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Published by the Consumer and Community Affairs DivisionMarch 2008A Critical Foreclosure Intervention Initiative Seeks Expanded Role for Mainstream Mortgage Servicers and Adoption of New ToolsIn this IssueThe Home Ownership Preservation Initiative page 1Conferences Focus on Unprecedented Foreclosures and other Challenges Presented by the Subprime, NontraditionalMortgage Market page 5ShoreBank’s Rescue Loan Program page 11CMAP Prepares GO TO 2040 Campaign: Regional Plan Seeks a Better Future for Metropolitan Chicago page 13Around the District page 15Calendar of Events page 17

Profitwise News and Views welcomes articleproposals and comments from bankers,community organizations, and other readers. Itis mailed (either electronically or via U.S. mail)at no charge to state member banks, financialholding companies, bank holding companies,government agencies, nonprofit organizations,academics, and community economicdevelopment professionals.You may submit comments, proposals, orrequest a subscription by writing to:Profitwise News and ViewsConsumer and Community Affairs DivisionFederal Reserve Bank of Chicago230 South LaSalle StreetChicago, IL 60604-1413or CCA-PUBS@chi.frb.orgThe material in Profitwise News and Views isnot necessarily endorsed by and does notnecessarily represent views of the Board ofGovernors of the Federal Reserve System orthe Federal Reserve Bank of Chicago. 2007 Federal Reserve Bank of ChicagoProfitwise News and Views articles may bereproduced in whole or in part, provided thearticles are not reproduced or distributed forcommercial gain and provided the source isappropriately credited. Prior writtenpermission must be obtained for any otherreproduction, distribution, republication, orcreation of derivative works of ProfitwiseNews and Views articles. To requestpermission, please e-mail or write to theaddress indicated above.AdvisorAlicia WilliamsManaging EditorMichael V. BerryAssistant Editor/Production ManagerMary Jo CannistraContributing EditorJeremiah BoyleCompliance EditorSteven W. KuehlEconomic Research EditorRobin NewbergerEconomic Development EditorHarry PestineGraphic DesignerKatherine RiccaVisit the Web site of the Federal Reserve Bank of Chicago at:www.chicagofed.org

CONSUMER ISSUESThe Home Ownership PreservationInitiative - A Critical ForeclosureIntervention Initiative SeeksExpanded Role for MainstreamMortgage Servicers and Adoptionof New Toolsby Michael V. BerryThe Home Ownership Preservation Initiative (HOPI) is a partnership of Neighborhood Housing Services of Chicago (NHS), the City of Chicago Department ofHousing, the Federal Reserve Bank of Chicago, and major financial institutions including JP Morgan Chase, Citigroup, HSBC, and GMAC Residential Capital, LLC(ResCap). It is a multi-faceted foreclosure intervention program that has served as a national model for cities facing high rates of foreclosure, and has been thesubject of several prior Profitwise News and Views articles.Foreclosure CrisisIn the current climate, the mission ofHOPI takes on a much higher level ofurgency. The graph in Exhibit 1 depictsthe sharp increase in foreclosure starts1city-wide in the past two years inparticular. Foreclosure starts in Chicagorose approximately 40 percent from2006 to 2007; and lower-income,underinvested communities, whichdescribes all NHS target areas ofChicago, are impacted most severely, asthey have higher concentrations of highcost mortgages, homes tend to remainvacant longer, and lower-incomehouseholds have a more difficult timerecovering from the effectsof a foreclosure.South Chicago, Humboldt Park, AuburnGresham, North Lawndale, Englewood,West Englewood, and Chicago Lawn.According to data compiled by NHS, allbut one of these neighborhoodsexperienced more than a 90 percentincrease in high-cost, subprime loansfrom 2004 to 2005 among allmortgagable properties within thecommunity. From 2005 to 2006, thesesame neighborhoods experiencedanywhere from a 4 percent to 21percent drop in high-cost loans onmortgagable properties, but thatdecrease is attributable to sharpincreases in foreclosures; a furthernegative impact was sharp increases invacancy rates in those communities. 2Information for 2007 has not been fullycompiled, but data through the first halfof the year indicate a strong increase inforeclosures, higher vacancy rates, andThe purpose of this article is todocument some of the impacts of thecurrent foreclosure crisis in highlyimpacted and vulnerable communities,and to articulate some of the remedialsteps suggested by HOPI stakeholders,and other actors seeking to address thecrisis through various means.HOPI continues to serve Chicagoresidents in some of the city’s most(historically) blighted communities:Profitwise News and ViewsMarch 2008

