Foreclosures often lock out renters

Foreclosure doesn't always hurt only the person whose name is on the mortgage. More renters are turning to support agencies for help.

Kimberly Edwards found out the duplex she was renting was in foreclosure only when a notice written in legalese was taped to her door. But its meaning was crystal clear: She and her two sons had to vacate the premises the next day or go to court.

As it happened, the property had been in foreclosure when she moved in and the six-month grace period was up. Edwards, a 29-year-old single mother in school with plans to become a paralegal, was paying her portion of her subsidized rent to a man who wasn't making mortgage payments.

Edwards is one of a growing number of renters being displaced because their landlords are losing their investment properties to foreclosure.

While there is no estimate of the number of renters being forced to move because their buildings are in foreclosure, workers on the front lines -- from foreclosure prevention counselors to tenants organizations -- say that starting last year, they began hearing from significantly more people caught in the foreclosure crossfire. The problem has been getting worse.

The number of investment properties entering foreclosure suggests the problem is widespread, although it is unclear how many of those were vacant. Hennepin County estimates that in the first quarter, about 45 percent of foreclosed properties could have been rentals, up from about 33 percent in 2006. Ramsey County estimates 43 percent in the first quarter.

Beth Kodluboy, executive director of the Minneapolis tenant advocacy group Home Line, has seen a steady increase in foreclosure-related calls. Through early June, the group took 77 calls -- as many as it did in all of 2006.

Cheryl Peterson, senior mortgage foreclosure prevention counselor for Twin Cities Habitat for Humanity, said she's been getting more and more calls from renters in the past year. "They don't know what to do," she said. Neither does Peterson, who is set up to work with homeowners, not tenants.

When displaced renters call, she explains the complicated and lengthy foreclosure process. She does what she can to refer renters to organizations that may be able to help with legal matters or with new housing, such as Legal Aid or tenant advocacy groups. Peterson also gets "a lot of calls from people who own several properties in north and south Minneapolis." she said. "Juggling the financing of multiple mortgages ... is beyond the foreclosure counseling programs's area of expertise because it's a business venture."

She blames the increase of investment property delinquencies on a mixture of subprime lending and small-time landlords who "couldn't afford the properties to begin with," and were dreaming of making it rich in real estate. But many took on more debt than they could afford, their adjustable mortgage rates spiked, or they couldn't find renters. They stopped making repairs. Then utilities got shut off.

Some landlords continue to pocket rent long after they stop paying the mortgage, allowing a tenant to learn of the foreclosure only when a deputy knocks on the door to hand them a foreclosure notice.

Telltale signs

Tenants advocates say that clues of foreclosure typically show up long before that.

For Edwards, the first sign that something wasn't right at the duplex at 36th Avenue and Washburn Avenue N. came in August, when the water was shut off for a couple of days. Her landlord, who lives in Colorado, also was slow to have a handyman come and fix the radiators, which were blazing hot in summer.

There were other signs. "He couldn't rent the other half of the duplex and the house was on the market, too, the entire time," Edwards said.

The court granted her 30 days to vacate, which gave her until just before Christmas to leave. "My kids didn't have a Christmas," she said.

Happy with the neighborhood, where she said "it was OK for my kids to ride bikes up and down the street," and lacking money to move, she tried to convince the bank holding the mortgage to let her pay rent directly to it and stay. But she recalls being told "absolutely not, because they didn't want to be a landlord."

Foreclosure - What Can We Expect

With the wealth of information and statistics flooding the market it's surprising to see that homeowners are not preparing themselves a little better. A study recently conducted by the Center for Responsible Lending predicts that 1 in 5 subprime loans issued in the past two years will enter some stage of foreclosure. This will be an estimated $164 billion cost to homeowners.

In addition to subprime loans, another driving force is the housing market, appreciation has come to a complete standstill in some states and some states are entering the negative zone. This is going to have a bad effect on the housing market as a whole and is only going to increase the quantity of foreclosures in the coming year.

With homeowners doing their homework on the foreclosure rates and different loan types contributing to this increase, they are less willing to try these creative loans methods that were common in 2005. Lenders are being warned to be more selective when reviewing the initial loan application to ensure that the homeowner can afford the loan 2 years from now. This foreclosure epidemic is having a negative impact on the mortgage industry as well as all other real estate professionals that are not working in the foreclosure arena.

Looking ahead and 2007 the foreclosure rate is expected to double from 2006. With 1.4 million homes entering some stage of foreclosure in 2006 that means that almost 3 million foreclosures are expected.

