New initiatives keep families in their homes through foreclosure and beyond

The foreclosure crisis shows no signs of stopping—in the Chicago region, new filings rose by over 20 percent in 2009. Every foreclosure leaves behind a property that stays vacant for a period of time. Such vacant properties can drain municipal resources, lower property values, and raise crime rates. Since real estate demand remains weak despite record low interest rates and government incentives, it is likely that these vacant homes will remain a burden on neighborhoods—and on lenders’ books—for a significant period of time. Woodstock research has found that lender-owned properties in Chicago take, on average, close to 16 months to be purchased by new owners and are disproportionately concentrated in communities of color.

Keeping families in their homes during and after the foreclosure process mitigates the negative impact of vacant properties on communities, reduces lenders’ costs in securing and maintaining properties, and provides stability for families as they figure out the next stage of their lives. A number of promising public, private, and nonprofit models are being tried throughout the country to stabilize communities by keeping families in their homes.

Boston Community Capital (BCC), a community development financial institution, is addressing the problem of underwater mortgages (where the home is worth less than what is owed on the mortgage) by buying back homes from lenders at market rate after the foreclosure process has been completed and re-selling the home to the original owner. The decline in real estate prices, particularly in low income areas, has allowed BCC to buy back homes at prices as low as 40 to 50 percent less than the outstanding mortgage principal. The original homeowner stays in the home throughout the foreclosure process, and must prove that he or she will be able to afford the new monthly payment. Some are concerned that BCC’s program would create an incentive for homeowners who can afford their mortgages to purposely default on their loans so they can buy their homes back at a lower market rate. In order to combat that possibility, BCC limits eventual appreciation to the borrower through a shared-appreciation second mortgage and screens out homeowners who have not experienced an adverse life event nor had a predatory loan.

Another strategy is Fannie Mae’s Deed for Lease program which allows homeowners to stay in their homes as renters after their deed has been transferred to Fannie Mae (a process called deed-in-lieu of foreclosure). If the borrower does not qualify for a loan modification or any of Fannie Mae’s other foreclosure prevention programs, and they can prove that they can afford to pay market rate rent, the borrower can qualify for the Deed for Lease program and stay in their homes for up to one year. While the borrower does not retain ownership of the home, it prevents immediate displacement, hurts their credit less than a foreclosure would, and gives them time to plan for other housing options. Freddie Mac has a similar program in which a month-to-month lease is offered to borrowers who are unable to avoid foreclosure.

In a similar move, Citibank’s Foreclosure Alternatives Program allows a borrower to stay in their homes as renters for up to six months after a deed-in-lieu transaction if they do not qualify for a modification or other solution. Additionally, Citibank will cover certain monthly expenses if the bank determines that the borrower cannot afford them and will provide housing counseling and at least $1,000 in relocation assistance when the borrower moves.

While every effort should be made to put borrowers into affordable monthly payments, the fact remains that some borrowers simply will not be able to qualify for loan modifications. This fact will not change as long as unemployment and the number of severely underwater homeowners remain high. If foreclosure cannot be avoided, finding other means to keep homes occupied is the next best step towards stabilizing communities. Programs such as these started by BCC, Fannie Mae and Freddie Mac, and Citibank are promising complements to existing loan modification and neighborhood stabilization efforts and have the potential to benefit families, communities, and lenders alike.