WORD ON THE STREET: In 2008, our organization, like many nonprofits, found itself trying to ramp up its staff to address the foreclosure crisis in southern Nevada. The issues we faced included training the staff on the various programs offered by the federal government, finding and securing funding to pay the staff, and working with various servicers that were also trying to learn the federal programs and their internal programs.
In 2009, the staff was trained and the funding was secured through the National Foreclosure Mitigation Counseling Program. However, the servicers were still trying to figure out the various programs offered and to hire and train their staff on both the federal and internal programs.
On average, a modification would take 12 months to complete. Due to the Home Affordable Modification Program requirements, many of the lenders were unofficially informing the clients that they would need to be delinquent before they could work with them. This created a dilemma for many of the clients, as they did not want to ruin their credit score but could no longer afford their mortgage payments due primarily to unemployment or underemployment.
The servicers, due to their backlog of files, would require the clients to provide updated documents every 30 to 60 days or as warranted as items continuously came up missing, or were considered outdated. This, in turn, would further frustrate the clients.
In 2010, we observed a shift in the foreclosure process as clients were strategically walking away from their homes as they fell further underwater – and the clients felt the servicers did not care because they hadn't been able to modify borrowers' home loans. We also saw an increase in short sales.
However, the challenge with short sales was that the servicers did not have a streamlined process, and it could take from one to two years to short sale the property. As unemployment continued to rise in southern Nevada, many of our clients from 2008 and early 2009 were returning to ask for their earlier modifications to be modified.
In the second quarter of 2011, we saw a decrease in the number of clients seeking a modification. However, the third quarter saw the number return to normal. The last quarter of 2011 saw a decrease in new foreclosure cases but an increase in the number of permanent modifications offered.
There are two main reasons for this decrease. First, most southern Nevadans find their homes are now 50% to 60% underwater, and the homeowners will only accept a principal reduction that the banks have been unwilling to grant.
During one-on-one counseling sessions, we found that due to a harsh economic climate, a permanent modification may not be the correct decision. Our community is still faced with high unemployment that has resulted in single-family income; loss or reduction in wages; and overextended credit cards, and many households have exhausted their savings and/or retirement. When our clients are informed that their lenders will not provide a principal reduction, they opt for a short sale instead of a modification.
There has also been a slowdown in foreclosures due to the passage of A.B.284 in Nevada last October. Many of the banks have slowed down the processing of notice of defaults. A.B.284 essentially makes the banks swear in an affidavit that they have the deed as well as accurate loan documents and appropriate signatures, before they can begin the foreclosure process.
It also requires banks to list accurate payment options and debt amounts for all liens in default. Finally, it requires the bank to show proof that this information is delivered to the appropriate party, rather than just mailing out and assuming it is received and understood.
According to a November 2011 report published by the brokerage firm Easy Street Realty Las Vegas, ‘The immediate effects of the law are that [real estate owned (REO) properties] processed by banks in Las Vegas has dropped from 1,500 to 2,500 per month to slightly over 50 in the last 30 days. In other words, the REO (and to some unknown extent, short sale) pipeline feeding our supply has been cut by over 95 percent overnight.’
We do not believe principal reduction is the answer to the foreclosure issue. Yes, it is a win for the client that receives the reduction; however, it is a loss for the banks and for the individuals that are not underwater. Our organization has recently modified three loans that we believe is a win for the client and the bank.
For example, a client owes $288,426 on a home that was now valued at $202,000. The homeowner wanted a principal reduction, but did not want to be required to increase the amount owed as the market improved. Bank of America was creative by offering to reduce the interest-bearing principal balance to $201,898 and to defer the $86,528 as interest free.
Bank of America modified the interest rate to a fixed rate, rather than the interest-only rate the homeowner was paying. Bank of America also extended the term of the loan to 40 years, with the deferred amount as a balloon payment at the end of the loan term or when the home is sold.
The win for the client is a fixed interest rate, a reduced monthly payment and the home loan is brought current. The win for the bank is that the client is staying in their home and the loan is current.
Leonard Chide is president and executive director of Neighborhood Housing Services of Southern Nevada Inc. This article is adapted and edited from testimony delivered before a recent hearing of the House Financial Services Committee. The original text is online.