Ohio ranks near top for underwater mortgages
Cleveland Plain Dealer - July 4, 2012
CLEVELAND, Ohio — Northeast Ohio’s shaky housing market will grow more unstable and possibly drag down the local economy if banks don’t reduce the principals on more mortgages, foreclosure prevention advocates say.
Some are urging lenders to grant more principal reductions as a way to deal with an increasing number of “underwater” mortgages – cases where homeowners owe more than their properties are worth.
Ohio has the nation’s fourth-highest number of mortgages underwater or near there, according to Policy Matters Ohio, a non-profit, policy-research organization. Advocates say principal reductions are the best solution because loans will be adjusted to reflect housing values, which have tumbled since peaking in 2005.
For their part, lenders say they have begun to reduce more principals, but they prefer to address mortgages case by case.
Since 2009, Chase has used loan modifications, including principal reduction, to help 800,000 people, twice the number of homeowners they have foreclosed on, a spokeswoman wrote in an email. Chase is part of the attorneys general settlement.
Wells Fargo, also part of the settlement, has done more modifications since March, including principal reductions, spokesman Jim Hines said.
“We believe principal reduction/forgiveness is not an across-the-board solution,” he wrote in an email. “Payment affordability continues to be key, so principal forgiveness needs to be used in a very careful manner.”
Government data show that the movement toward principal reductions still remains low.
Although reductions are up, they constitute the second smallest percentage of loan modifications,according to a report last week by the Office of the Comptroller of the Currency, which regulates all national banks and federal savings associations.
About 10 percent of loans were modified using principal reduction during the first quarter of 2012, up from 3 percent a year earlier. Interest rate reduction was among the most popular, remaining at more than 80 percent for both years.
Modifications reduced monthly principal and interest payments by an average of $437 for the first quarter of 2012, or 31 percent more than the year before.
Restoring Stability, part of a federal program targeted to states with high foreclosure rates, shows the lack of principal reductions. Three hundred servicers have signed up to offer principal reductions since the program began in 2010, said Arlyne Alston, a spokeswoman with Ohio Housing Finance Agency, which runs the program. None has offer them yet, she said.
“Financial institutions have to be willing to work with the borrower and do the principal reductions and other modification,” she said.
Nearly a third of mortgages in Ohio are underwater, according to sources including RealtyTrac, an online foreclosure database. Foreclosures also are increasing, after falling in recent years. They reached a 17-month high in May, RealtyTrac said.
The groups lobbying lenders include Empowering and Strengthening Ohio’s People, or ESOP, and the Vacant Abandoned Property Action Council, or VAPAC.
ESOP is asking institutions including Bank of America, Chase, US Bank and Wells Fargo to adopt a principal reduction model used by Ocwen Financial Corp., an Atlanta servicer. Under that model, the company gets some of the appreciated value of a home if the local market recovers.
Frank Ford, senior vice president of Neighborhood Progress Inc. and VAPAC chair, wouldn’t say which banks his group has approached because agreements haven’t been reached.
“I am trusting that they will be smart enough to realize that this is simply a good business decision,” Ford said.
Reductions aren’t always
best option, banks say Vicki Vidal, associate vice president of loan administration at the Mortgage Bankers Association in Washington, D.C., said principal reductions don’t always make good business sense. Mortgage modifications such as lower interest rates and deferrals — allowing borrowers to pay the principal debt amount later — put lenders at less risk, she said.
“If principal is reduced, the borrower earns that and the bank never recoups the money that it lost,” Vidal said. “Institutions have to be able to recoup their money or they don’t have a secure transaction.”
Foreclosure prevention groups say modification that don’t include principal reduction generally don’t work for the circumstances facing Northeast Ohio. Most foreclosures used to be caused by subprime loans. Modifying those loans by eliminating high fees and interest rates often was enough to prevent delinquencies.
Now, many homeowners facing foreclosure have prime loans. Other types of modifications do little to lower mortgages enough to combat negative equity or get payments low enough to compensate for borrowers earning less because of high unemployment and underemployment.
Other modifications can’t make up the steep decline in housing values, Ford said. Home prices are down 25 percent in Cuyahoga County since 2005 and 50 percent in Cleveland, he said.
