Keeping Homeowners As Tenants

The main goal of American Homeowner Preservation in Cincinnati, Ohio, is to evaluate a lender’s nonperforming mortgage portfolio and provide an innovative liquidation opportunity. The company buys these loans secured by low-valued homes at under $75,000 and keeps the homeowner as a tenant.

The program consists of lenders referring delinquent borrowers to AHP along with a target net recovery amount. AHP then contacts the borrower, explains the program and schedules a home inspection.

Most borrowers are thrilled with AHP’s offer, with an option to lease and repurchase the home at greatly reduced prices from what they previously paid. Thus, AHP is often able to close referrals in 15 to 45 days, says AHP director Jorge Newbery, who has 17 years of real estate experience with a specialty in distressed property. The former nonprofit organization opened its doors almost two years ago. AHP started out working with homeowners in foreclosure with the intention of keeping them in their homes. Their plan was to make short sale offers to lenders.

“Let’s say someone refinanced their home three or four years ago at the top of the market. They currently owe $100,000. The property is now worth $60,000 and there’s some REOs selling in that area for $40,000. We would make an offer of $30,000 and go to the lender, and try to get the lender to approve the short sale,” says Mr. Newbery.

“The argument to the lender is it’s in Ohio, it’s going to take you six, nine, 12 months to foreclose. By the time you close, and you evict the family, the property is going to get vandalized. They strip out all the copper and you end up selling it for $40,000 but it takes you $10,000 in legal and other costs to get there in a year. So, why not take $30,000 today on a short sale?”

Logically, it makes sense, but the reality is American Homeowner Preservation signed up about 800 homeowners on short sales and the vast majority did not get approved and are in various states of processing. “We’re closing some now where some of these families first applied with us in September 2008 and we’re closing now in September 2009.”

The company has begun contacting borrowers to get pre-approvals for one its servicer clients. “They said, 'Before we even start foreclosure, we are going to give you a name, phone number, address, and we are going to tell you how much we want. If you can get us $30,000 on this home, it’s pre-approved, we’ll make the deal,’” he said.

“That has worked very well. We have tried to go to other lenders and servicers to develop similar relationships and some of them have come back and said, 'We’ll sell you the charge-offs, the nonperforming, we’ll put together a pool for you or we already have one that we are trying to sell, here it is.’”

AHP recently lined up an investment group putting up capital for the company to simply buy the notes. “The goal is to get control of that mortgage and be able to dispose of it promptly. This waiting, going back and forth with the servicer for a year, is certainly inefficient for us and I think fairly inefficient for the servicers. That’s how we ended up here. It wasn’t our first plan, but it’s what we’ve done,” said Mr. Newbery.

If a homeowner comes to AHP and says he wants to stay in the home, the homeowner will sell it to the company, who will still work with them to get an affordable lease that’s not more than a third of their income and a favorable option to repurchase.

“We’ve gotten approvals from just about all the major lenders. Citibank was our very first approval. We’ve had some from Countrywide, Chase, Litton, HomeEq, HSBC, just about everybody has approved them on an individual basis, which is fairly inefficient.” AHP hopes to buy these nonperforming mortgages at a reasonable price where they know they can go to the homeowner and strike a deal on the majority of the cases. If they buy it for $30,000, they give the family an option to purchase it for between $34,500 and $39,000. “And considering they previously owed $100,000, now they have the option to repurchase at a third of that. It gives them a great deal of incentive to stay, pay their lease and eventually repurchase it.” Most of the families have credit challenges and AHP provides counseling to help get them in a position to qualify to repurchase their home with an FHA loan. The target date is usually three years. That’s because FHA will qualify borrowers if they have had a foreclosure or severe mortgage delinquency provided that three years passes and in that time borrowers rebuild their credit.

“The only way they can do that is through alternative credit. That’s paying your lease payment on time, your utilities, your cable, your phone bill.”

To say this can happen in one or two years is unrealistic for everybody, Mr. Newbery added. “Most of these families have regular jobs and decent income. In many cases they have taken reduced income, but they do still have jobs,” he said.

One of the biggest challenges, according to Mr. Newbery, is when servicers modify a loan and keep the principal at $100,000 and the house next door is for sale for $60,000 or $50,000. “Even if you modify it down to 2% or 3%, it is still tough for a family to justify paying a $100,000 mortgage on a house that’s only worth half that,” he said.

“We solve that problem. We go a little bit lower than what the neighboring house is selling for and create a real incentive. It makes sense. Our challenge is we stall at the servicer level on many occasions. It’s improved of late and hopefully it will improve even more.”

Although there is talk of this next big wave of foreclosures and REO, it’s not too late to help the millions of families who are still in their homes if they have a reasonable income and can afford to stay.