Community Programs Help Residents Save Home Using HUD's 203(k)

Thanks to a sophisticated negotiation strategy, a mission-driven non-profit and assistance by the Massachusetts Attorney General, a determined long-term homeowner was recently empowered to reclaim her foreclosed home. A disabled Mattapan resident was able to use HUD's 203(k) Program to save her home with the help of Community Homeowners Association (CHA). CHA is a Boston-based FHA approved mortgagor offering a unique lease to own program which allows first-time homebuyers, refinancers and those facing foreclosure who cannot qualify for credit reasons an opportunity to purchase or retain their home through credit qualifying mortgage assumptions.

Providing homeownership and foreclosure prevention counseling for several years, CHA employs the FHA mortgage program to empower those potential borrowers who are declined by lenders based upon credit problems. Since the majority of lender declines are due to credit disqualification, a large segment of the homebuying market (presumably many with only marginal or temporary credit issues) are denied access to homeownership opportunity for months or years.

Typically, a declined loan applicant will be referred to a credit repair or counseling agency, or directed to a homebuyer education course. While there are many effective programs which provide help, the declined borrower in virtually every case receives the same advice given by the lender, "pay your 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's limbo, with no ability to project when, or if, he will be allowed into the mortgage market.

Forget about that house you have already chosen, never mind that your buddy's uncle is giving you the chance of a lifetime to achieve the dream of homeownership, put your homebuyer's course certificate in a frame on your apartment wall, explain to your family that they will not become homeowners any time soon, and, with the vagaries and uncertainty of everyday life, hope that you can rebuild your credit over time. And, pray that the credit reporting agencies correctly reports your future bill paying habits.

For many potential homebuyers who suffered an unforeseen hardship, particularly cases involving foreclosure or bankruptcy, but who have since recovered financial stability, there is simply no way to access financing through traditional sources. Such applicants, often residents of lower-income, urban neighborhoods, are forced to seek unregulated, high interest lenders with all the attendant disadvantages for the borrower.

With record numbers of bankruptcy filings, and with consumer spending and borrowing at unprecedented levels, pressure grows for greater lender flexibility in dealing with credit issues. Most lenders now have loan products designed to provide some measure of relief for the credit challenged. Unfortunately, such products seldom go far enough to qualify any but the most compelling applicants.

CHA's program enables the borrower to build his credit profile while living in and investing in his future home. By making on time lease payments as well as other housing expenses the lessee / assumptor is assured a real opportunity at homeownership. CHA provides ongoing pre- and post-assumption counselling and monitors the client's credit and payment practices to ensure the lessee's ability to own the property within the time limits prescribed by FHA. Additionally, since the lessee / assumptor must pay transaction fees 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 assumption requirements.

This program allows a committed potential homeowner to move into the home of his choice today (within his income limitations, of course) while preparing for ownership in the near future. The lessee / assumptor is responsible for all costs associated with the premises, and will benefit from property appreciation as well as from approved capital improvements he makes to the property.

The Facts

Orrina Turner purchased her Mattapan single-family home more than 20 years ago with conventional financing. A reading specialist in the Boston School system for many years, her teaching career was ended when she suffered a stroke while at work four years ago. Unable to work, Mrs. Turner fell behind 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 unsuccessful and Mrs. Turner became chronically late with her payments. A subsequent repayment plan agreement was denied by the new mortgage holder after the original lender was purchased during the megabank merger/acquisition feeding frenzy of the mid-nineties. The new note holder demanded immediate payment of all arrears and instituted foreclosure action. Post foreclosure attempts by family members to avoid eviction by purchasing the property (purchased earlier by Fannie Mae at foreclosure sale) were unsuccessful as Fannie required payment of principal and arrears (including legal and foreclosure costs), totaling more than $120,000, although neighborhood property values had fallen substantially.

After lengthy eviction proceedings, including several temporary stays of eviction and a bankruptcy filing, Mrs. Turner was ordered to vacate the premises. A former client advised the Turners to seek out CHA for help. As it was too late for foreclosure prevention counseling, the family was advised that the only permanent solution to Mrs. Turner's problem was for CHA to negotiate with Fannie to the purchase the property and granting the opportunity for the Turners to eventually assume ownership under the agency's Lease with Option Purchase Program.