Kathryn Wertheim Hexter, director of the Center for Community Planning and Development at Cleveland State University, who evaluates foreclosure prevention programs, said a troubling trend is developing among homeowners going to local nonprofits for help.
“We’re hearing people are not accepting modifications being offered by the banks,” she said. “Their homes are so underwater that these offers will make little difference.”
At Ocwen Financial Corp., the Shared Appreciation Modification program allows the principal of a mortgage to be written down to 95 percent of the current market value of a home. The written-down portion is forgiven by one-third each year for three years. If the house is later sold or refinanced, and its value has appreciated, the lender gets 25 percent of the gain.
Paul Koches, executive vice president, said 80 percent of people who apply get into the principal reduction program. Of the 19,000 principal reductions done nationwide, 1,100 have been in Ohio. The average mortgage balance of Ohio applicants is $114,000 before the modification and $85,000 after. Six months after receiving principal reductions, fewer than 10 percent of homeowners have defaulted, he said.
Tanisha Barry, a social worker from Euclid, said she would have gone into foreclosure without the program. Her home’s value had plummeted to about half of what she paid for it 12 years earlier. Complicating matters was a high interest rate that was about to kick in because of an adjustable rate mortgage. Ocwen reduced her $188,000 loan to $65,000.
Before the principal reduction, Barry went through all of her savings and some of her retirement trying to save the house.
“I was going to walk away if things hadn’t worked out with Ocwen,” she said.
Debbie Kline did a lot of research before buying her home in 2008 in Cleveland’s West Park neighborhood. She searched for a neighborhood with few foreclosures. She shopped around for the right mortgage. Maybe she should have looked into a crystal ball
Kline said foreclosures on her block have gone from two to about 15. The home she paid $79,000 for has dropped by at least $30,000. Frustrated, she, too, considered walking away.
Then she decided to fight. Kline heads Cleveland Jobs with Justice, a coalition of labor, faith and community organizations. The group belongs to ESOP, which Kline helped persuade to lobby for mass principal reductions.
“We, the taxpayers, bailed the banks out, now it is time for them to bail us out,” she said.
Kline doesn’t qualify for principal reduction because she has a government-insured loan, which includes Fannie Mae, Freddie Mac and Federal Housing Administration loans. Those loans make up about 60 percent of home mortgages. The Federal Housing Finance Agency has declined to allow such modifications for homeowners, which has put the agency at odds with many in Congress.
Policy group cites ‘dismal’ mortgage outlook
David Rothstein, project director for asset building at Policy Matters Ohio issued a report in April expressing deep concern about “dismal indicators on home equity and delinquent loans” in Northeast Ohio. He supports a universal policy in which every mortgage originated between 2004 and 2008, which tend to be the one’s most at risk of being underwater, would be eligible for principal reductions, even if they are not delinquent.
Paul Bellamy, ESOP’s director of development and research, agrees.
“It doesn’t make sense for anybody to have inflated mortgage values — whether or not they are able to make payments,” he said. “As long as there is this debt hanging over the area without the underlying value to support the debt, it is going to be dragging down the economy for years and years.”
Daren Blomquist, vice present of RealtyTrac, said universal principal reductions aren’t a cure-all for every underwater loan. Short sales — in which a lender allows a property to sell for less than the balance of the mortgage — pose less of a threat to lenders. By getting the loan off the books, the lender doesn’t have to risk the property going into foreclosure. Short sales in Ohio for the first quarter of 2012 were up 25 percent from the year before, he said.
While debate about how best to address underwater mortgages continues, there is agreement the brewing crisis should be tackled.
Rothstein found that the number of mortgages with negative or near-negative equity in Ohio grew by 80,000 in the fourth quarter of 2011. That was 520,000 mortgages, up by 80,000 from 2010.
Blomquist describes these as the “wild-card” influencing foreclosure rates.
“Even if a quarter were foreclosed on, it would have a huge impact on the housing market and home values,” he said. “It is kind of a vicious cycle: as more foreclosures happen, they tends to bring down the values which pushes more homeowners underwater.”