These predictions are grim to say the least. Not only for American homeowners grasping to their "American Dream" but also for those real estate and mortgage professionals not offering foreclosure prevention type alternatives. On the other hand there are some real estate agents and mortgage brokers that have realized that adding foreclosure prevention type services is not only going to increase their bottom line but insure that these clients of theirs come back themselves and refer others as well. Diversity in the real estate and mortgage industry is a must coming into 2007. Without the ability and foresight to diversify, incomes for these professionals are going to feel a strong pinch in the coming years.

There are companies that offer partnership and/or training on foreclosure prevention alternatives and they are seeing a flood of brokers and agents stepping up to the plate. In a recent interview with the president of Freedom Foreclosure Prevention Services, LLC, Jeff Segal, he stated "It's not only imperative for mortgage and real estate professionals to add to their current services, come 2007 it will be absolutely necessary if they want to survive this injured market. In the past six months our company has developed a unique partnership program that works well for these professionals to offer services and actually experience relief in this economical whirlwind we have all been experiencing. If they have clients coming to their front door that are facing foreclosure and they can't offer a solution, they send these clients away and will never lay eyes on them again or their business. If they are able to offer a viable and ethical solution, even if they are just referring them to someone, they are securing that client's rapport, business and the most powerful advertiser still today - word of mouth referrals. Its time they realized that diversification is going to be the life raft of 2007 for most of these folks."

He has created a unique opportunity for real estate and non real estate professionals so they can expand their current services and offer foreclosure prevention assistance.

It is refreshing to know that there are still people out there looking out for the homeowners. Hopefully, in 2007, we will see more Americans helping Americans. It's the only way to survive the market that lies ahead without losing sleep over possible unethical practices just to stay afloat. As a nation it is important to stand together through this foreclosure epidemic and fight back for our fellow Americans.

For more information on Foreclosure Prevention Service, you can click here.

Mortgage Industry Working on Foreclosure-Prevention Fixes

Congress and private lenders are looking to create new tools to help prevent mass foreclosures in the ailing subprime sector nationwide. Tomorrow on Capitol Hill, a House financial services subcommittee will discuss alternative programs to assist home owners who bought more than they could afford at the height of the housing boom, and who are now facing sharp payment increases they cannot afford.

Last week in the Senate, the Joint Economic Committee issued a report suggesting that the Federal Housing Administration (FHA) might play an important role in transitioning subprime borrowers out of high-cost, adjustable rate loans and into fixed rate government insured mortgages.

Private mortgage firms are also ratcheting up their own "loss-mitigation" efforts, reaching out to borrowers heading for-but not yet in-serious delinquency. EMC Mortgage Corp., a subsidiary of Wall Street bank Bear Stearns, announced creation of a roving 50-person "Mod Squad" team of loss-mitigation and workout specialists. Named after a popular TV program from the late 1960s-early 1970s, EMC's Mod Squad plans to work in dozens of cities with borrowers individually, and to reach out through community and credit counseling groups.

The squad's goal will be to modify the terms of mortgages to better fit borrowers' actual economic situations today. Among the optional forms of modification will be lowering interest rates, switching from floating-rate to fixed rate, restructuring payment schedules and deferring repayment of arrears. EMC is not offering the program solely out of the goodness of its heart, however. Foreclosures cost bond investors around $80,000 per case, whereas a loan modification may cost just a small fraction of that.

Tom Morano, global head of mortgages for Bear Stearns, said "proactively avoiding foreclosures can reduce the severity of losses, benefiting both homeowners and bondholders. (It's) a win-win proposition."

Meanwhile, attention is being focused on new foreclosure prevention concepts that go beyond loan modifications and do not require "short sales" of properties or deeds in lieu of foreclosure to satisfy the owner's debt. One idea is being discussed on Capitol Hill was proposed by a Virginia-based loss-mitigation firm, Lyons McCloskey LLC. The program is a variation of FHA's "partial claim" option, where money is advanced to bring a borrower's loan account current. The advance is structured as a second lien against the property, but carries no interest rate and must be paid from the proceeds of any future sale of the house.

In the Lyons McCloskey plan, seriously delinquent borrowers would be refinanced into fixed-rate mortgages insured or provided by FHA, the VA, Freddie Mac or Fannie Mae. The refi costs and any arrears on the previous mortgage would be treated as a "soft second" lien with no interest payments due. FHA would partially guarantee the second lien, and the bondholders or investors would assume the risks on the uninsured portion.

Full payment of the lien would not be due until the house sold or the homeowners had the financial wherewithal to pay off the debt.

The key to this program, according to Bob Lyons and Joe McCloskey of the loss-mitigation firm, is that it has the capacity to handle situations where borrowers are able to make mortgage payments at a lower interest rate, but are shackled with arrears that they can't afford to repay and mortgage balances in excess of the current home value.

Some legislation would likely be required for any FHA role in this or other new programs, but housing leaders in both the House and Senate appear ready to consider foreclosure-prevention remedies as part of pending FHA reform legislation.