Counseling Reduces Low-Income Foreclosures

Washington-Responsible one-on-one counseling combined with long-term financial planning and in-house origination-to-servicing appears to be an efficient strategy that minimizes foreclosure rates, especially among "high-risk" low-income borrowers.

New performance analysis of mortgages made to low-income buyers who participated in homeownership education programs offered by NeighborWorks America organizations show their foreclosure start rate is 20 times less severe than that of subprime borrowers, and three times better than that of prime borrowers. Comparing foreclosure data provided by the Mortgage Bankers Association, NeighborWorks found that while its own loan portfolio had a foreclosure start rate of 0.21% in the second quarter of 2008, the overall market's foreclosure start rate was 1.08%, more than five times as great.

Also, NeighborWorks mortgages perform similarly to prime market loans, NeighborWorks spokesperson Douglas Robinson said. Quoting Mortgage Bankers Association data, he said the foreclosure start rate for conventional conforming mortgages was 0.61% in the second quarter, compared to 0.21% for mortgages originated and serviced by NeighborWorks.

It is a well known fact that one of the toughest problems servicers face these days is to follow up the trail of data related to loans in default or risking foreclosure, Mr. Robinson said. Once loans move on to the secondary market it becomes even harder to properly evaluate loan default risk.

"It's hard to get answers about these foreclosed loans. I know from conversations with lender partners that fewer than 10% of the people who come to us for foreclosure prevention counseling received homeownership counseling," he said. "We look at this crisis and think how can we not have this happen again. One way is to somehow make pre-purchase mortgage advisory available to more people in the future and we will see less home foreclosures."

"Facts tell the real story," said NeighborWorks CEO Kenneth D. Wade. "The vast majority of mortgages facilitated by NeighborWorks organizations are to buyers with low and moderate incomes and less-than-perfect credit scores, yet by obtaining quality mortgage advice these homeowners have been able to sustain homeownership during the most severe housing crisis since the Great Depression."

According to Mr. Wade, NeighborWorks organizations have a track record of providing one-on-one mortgage advice, encouraging homebuyers to avoid loans that they cannot afford for the long term. "That dedication to community stability and strength is the foundation of what we're doing." As illustrated by NeighborWorks data, he argued, "The idea that some observers now are pointing to low-income people as the cause of the financial crisis we're facing today is just wrong."

NeighborWorks has relationships with many of the country's top lenders it has limited capital available, he explained, so it services the in-house originated loans, even if they are high-risk mortgages loans made by NeighborWorks lender partners to borrowers who received financial education and counseling from NeighborWorks, as a rule, also are serviced by the same lender.

This strategy has also helped combine the long-term benefits of NeighborWorks counseling with financial planning services, Mr. Robinson said. NeighborWorks clients are required to take at least three financial education classes. Mr. Robinson believes NeighborWorks counseling is highly efficient because it also offers potential homebuyers one-on-one, face-to-face consulting.

"Not every person we talk to will get a house or be referred to a mortgage servicer, but the 21 basis points we are talking about, those loans that did not go into foreclosure, NeighborWorks is the servicer on those loans."

Most importantly, he said, "If they are not ready we tell them. Sometimes we work with them for a few months through one-on-one counseling to make sure people know about all the other obligations they have that come along with homeownership, so people come back when they are ready."

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