declining property values, all wellbeyond the city of Chicago averages.HOPI has from an early stageengaged large financial institutions,including the institutional investmentcommunity, and city government tobring funding and resources to bear,and has produced tangible results.3Through four full years of HOPI’soperation, and much experience withearlier foreclosure intervention initiatives,NHS has, as a result of learning derivedfrom data collection and assimilation,focus groups, and dialogue with frontlinecounselors, added important dimensionsto the program that continually improveits potential for neighborhood impact.The current crisis was fueled byinstitutional demand for asset-backedsecurities. The massive mortgageservicing infrastructure that hasdeveloped to support this demand, andthe complex arrangements that existbetween borrowers, servicers, and assetbacked securities investors underscoresthe need to engage servicing institutionsin both dialogue and remedial action. NHSis making progress on this front, and hasopened dialogue with the AmericanSecuritization Forum (ASF), whichrepresents a cross-section of mortgagebacked securities issuers, servicers, andsecurities ratings agencies.The Key Role of ServicingOrganizations in ForeclosureInterventionMortgage servicers represent oneimportant frontline actor in themortgage industry and in the currentcrisis, as they deal directly withborrowers. An important aspect of aneffective program to prevent andremediate foreclosures is anunderstanding of the borrower’sperspective, behavior, and, obviously,financial situation. To the extent thatservicing personnel can be trained toask appropriate questions and referborrowers to counseling resources earlyin default (or ideally before it occurs, if arate reset is imminent, for instance), they Profitwise News and Viewsmay have a significant impact onpreventing many foreclosures. A keylearning from interaction with andsurveys of HOPI counselors is thatborrowers do not view their loan serviceras a source of assistance when facingdefault. Borrowers are simply unawarethat servicers have loss mitigation unitsuntil the borrower indicates thewillingness but not the ability to staycurrent on their loan.A major HOPI recommendation tomortgage servicing organizations is tomake borrowers aware, in nonthreatening ways, of loss mitigationservices before loans are seriouslydelinquent and options very limited, andto encourage borrowers to take an active,remedial role for their own benefit.Paradigm shifts take time, but there isreason to believe that servicers aremoving in this direction. ASF inDecember issued a position paperentitled “Streamlined Foreclosure andLoss Avoidance Framework forstrong need for more active, aggressive,and hands-on resources. Evidence of thisneed derives from NHS focus groups ofindividuals facing foreclosure, which asidefrom financial distress, also reveal thetragic, human side of foreclosure. Often aserious life event – death or disability of aloved one (or the principal borrower him/herself), loss of employment, and/orinability to find new employment – is theprincipal reason for default. Depression,inertia, and a sense of fatalism oftenoverwhelm home owners under thesecircumstances, and preserving their homemay not be a priority as they work throughcritical life issues.NHS has developed a more nuancedframework for classifying troubledborrowers, with six levels. The top level isborrowers who are likely in a healthyenough financial situation to refinance orotherwise find the means to stay in theirhome. The next three levels representgradually less solvent and troubledhouseholds, with the fourth levelAmong the most vulnerable populations, however, such as thecommunities NHS serves, there is a strong need for moreactive, aggressive, and hands-on resources. Evidence of thisneed derives from NHS focus groups of individuals facingforeclosure, which aside from financial distress, also revealthe tragic, human side of foreclosure.Securitized Subprime Adjustable RateMortgage Loans.”4 For servicing ofdistressed borrowers, the paperessentially divides these households intothree categories: those that have theability to refinance, those that need somekind of loan modification to remain intheir home (and/or refinance), and thosethat have an unsustainable situation thatrequire loss mitigation measures.The ASF paper creates a usefulframework to provide remedial and lossmitigation focused servicing across allborrowers. Among the most vulnerablepopulations, however, such as thecommunities NHS serves, there is aMarch 2008representing the last that has onlylimited opportunity of keeping theirhome(s). The fifth level is borrowers thatwill inevitably be foreclosed, absentassistance to engineer a sale or otherdisposition before foreclosure occurs.The final level is investors, who mayhave abandoned the property. Theprincipal consideration in this instance isthe disposition of the property, and thatit is returned to, ideally, owner-occupiedstatus as soon as is practicable.