Initial attempts by CHA to purchase the property were frustrated by the refusal of Fannie's local lawyer to forward CHA's offer to Fannie. Out of fear and despair, and as eviction loomed nearer, Mrs. Turner contacted the state attorney general's office for help. Attorney General Scott Harshbarger's team of lawyers determined that Mrs. Turner had been treated unfairly by the failure of Fannie's local lawyer to transmit CHA's offer and his refusal to negotiate in good faith with CHA.

Attempts for informal resolution failed and the attorney general brought action in Superior Court seeking to enjoin Fannie from evicting Mrs. Turner. In rejecting Fannie's lawyer's argument that he indeed had no obligation to 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 pending eviction implied an obligation of good faith in communicating with bona fide interested parties.

The judge found that Fannie had not negotiated in good faith, and issued an injunction the effect of which was to encourage Fannie to negotiate with Mrs. Turner and the attorney general. The judge's action created "a more level playing field" and granted Mrs. Turner greater negotiating power with the support of the attorney general.

On June 18, 1997, CHA purchased the property for CHA's original offer price of $65,000., allowing Fannie to clear its books of a delinquent, nonperforming account while resolving an intractable asset management problem; and transforming a potential public relations headache into a win-win resolution acceptable to all. Mrs. Turner did not have to move out and is now a tenant in her former home. "Thanks to Community Homeowners I will not have to leave my 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 meets FHA qualifying assumption guidelines. With a lower mortgage payment, improvements to the property and an assurance of regaining ownership, Mrs. Turner's nightmare has 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 real opportunity to retain her home. Requiring only minimum repairs, CHA's total borrowing 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 equity as she builds her credit by making on-time lease payments to CHA. To avoid windfall potential, CHA required a recapture provision should Mrs. Turner transfer the property within a prescribed period after assumption.

This example demonstrates that it would have been more beneficial to the lender had it worked effectively with Mrs. Turner when she initially fell into arrears, instead of aggressively seeking to foreclose. Although her income had been sharply curtailed, with family support Mrs. Turner would likely have qualified for a workout option, avoiding expensive legal costs to 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 default in the first place. The importance of the availability of counseling agencies specially trained to deal with preforeclosure issues is critical to maintain homeowner and neighborhood stability. Had resources been more readily available in Mrs. Turner's neighborhood it is very likely that she could have identified an early alternative to default. All secondary market participants, and most banks and regulated mortgage lenders have established programs to assist those who have suffered a hardship to avoid losing their home.

Secondly, in far too many instances the Mrs. Turners of the world are not provided with reasonable and acceptable opportunities by lenders and servicers to restructure their loans, or to attain adequate and reasonable alternative loan products. The elderly, the infirm and certainly minorities are still most often met with a "pay-up or get-out" attitude rather than the supportive and sympathetic ear servicers and lenders typically provide to their better-heeled customers.

Thirdly, it is important that lenders increase their efforts to assist at-risk borrowers to retain their homes. Treating all customers with respect and professionalism is not only good practice but it is good for a lender's bottom line in terms of savings realized by avoiding unnecessary and often uncontrolled collection and foreclosure expenses. As in the case of Mrs. Turner, the honest and effective efforts of CHA resulted in the best, permanent solution for all parties. A fraction of the time and expense used in the multi-year effort to foreclose upon Mrs. Turner could have been used to help her to stabilize mortgage and her life.

Lenders and qualified community-based organizations like CHA should strengthen collaborative efforts to promote housing stabilization efforts. CHA provides foreclosure prevention services of behalf of Freddie Mac and has received special training from Fannie Mae, FDIC, PMI and other lending institutions to aid individuals and communities.

Hopefully, the Turner example will encourage lenders to become more proactive in seeking out experienced community-based organizations to reduce the rate of foreclosures and to lessen the negative impacts of foreclosure actions, particularly in marginal or at-risk areas. Creative and sound alternatives to foreclosure and compassionate and effective responses to hardship situations will benefit consumers and lenders alike. Lending policies and collection practices should continue to be refined to better promote the national housing policy 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

Home