FHA mortgage delinquencies are up, and borrowers find there’s no easy way out.
It’s just an average den in an average suburban town house in Clinton, Md. But it’s Lisa Gressen’s favorite room, her little corner of the world, and she’s fighting hard to keep it.
There are two cream-colored couches opposite a television in the den, which also has a phone, an alarm clock, and cushy carpet that crunches under your feet like light snow. From one window, Gressen can look out to the park behind her house, where the sun sets over the trees; from the other, she can watch her three children at a playground that echoes with shouts and giggles.
“I have everything I need here,” Gressen says proudly.
Gressen, who works for the Department of Agriculture, moved into this house from a cramped Landover, Md., apartment in October 1999, thanks to a Federal Housing Administration (FHA)-insured mortgage. An arm of the Department of Housing and Urban Development (HUD), the FHA helps lower- and middle-income home-buyers secure mortgage loans that they otherwise might not get, and it promises to repay the lender if the homebuyer defaults.
In September 2000, Gressen’s husband, Marcis Gressen, was laid off from his job with JAM Trucking, and the monthly mortgage payment of more than $1,200 soon swallowed the family’s savings. By January 2001, Gressen had missed two mortgage payments and faced foreclosure.
“You work so hard to get to this point,” says Gressen. “It’s heart-wrenching.”
Unsure of what to do, Gressen sought counseling from Mildred Harris at D.C.’s Marshall Heights Community Development Corp. (CDC). Harris, a HUD-approved counselor, has seen many such cases of late, part of a rising tide of FHA-insured-mortgage delinquencies in the D.C. metro region. She told Gressen about the FHA’s loss-mitigation program, an effort by the federal government to help homeowners with FHA-insured loans save their houses and creditand avoid the embarrassment and feelings of failure that arise from foreclosure.
Under the loss-mitigation programs, lenders have five ways to deal with problem mortgages. They decide which option to apply, but they must comply with FHA guidelines. Among the most popular is a special forbearance, in which the borrower is allowed a short period of time (usually less than a year) to get caught up on the mortgage. In some cases, a permanent loan modification can be obtained, in which the debt is folded into the original mortgage so the borrower can repay it over the length of the agreement. In both cases, the FHA compensates the lender to help offset costs. In other situations, the lender can choose to grant a borrower an FHA-reimbursed advance (known as a “partial claim”) or require the owner to give up the property via a sale or return of the deed to the FHA.
The FHA created the loss-mitigation program in 1996 under a mandate from Congress to reorganize the FHA’s assignment program, which previously handled such problem mortgages. Under the assignment program, the FHA paid off lenders and took over mortgages directly. With the FHA administering the mortgages, homeowners had three years to catch up on their payments before facing foreclosure again.
Several Washington-area HUD-approved housing counselors believe that the change was a huge mistake. Wayne Hodges, president of the D.C. Metropolitan Association of Housing Counselors, says the FHA’s loss-mitigation program is flawed because lenders have too much power, and in some cases, are flatly uncooperative.
“In our profession,” Hodges says, “people think the program is a joke.”
With Harris’ help, Gressen applied for special forbearance in February. The paperwork seemed endless: credit and financial statements, letters from employers, and personal letters to the mortgage company, some of which the mortgage company lost. Gressen waited months to hear back. In the meantime, her husband landed another job with JAM Trucking, but the added income quickly went to pay for the children’s numerous expenses and the family’s soaring utility bills.
Gressen says she called her mortgage company (which she declines to name, for fear of jeopardizing her forbearance agreement) numerous times to check on her status. She says she usually was put on hold, sometimes as long as 20 minutes, and when she got through, the representative seemed to have little information, constantly telling her, “I’ll have to check with my boss.”
Gressen says she was told that she had to be more than three months delinquent on the mortgage to get a special forbearance. So she had to wait to get further behind. Meanwhile, the late fees and legal costs piled up, adding to her family’s debt. The lender also hiked Gressen’s adjustable rate mortgageby almost $150 per monthwithout notifying her in writing.
On April 13, the lender called Gressen to say she had been accepted for the special forbearance program and that she needed to make a “good-faith” payment of $2,500 by that Monday, April 16. Her monthly mortgage payment would increase to $1,897, and the first payment was due May 1. That left Gressen and her family, already struggling with debt, with two weeks to pay nearly $4,400. They had little choice. They were told that one missed payment would result in foreclosure.