Neighborhood Housing Services ofAmerica (NHSA) and Just PriceSolutions On December 26, 2007, PresidentBush signed legislation authorizing a 180 million appropriation for theNational Foreclosure MitigationCounseling Program. These funds areto be administered by NeighborWorks America through a competitive grantprocess. Properly trained and qualifiedhousing counselors can help troubledborrowers to assess their financialcondition, assets, and creditworthiness, and work with currentlenders to restructure or refinancesubprime or adjustable-rate mortgagesthe borrower can no longer afford, orthat is already in default. As thefinancial community and the host ofinterested organizations concernedwith preserving neighborhoods andhome ownership look to broad-basedsolutions, a key obstacle related toservicing severely limits the capacity torefinance troubled borrowers.Currently, each loss mitigationaction, from successful refinancing tosale or transfer in lieu of foreclosure,must be handled on a separate basis,and any negotiations with an existinglender, actually their servicer, also musttake place individually. There is noindustry-wide or broadly compatibleplatform for exchanging data betweencounselors (attempting to aid distressedand/or defaulted borrowers) andmortgage servicers, who can make adecision to restructure, forbear payments,or otherwise modify existing mortgages.Organizations affiliated with NHS areworking to overcome this key obstacle.Neighborhood Housing Services ofAmerica, the secondary market entityaffiliated with NeighborWorks America,has developed an e-commerce platformcalled Just Price Solutions (JPS). JPSprovides access to purchase moneymortgages for households with limited(or no) credit history, using alternativecredit data such as rent and utilitypayments. The platform is beingredesigned in order to provide anefficient means for financial/creditcounselors to upload vital data tomainstream mortgage servicers withoutthe need for servicers to reveal legallyProfitwise News and ViewsMarch 2008

restricted data on individual borrowersto counseling agencies. Both ends ofthis relationship require registration andare password protected. Counselors canprovide a complete financial picture of aborrower facing default, up to andincluding a (current) market value forproperty secured by the mortgageagreement, and eliminating the need forfaxing forms, documents, etc. Exhibit 2depicts the loss mitigation workflow.Notes1 Not all “foreclosure starts” leadultimately to foreclosure. In somecases, a borrower may work out arefinancing, turn over the propertydeed (known as “deed-in-lieu offoreclosure”) to the servicer in orderto avoid the negative impacts offoreclosure on credit history, or reachanother outcome other thanforeclosure.In suggesting new and untestedstrategies to stem foreclosures, it isimportant to recognize the complexrelationship between borrower, servicer,and ultimately the mortgage holder, whois usually several steps removed fromthe organization that originates the loan,and may not be a single entity. However,addressing the current crisis has provedcostly and difficult in many aspects, anda common information platform forindependent, qualified counselors andmortgage servicers may prove to be anextremely important asset.2 For additional Chicago areahousing and foreclosure data, s/pnv2008nghbrhd bkgrnd data.pdf3 Available at: www.chicagofed.org/community development/files/pnvredec07 web all.pdf4 Available at: nclusionThe Chicago Fed’s Consumer andCommunity Affairs (CCA) division isworking on many fronts to address thecurrent foreclosure crisis, which hasimpacted Seventh District cities andurban areas – Detroit was recentlydetermined to have the nation’s highestforeclosure rate – significantly. HOPIoffers a valuable organizational modelfor other areas of the country, and itsmethods are being adapted in othercities. Profitwise News and Views willcontinue to document progress of thisimportant initiative, and CCA willcontinue to work to help advance itsimportant mission. Profitwise News and ViewsBiographyMarch 2008Michael V. Berry is a senior researchanalyst and manager of the EmergingConsumer and Compliance Issuesunit of the Federal Reserve Bank ofChicago’s Consumer and CommunityAffairs division. Mr. Berry is also themanaging editor of, and a frequentcontributor to, the Federal ReserveBank of Chicago’s Profitwise Newsand Views publication. Mr. Berryholds a B.A. in political science fromSusquehanna University and anM.B.A. from DePaul University.

