Economic development

Loan Modification Program Helps Homeowners Stave Off Foreclosure

ESOP is helping homeowners in Cleveland, where 25 percent of homeowners there have underwater mortgages, with an innovative approach.

My report on ESOP’s innovative approach to helping underwater homeowners, for Dowser:

In 2010, when Antonio Martin, a 36-year-old husband and father of three who lives in a suburb of Cleveland, was laid off from his job at a Verizon retail store, he could no longer afford his $1,132 monthly mortgage payments. He had previously struggled with his mortgage, years ago, when he found that the adjustable rate loan he had taken on was making his payments skyrocket. (An adjustable rate mortgage loan comes with a variable interest rate tied to an index that effectively transfers risk to the borrower instead of the lender.) An organization named ESOP had helped Martin renegotiate that loan; now, unemployed and in fear of losing his family’s home, he turned to ESOP again. The result, after a consultation and application period that led to Martin’s enrollment in a principal reduction modification loan from Ocwen Financial Corporation, was that his mortgage payment went down to $640 per month. On top of that, the principal loan on the house—which is rapidly depreciating in value—will be reduced by$34,000 each year for three years, for a total reduction of $112,000.

“I went to ESOP and filled out the packet for the loan modification program offered by the Obama administration—we had to try that first. But I didn’t get approved for that, for some reason. Then ESOP told me that they would approve me for a modification to my loan,” Martin explained to Dowser. “It was pretty simple because the relationship that ESOP has built with these loan companies—working with them on behalf of homeowners—makes the process easier. This is the easiest process I’ve gone through in dealing with the loan companies.”

In 2010, two years after the onset of the subprime mortgage financial crisis, nearly 11 million U.S. homes were “underwater,” meaning that they owe more on their mortgages than their homes are now worth. “Home values have dropped so far, so fast, that nearly twenty-five percent of mortgage holders today [in Cleveland] owe more than their house is worth,” reported an episode of 60 Minutes recently that highlighted the surge of vacant homes in Cleveland, due to the current combination of underwater homeowners and high unemployment.

The Obama administration created the Home Affordable Refinance Program to help underwater homeowners, but not all who need assistance are eligible (such as Antonio Martin). ESOP is charting a new path for helping underwater homeowners by striking a deal with the lenders that benefits all parties.

ESOP (Empowering and Strengthening Ohio’s People) is an Ohio-based HUD-certified foreclosure prevention counseling agency. It works by engaging loan servicers or lenders and borrowers, and acting as a good-faith intermediary between the parties. There are two unique aspects to ESOP’s work: one is how it holds lenders accountable, using a “tough love” approach and having a strict policy regarding homeowners’ compliance to information requests;  the other is getting large companies (including Bank of America, CitiMortgage, Ocwen Financial Corporation, and Litton Loan Servicing) to see the element of human experience behind all the paper of a mortgage.

ESOP provides this human element by bringing executives from banks and loan servicers on community tours, where they get to meet their homeowners and see the effects of their policies. In one case, reported by David Bornstein in the New York Times last year, the lending agency Countrywide “signed an agreement after senior executives took a tour of Slavic Village, an area on the east side of Cleveland where a third of homes, many of them foreclosed by the lender, remain vacant, boarded up, stripped and ransacked, demolished, or occupied by squatters and drug dealers.” Once lenders have seen these neighborhoods with their own eyes, they are more apt to agree to ESOP’s “fair lending agreements,” under which they enter into a working relationship with underwater homeowners.

For Martin, Ocwen’s principal reduction loan plan wasn’t just the best option, it was also the only one available, since he wasn’t approved for the government’s Home Affordable Refinance Program. Ocwen began offering their principal reduction loan plan about a year ago; the Washington Post reports that “79 percent of the customers who were offered the test program signed up, and the re-default rate has been 2.6 percent — far below the 40 to 50 percent rates within similar periods in some federally sponsored loan-modification efforts.” Ocwen hopes to take the program national, and is close to having regulatory approval in every state.

ESOP would also like to see their unique approach go national—but there are barriers to expanding the lending agencies they work with. “The main reason this can’t happen on a large scale to make a significant impact on the housing market is because FHFA, the conservator of Fannie Mae and Freddie Mac, will not use principal reduction on mortgages that it owns or underwrites.  Some members of Congress are challenging the acting Director Ed DeMarco on this [with a letter and a YouTube video asking DeMarco to change his position on principal reduction loans],” wrote Deonna Kirkpatrick, ESOP’s Director of Communications, in an email to Dowser.

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