HomeCommunity Programs Help Residents Save Home Using HUD's203(k)
Thanks to a sophisticated negotiation strategy, a mission-driven non-profitand assistance by the Massachusetts Attorney General, a determined long-termhomeowner was recently empowered to reclaim her foreclosed home. A disabledMattapan resident was able to use HUD's 203(k) Program to save her homewith the help of Community Homeowners Association (CHA). CHA is a Boston-basedFHA approved mortgagor offering a unique lease to own program which allowsfirst-time homebuyers, refinancers and those facing foreclosure who cannotqualify for credit reasons an opportunity to purchase or retain their homethrough credit qualifying mortgage assumptions.
Providing homeownership and foreclosure prevention counseling for severalyears, CHA employs the FHA mortgage program to empower those potential borrowerswho are declined by lenders based upon credit problems. Since the majorityof lender declines are due to credit disqualification, a large segment ofthe homebuying market (presumably many with only marginal or temporary creditissues) are denied access to homeownership opportunity for months or years.
Typically, a declined loan applicant will be referred to a credit repairor counseling agency, or directed to a homebuyer education course. Whilethere are many effective programs which provide help, the declined borrowerin virtually every case receives the same advice given by the lender, "payyour bills on time for a year or two, then come back and reapply."With no assurance that a loan will be granted even if his credit is improved,many potential homeowners are left discouraged and disheartened, in a borrower'slimbo, with no ability to project when, or if, he will be allowed into themortgage market.
Forget about that house you have already chosen, never mind that yourbuddy's uncle is giving you the chance of a lifetime to achieve the dreamof homeownership, put your homebuyer's course certificate in a frame onyour apartment wall, explain to your family that they will not become homeownersany time soon, and, with the vagaries and uncertainty of everyday life,hope that you can rebuild your credit over time. And, pray that the creditreporting agencies correctly reports your future bill paying habits.
For many potential homebuyers who suffered an unforeseen hardship, particularlycases involving foreclosure or bankruptcy, but who have since recoveredfinancial stability, there is simply no way to access financing throughtraditional sources. Such applicants, often residents of lower-income, urbanneighborhoods, are forced to seek unregulated, high interest lenders withall the attendant disadvantages for the borrower.
With record numbers of bankruptcy filings, and with consumer spendingand borrowing at unprecedented levels, pressure grows for greater lenderflexibility in dealing with credit issues. Most lenders now have loan productsdesigned to provide some measure of relief for the credit challenged. Unfortunately,such products seldom go far enough to qualify any but the most compellingapplicants.
CHA's program enables the borrower to build his credit profile whileliving in and investing in his future home. By making on time lease paymentsas well as other housing expenses the lessee / assumptor is assured a realopportunity at homeownership. CHA provides ongoing pre- and post-assumptioncounselling and monitors the client's credit and payment practices to ensurethe lessee's ability to own the property within the time limits prescribedby FHA. Additionally, since the lessee / assumptor must pay transactionfees and must escrow security and assumption funds, he has an at-risk "investment"in the property and has every incentive to comply with lease and assumptionrequirements.
This program allows a committed potential homeowner to move into thehome of his choice today (within his income limitations, of course) whilepreparing for ownership in the near future. The lessee / assumptor is responsiblefor all costs associated with the premises, and will benefit from propertyappreciation as well as from approved capital improvements he makes to theproperty.
The Facts
Orrina Turner purchased her Mattapan single-family home more than 20years ago with conventional financing. A reading specialist in the BostonSchool system for many years, her teaching career was ended when she suffereda stroke while at work four years ago. Unable to work, Mrs. Turner fellbehind in her mortgage payments (mortgage balance at the time = $80,000)after expending her savings and that of her supportive family members.
Early attempts to achieve a modification with her lender were unsuccessfuland Mrs. Turner became chronically late with her payments. A subsequentrepayment plan agreement was denied by the new mortgage holder after theoriginal lender was purchased during the megabank merger/acquisition feedingfrenzy of the mid-nineties. The new note holder demanded immediate paymentof all arrears and instituted foreclosure action. Post foreclosure attemptsby family members to avoid eviction by purchasing the property (purchasedearlier by Fannie Mae at foreclosure sale) were unsuccessful as Fannie requiredpayment of principal and arrears (including legal and foreclosure costs),totaling more than $120,000, although neighborhood property values had fallensubstantially.
After lengthy eviction proceedings, including several temporary staysof eviction and a bankruptcy filing, Mrs. Turner was ordered to vacate thepremises. A former client advised the Turners to seek out CHA for help.As it was too late for foreclosure prevention counseling, the family wasadvised that the only permanent solution to Mrs. Turner's problem was forCHA to negotiate with Fannie to the purchase the property and granting theopportunity for the Turners to eventually assume ownership under the agency'sLease with Option Purchase Program.
