Lenders, Feds Finally Paying Attention to Mortgage Crunch

Looks like people are finally starting to take the mortgage situation seriously, and by people we mean the federal government and major industry players.

'Bout time!

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 interest rate.

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 solutions.