Mildred Harris’ desk is submerged in light-green cardboard folders. Each one contains the detailed history of a client’s fight to keep a house, and trying to find a particular file is like a demented form of “Where’s Waldo?”
Harris shuffles through dozens of folders on her desk and in her filing cabinet, looking for a specific case. The credit reports, financial statements, and mortgage-company letters are so numerous that it’s easy to lose perspective on the immediate task at hand.
But Harris tries to maintain focus. “These are people’s lives we’re dealing with,” she says. On this particular afternoon, Harris must counsel three clients and file six new loss-mitigation requests by 4 p.m.
Foreclosure and delinquency statistics are difficult to unearth, because no local government agency keeps track of them. But delinquencies on FHA-insured loans are steadily rising in the Washington area, according to the Mortgage Bankers Association of America’s (MBA) National Delinquency Survey, which covers roughly 65 percent of the nation’s mortgages. MBA figures show that the percentage of FHA-insured loans past due in the District rose from 9.77 percent of 14,147 loans in the first quarter of 2000 to 12.38 percent of 14,938 loans in December 2000, which is the last quarter for which statistics are available. That’s a total of nearly 500 new delinquencies.
Yet much of the evidence remains anecdotal. Janice Ataiyero, who handles the incoming inquiries at the Marshall Heights CDC, says the number of calls requesting counseling for delinquencies and foreclosures on FHA-insured mortgages has increased from two or three each week last fall to two or three per day in the past three months.
Marvin Adams, operations manager at HomefreeUSA, a housing counseling center at 318 Riggs Road NE, has noticed the trend as well. “We have one guy handling that, and he has gotten swamped in the last four or five months,” he says.
Harris, Adams, and Hodges agree that a combination of factors has led to the increase, including a booming housing market, a slowing economy, low interest rates, and overeager lenders and realtors who use financing maneuvers to squeeze buyers with FHA-insured mortgages into houses they can barely afford. Borrowers facing foreclosure on FHA-insured loans have only one outlet: the loss-mitigation program.
Hodges, who also sits on the board of the National Association of Housing Counselors, says the pre-1996 assignment program helped homeowners much more. He believes that loss mitigation is well-intentioned, but he finds it ridiculous that mortgage companies, not the FHA, decide who qualifies for loss-mitigation assistance.
The new program, unlike the assignment program, Hodges continues, allows the FHA little control over loss mitigation, and mortgage companies care about the bottom line more than they do about borrowers. Hodges says that he has flown to Oklahoma eight times in the past few years to get Wells Fargo Home Mortgage to act on loss-mitigation claims. “Some of those people lost their homes,” he adds.
Hodges concedes that the assignment program wasn’t perfect and needed reform, but argues that the loss-mitigation setup wasn’t the right choice. “HUD should have more input than they have,” he says.
FHA officials say they conduct a yearly review of each lender, randomly examining files to make sure the lender has followed FHA procedures, and HUD officials vehemently defend the loss-mitigation program.
One HUD official who directs loss-mitigation policy says the program is a huge success. She argues that the assignment program was flawed because it made the FHA act as a lendera role the agency wasn’t equipped to handle. That resulted in bureaucratic gridlock and more foreclosures.
HUD officials note that the loss-mitigation program helps far more people (more than 31,000 last year) than the assignment program ever did (nearly 12,000 in 1996) and that it has cut costs and paperwork. “The loss-mitigation program was a huge breakthrough,” says the loss-mitigation official.
Harris says about 95 percent of her applicants get accepted for some form of loss mitigation, but she observes that the system could be smoother. She adds that educating first-time home-buyers before they start looking for a house is the ultimate solution.
Despite her acceptance into the loss-mitigation program, Gressen’s efforts to save her mortgage remain unresolved. Last week, she began getting letters from attorneys offering to help her file for bankruptcy. The letters said that her mortgage company had started foreclosure proceedings in Prince George’s County Court on April 18five days after Gressen was accepted for the special forbearance and two days after she made her good-faith payment of $2,500. She’s received letters from 10 different attorneys in the past weekbut nothing from the mortgage company or the FHA.
As of today, Gressen still isn’t sure where she stands. CP