Initial attempts by CHA to purchase the property were frustrated by therefusal of Fannie's local lawyer to forward CHA's offer to Fannie. Out offear and despair, and as eviction loomed nearer, Mrs. Turner contacted thestate attorney general's office for help. Attorney General Scott Harshbarger'steam of lawyers determined that Mrs. Turner had been treated unfairly bythe failure of Fannie's local lawyer to transmit CHA's offer and his refusalto negotiate in good faith with CHA.
Attempts for informal resolution failed and the attorney general broughtaction in Superior Court seeking to enjoin Fannie from evicting Mrs. Turner.In rejecting Fannie's lawyer's argument that he indeed had no obligationto negotiate in good faith with Mrs. Turner, CHA or the attorney general,Judge Peter Lauriat found that prior Housing Court orders granting Mrs.Turner time "to negotiate with" Fannie to resolve the pendingeviction implied an obligation of good faith in communicating with bonafide interested parties.
The judge found that Fannie had not negotiated in good faith, and issuedan injunction the effect of which was to encourage Fannie to negotiate withMrs. Turner and the attorney general. The judge's action created "amore level playing field" and granted Mrs. Turner greater negotiatingpower with the support of the attorney general.
On June 18, 1997, CHA purchased the property for CHA's original offerprice of $65,000., allowing Fannie to clear its books of a delinquent, nonperformingaccount while resolving an intractable asset management problem; and transforminga potential public relations headache into a win-win resolution acceptableto all. Mrs. Turner did not have to move out and is now a tenant in herformer home. "Thanks to Community Homeowners I will not have to leavemy home. They were able to buy the house, and I know I'll own it again soon.",comments a delighted Mrs. Turner.
She will resume homeownership within approximately one year as she meetsFHA qualifying assumption guidelines. With a lower mortgage payment, improvementsto the property and an assurance of regaining ownership, Mrs. Turner's nightmarehas ended, and she now faces a brighter and more secure tomorrow.
The Financing Strategy
Using the leverage provided by 203 (k), CHA provided Mrs. Turner a realopportunity to retain her home. Requiring only minimum repairs, CHA's totalborrowing was $71,000 which translated into an affordable PITI payment of$725. The after improved value is $90,000. With the right of assumption,Mrs. Turner will be in the advantageous position of securing built-in equityas she builds her credit by making on-time lease payments to CHA. To avoidwindfall potential, CHA required a recapture provision should Mrs. Turnertransfer the property within a prescribed period after assumption.
This example demonstrates that it would have been more beneficial tothe lender had it worked effectively with Mrs. Turner when she initiallyfell into arrears, instead of aggressively seeking to foreclose. Althoughher income had been sharply curtailed, with family support Mrs. Turner wouldlikely have qualified for a workout option, avoiding expensive legal coststo the lender and years of uncertainty and stress for the Turners.
Lessons To Be Learned
Of course, the first lesson learned is to avoid falling into defaultin the first place. The importance of the availability of counseling agenciesspecially trained to deal with preforeclosure issues is critical to maintainhomeowner and neighborhood stability. Had resources been more readily availablein Mrs. Turner's neighborhood it is very likely that she could have identifiedan early alternative to default. All secondary market participants, andmost banks and regulated mortgage lenders have established programs to assistthose who have suffered a hardship to avoid losing their home.
Secondly, in far too many instances the Mrs. Turners of the world arenot provided with reasonable and acceptable opportunities by lenders andservicers to restructure their loans, or to attain adequate and reasonablealternative loan products. The elderly, the infirm and certainly minoritiesare still most often met with a "pay-up or get-out" attitude ratherthan the supportive and sympathetic ear servicers and lenders typicallyprovide to their better-heeled customers.
Thirdly, it is important that lenders increase their efforts to assistat-risk borrowers to retain their homes. Treating all customers with respectand professionalism is not only good practice but it is good for a lender'sbottom line in terms of savings realized by avoiding unnecessary and oftenuncontrolled collection and foreclosure expenses. As in the case of Mrs.Turner, the honest and effective efforts of CHA resulted in the best, permanentsolution for all parties. A fraction of the time and expense used in themulti-year effort to foreclose upon Mrs. Turner could have been used tohelp her to stabilize mortgage and her life.
Lenders and qualified community-based organizations like CHA should strengthencollaborative efforts to promote housing stabilization efforts. CHA providesforeclosure prevention services of behalf of Freddie Mac and has receivedspecial training from Fannie Mae, FDIC, PMI and other lending institutionsto aid individuals and communities.
Hopefully, the Turner example will encourage lenders to become more proactivein seeking out experienced community-based organizations to reduce the rateof foreclosures and to lessen the negative impacts of foreclosure actions,particularly in marginal or at-risk areas. Creative and sound alternativesto foreclosure and compassionate and effective responses to hardship situationswill benefit consumers and lenders alike. Lending policies and collectionpractices should continue to be refined to better promote the national housingpolicy of encouragement for home acquisition and retention.
For more information on CHA and its services, contact:
Dwight Miller at (617) 445-4005
Community Homeowners Association
P.O. Box 2, Dorchester, MA 02121