This summer, mortgage servicer Ocwen Financial Corp. officially launched a mortgage principal reduction program for homeowners with negative equity—one of the first programs conducted without the help of a government agency.
With the Shared Appreciation Modification program, Ocwen will write down loan principal to 95 percent of a home’s current market value. The write-down is forgiven in one-third increments over a three-year span, “so long as the homeowner stays current on the modified mortgage,” according to an Ocwen news release. If and when the house is sold or refinanced, the borrower holds on to 75 percent of the appreciation; the remaining 25 percent goes to the investors who own the loan. Other servicers have sporadically used Hardest Hit Fund and Home Affordable Modification Program dollars to subsidize principal write-downs, but this is a first-of-its-kind effort.
Over the past few years the principal reduction drumbeat played by advocates has grown ever louder. The New Bottom Line has made principal reduction for all underwater loans one of its goals. Clearly Ocwen, which is no charity, believes what advocates have been saying for a long time: when you take a clear-eyed look at the situation, principal reduction is the route to real loss mitigation.
But with the GSEs recently insisting they will not write down principal, it’s unclear how long it will take before principal reduction programs of any sort become an industry-wide standard. While waiting for an answer, underwater borrowers will have no choice but to hold their breath.
HUD, in light of a recent capital needs study, will conduct a “rental assistance demonstration” rather than complete programmatic implementation of its Preserving, Enhancing, and Transforming Rental Assistance plan, which was first announced in February 2010 (see SF Summer 2010). The $350 million package would have allowed the borrowing of private capital to improve and preserve public and private HUD-assisted housing. In late 2010, Rep. Keith Ellison of Minnesota introduced the Rental Housing Revitalization Act (RHRA), which contained many elements of PETRA while trying to address advocates’ concerns about it. While it’s hard to imagine RHRA gaining traction in this Congress, HUD hopes its scaled-down demonstration effort could follow the PETRA model, preserving as many as 263,000 units by converting them to project-based assistance and bringing in private debt to address capital needs.
In 2010, N.J. Governor Chris Christie introduced legislation to abolish the Council on Affordable Housing, the enforcement body for New Jersey’s fair share affordable housing rules, which grew out of the famed 1975 Mt. Laurel lawsuit (see SF Summer 2010). That bill has now stalled in the state Legislature’s lower house. But Christie has found another way move his agenda, dissolving COAH through an administrative move into the state’s Department of Community Affairs, whose commissioner is appointed by the governor. COAH was previously an independent entity. Housing advocates say the move is illegal and have vowed to fight it.
“The only thing worse than a dysfunctional COAH is Chris Christie running the show,” Kevin Walsh, associate director of the Fair Share Housing Center, told The Star-Ledger. “He’s going to take it so far in the direction of towns doing whatever they want.” Fair Share says it will battle the governor’s move in court.
“What we now have taking place in Cleveland is an ‘REO Race’,” wrote Frank Ford in our Fall/Winter 2009 issue, describing a “tsunami” of neglected, vacant, unmaintained properties affecting his city’s neighborhoods. “Can financial institutions ‘unload’ or ‘dump’ their liability before the local municipal code enforcement officials catch up with them? In their race to dump property, the banks are making no effort to screen the buyers.”
Both the irresponsible investors banks were selling to and the banks themselves were ignoring properties they owned, allowing them to decay past the point of no return. It got so bad that the Cleveland Municipal Housing Court (see p. 26) levied millions of dollars of fines on REO investors and servicers for failing to show for court hearings.
Now, in at least a few cases, properties with no real market value are heading in a different direction: In June, Wells Fargo donated a handful of vacant properties to the Cuyahoga Land Bank, which was in formation when Ford was writing in 2009. Crucially, Wells also contributed up to $7,500 per property to cover the cost of demolition ($3,500 per property in NSP2 target areas). Before long, Bank of America was on board with the same price model.
Russ Cross, Midwest regional servicing director for Wells Fargo Home Mortgage said in a statement made at the time of their announcement that Wells has donated 26 properties and $127,000, “and we will look at additional properties that we can contribute.”
It’s clear why such a move would be in the self-interest of the lenders: they off-load properties where they won’t recover costs anyway in a way that reduces possible legal exposure (and fines) and mitigates the increasingly negative PR they are getting. But that’s OK: it’s also in the best interests of Cleveland’s neighborhoods.
Of course, at this volume the donations make a very small dent in a much bigger vacant and abandoned properties problem. The work of creating incentives for owners of vacant properties to do the right thing, through codes and the courts and the streets, clearly needs to continue.
We have long known that fewer local bank branches spells declines in financial investment in a community. As John Taylor, president and CEO of the National Community Reinvestment Coalition, pointed out in our Fall/Winter 2009 issue, the systemic closing of bank branches in low- and moderate-income neighborhoods is followed by payday lenders, pawnshops, and check cashing services stepping in to fill the void.
A new report out of UVA’s Darden School of Business, Perdido en la Traducción, looks at the positive flip side of this phenomenon: It finds that in low-income, Latino communities in Virginia when the number of community bank branches at which residents open accounts increases, neighborhood crime decreases, property values increase, and financial literacy improves. There are almost 39,000 Latino households in Virginia that do not have savings or checking accounts with a bank or credit union. These unbanked households, the report goes on, generate on average $23,500 in annual income, “suggesting that at least $917 million annually is not being serviced by Virginia’s depository institutions.” Sounds like reversing the loss of bricks-and-mortar branches could be a win-win for neighborhoods and lenders.
More local bank branches might also help with the persistent disparities in access to conventional lending products in communities of color. As was reported earlier this year in the fifth annual installation of Paying More for the American Dream, a joint report compiled by several groups including the Woodstock Institute and the Neighborhood Economic Development Advocacy Project, which examined seven U.S. metro areas, certain neighborhoods are still faring disproportionately badly when it comes to access to credit. In 2008 and 2009, the number of conventional refinance loans made in predominantly white neighborhoods in the American Dream’s study area “more than doubled in all seven cities examined. During this time, however, conventional refinance lending declined sharply in communities of color in all but one of the seven cities examined.”