to purchase their
homes did benefit from the appreciation of home prices over the last decade.
While home prices in the area are declining, Rosengren said, there are three
hopeful factors that may mitigate any upcoming damage. First, the Fed
researchers found that many of the subprime borrowers have respectable credit
histories. Data, again from Middlesex County, shows that 64 percent of subprime
borrowers had FICO credit scores of 620 or higher and 18 percent had scores
over 700. They may have chosen a subprime product in order to more greatly leverage
a purchase or may have been steered there by an aggressive loan agent. In either
case, these borrowers may be able to transition into a prime product if their
interest rates start to spiral upwards.
Second, many borrowers have owned long enough that their home has appreciated
and they may have sufficient equity to refinance into a prime product.
Third, many so-called "teaser" mortgages carried
a much higher rate than found on prime loans; if these borrowers could qualify
for a prime product, they might actually see a significant reduction in their
Rosengren said that he had been meeting with bankers from all over New England
to explore opportunities for commercial banks to get back into the mortgage
market. Since they were not involved in originating subprime products and are
well capitalized, they may have profitable opportunities in the current market
and, "They have shown some interest in the opportunities and have agreed to
examine how we can encourage borrowers to pursue opportunities with banks before
they get behind in their mortgage. To the extent that some subprime borrowers
have improved their FICO score with regular payments, already had a high FICO
score, or have appreciated wealth in their house, now is the time for these
borrowers to seek lower cost financing opportunities."
The Fed President said that "The Federal Reserve Bank of Boston has created
several brochures that are intended to help borrowers consider all their options,
and we are creating a web site to help borrowers in subprime products to get
information and help looking for refinance opportunities."
Finally, The Mortgage Bankers Association (MBA) has established a Foreclosure
Prevention Resource Center on its consumer education site, HomeLoanLearningCenter.com.
The site is part of MBA's effort to advise those who may face trouble
making their loan payment to contact their loan servicer as soon as possible
to determine if an alternative to foreclosure may be possible based on the borrower's
financial and employment status.
The site is bi-lingual and includes a listing of major loan servicers and their
contact information as well as a guide to the "Things to Know When You
Contact Your Lender" so that borrowers having difficulty making mortgage
payments can begin an informed dialogue with their servicer about potential