Foreclosure Assistance

Much has been made in the media of late about the quality of loan modifications being made and if these really prevent foreclosures or just delay them. The data on re-default of modified loans looks like at least half run into further payment problems. Although we really need to know more about which loans were offered mods and on what terms before reading too much into this. In the past lenders used mods as a 'last resort' to borrowers in deep trouble. For better or worse mods are starting to be used earlier and for more borrowers with a better balance sheet going in. Of course unaffordable payments and being under water (debt>home value) can happen under a mod, too, so we'll never see stellar performance unless the mod cuts principal and interest.

Thanks to my colleagues at MortgageKeeper Referral Services Inc. the data below provides some evidence of the situation borrowers in default face. MortgageKeeper is used by credit counselors and loan servicers--most notably the 888-HOPE Hotline counselors--to make referrals to local services depending on what the borrower talks about on the phone. For example, a borrower who is behind may blame being out of work as a cause of falling into default, so the counselor looks up a number for an unemployment office in the MortgageKeeper database. There are something like 16 service categories for service agencies in MSAs with the highest rates of foreclosure (45 cities and counting). The chart below is based on 67,500 referrals made to borrowers in 2008 (one borrower could have more than one referral). The red bars are as of December, the blue bars as of June.



Source: MortgageKeeper Referral Services, Inc.
2008 referrals to services (67,500 total referrals)

What is notable here are the jumps in the last two categories: Job Training and Heating/Utility Bills. Heating and Utility assistance moved from 1 in 5 to almost 1 in 3 referrals. December's weather likely plays a role here, but clearly this is a major expense stretching budgets (see previous post).

More interesting is the Job Training category. Job training has jumped from 13% to 23% of all referrals. This suggests people are not just unemployed ("Unemployment Assistance" covers that), but looking to change what they do. Obviousily this will take time. It also suggest workers are trying to adapt to changes in the overall economy, as whatever they used to do no longer seems viable. While a small share of all referrals, child care more than doubled to 7% of referrals. This is likely connected as people move into new jobs requiring different child care arrangements or lower-cost/subsidized care.

Note also the incidence of legal services. The exact nature is unclear, but likely related to financial issues - perhaps the mortgage, another source of credit or even intent to file for bankrupty. If proposals to change the bankruptcy law to allow judges to "cram down" changes in mortgages (basically in involuntary modification) this category is likely to grow signficantly.

The Misc/Other category includes issues such as "Substance Abuse" "Reverse Mortgages" "Income Tax Assistance" "Worker's Comp/Disability" "Mental/Family Counseling" and "Pharmaceutical and Medical Costs". In general these have not garnered many referrals however.

What's all this tell us? Well, first that consumers probably need more than just a 'new' loan. They need to get childcare, get re-trained in another field, get organized and back to work. This a bigger task than most lenders are willing to support. Local services can play a role, but consumers need to know enough to take some steps. Second, the data on utility bills suggest basic budgeting is in demand. Consumers should be prepared for higher energy costs each winter. On the bright side falling energy cost ought to lending a helping hand to borrowers trying to stretch their budgets.