CONSUMER ISSUESConferences Focus on Unprecedented Foreclosuresand other Challenges Presented by the Subprime,Nontraditional Mortgage Marketby Steven W. KuehlFor more than a decade the Consumer and Community Affairs (CCA)division of the Federal Reserve Bank of Chicago has worked with communitydevelopment and governmental organizations to understand and addressgeographically concentrated foreclosures in lower-income communities.Foreclosure is a continual problem in low-income communities; foreclosureshave a more pronounced effect in low- and moderate-income (LMI)communities because foreclosed homes tend to stay vacant longer, and lowerincome families have less savings to fall back on, and accordingly a muchmore difficult time recovering from the financial impact of foreclosure thanmiddle- and upper-income households (Schloemer et al., 2006). The currentcrisis has reached into much higher levels of income and wealth, and is thefocus of much attention from lawmakers, regulators, consumer advocates, economists, and others. It has also had an even more pronounced impact incommunities that already suffered high rates of foreclosure. These communities have few traditional financial institutions, such as banks and thrifts, and mustlargely rely on fringe and/or less regulated financial service providers, such as payday lenders and mortgage brokers, for credit.During 2007, the Emerging Consumer and Compliance Issues unit of the Chicago Fed’s CCA division held two major conferences that focused on the challengespresented by the subprime/nontraditional mortgage market for both lenders and consumers. The purpose of this article is to summarize the major areas ofdiscussion during these two meetings, some of which may offer insights as the Federal Reserve System and many concerned groups and individuals work toaddress and contain the current crisis.In January, CCA convened “An Informed Discussion of Nontraditional Mortgage Products and Other Risks.” The conference was intended as a drill down onnontraditional mortgage products, the financial markets that fueled rapid growth of these products, and their impact on housing markets, both within the state ofIllinois and nationally. A December conference held in Waukesha, Wisconsin, was titled “An Informed Discussion of Nontraditional Mortgage Products and EscalatingForeclosures.” This conference looked at the issue in Wisconsin, and created a regional task force to reach recommendations and an action plan in 2008.An Informed Discussion ofNontraditional Mortgage Productsand Other RisksRepresentatives from the FederalReserve Bank of Chicago provided anoverview of the risks posed bynontraditional mortgage products.“Nontraditional,” “alternative,” or “exotic”mortgage products are residential loansthat include interest-only and paymentoption adjustable-rate mortgages(ARMs) that allow borrowers to deferrepayment of principal and sometimesinterest – essentially to exchange lowerpayments during an initial period forhigher payments later. Nontraditionalmortgages offer potential benefits forhome buyers in strong, stable housingmarkets, and to sophisticated (higherincome) borrowers with irregularearnings, such as consultants, salesexecutives, and others. They were notoriginally developed for mass marketingpurposes; these loans were originallyintended for only a narrow band ofmortgage consumers. Amid industryconcerns, federal regulatory agencieshave issued guidelines to help curtailunprecedented default and foreclosurerates that have resulted from massmarketing of nontraditional mortgages.These guidelines stress the need forclear disclosure of loan terms to theconsumer, and commitment on the partof financial institutions to soundunderwriting standards and riskmanagement policies for alternativemortgage products.Profitwise News and ViewsMarch 2008

Morning Panel DiscussionThe morning panel discussion wasentitled “Nontraditional Mortgages: AConversation with Diverse Perspectives.”Examiner John Taylor of the FederalReserve Bank of Chicago moderated thepanel. John Bellini, senior vice presidentof Paramount Bank, discussed hisbank’s policy of offering nontraditionalmortgage products, but only to qualifiedand properly vetted applicants who needflexibility. Allen J. Fishbein, director ofHousing and Credit Policy of theConsumer Federation of America,expressed concern that such productsmay have a very detrimental impact onconsumers who don’t fully understandthe related financial implications andpotential hazards. Michael Mangin,executive vice president of MarquetteBank, also expressed concern that themortgage industry in general wasextending mortgage credit tounprepared and under-qualifiedhouseholds. Robin Conner, vicepresident and assistant general counselof the Securities Industry and FinancialMarkets Association, discussed theimportant role that the secondary marketplays in liquidity and risk managementfor financial institutions (mortgageoriginators), emphasizing the importanceof smoothly functioning markets, even ifsome fallout – defaults and foreclosures– is inevitable. Mr. Fishbein remarkedthat the fallout impacts LMIcommunities and householdsdisproportionately, and that smoothlyfunctioning capital markets should notbe the only consideration.lending sector over the past ten years.As recently as the late 1990s, noattorneys in the office had litigated amortgage fraud case.Mr. James explained that hisinvolvement with mortgage fraud casesbegan when a couple walked into hisoffice with

Housing, the Federal Reserve Bank of Chicago, and major financial institutions including JP Morgan Chase, Citigroup, HSBC, and GMAC Residential Capital, LLC (ResCap). It is a multi-faceted foreclosure intervention program that has served as a national model for cities facing high rates of foreclosure, and has been the

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