Foreclosure fallout

When Greg Sterns left the ministry a decade ago to become a financial manager at Lighthouse of Oakland County, his work involved helping first-time homebuyers navigate their purchases and counseling people about credit and debt management. Holding classes and running meetings, he'd help individuals and families design budgets, deal with bad credit issues and plan for their financial futures.

In the last two years, his job has changed drastically. He and the rest of a growing Lighthouse staff in Oakland, Macomb and Wayne counties now mainly focus on one problem.

"The primary thing we're working on is the foreclosure crisis," Sterns says. "We're in the trenches and we're getting buried."

An average of 40 calls a day come into the hotline at Lighthouse, a nonprofit community-assistance agency based in Pontiac. Many of the callers become clients, and Lighthouse can help them renegotiate terms with lenders, as well as reviewing finances, debt and household budgets.

In each of the last three years, the Lighthouse client load has doubled, rising from about 200 people facing foreclosure in 2006 to 400 in 2007 and to 800 last year, Sterns says. That doesn't count the hundreds of others who attended classes or just called for advice or referrals for other financial services.

"Obviously the economy has had a huge impact on what's happened," Sterns says. "What we're seeing is a reduction in income and loss of jobs. These have been the two prominent issues — along with an illness — that oftentimes cause people to lose income and gain expenses. That's been going on for the last three years."

And the subprime crisis has hit. Sterns sees people with mortgages with adjustable rates that skyrocketed before they could refinance and lock in reasonable rates. Other clients have plans that have resulted in much higher monthly payments than they expected.

The majority of Lighthouse's clients now are people who purchased or refinanced in the last two to three years, he says. "Probably 90 to 95 percent of the individuals we see are with subprime mortgages," he says. "We knew that was going to happen."

Sterns and other housing counselors are poised to have more clients if the Michigan economy worsens and lenders foreclose on people who miss payments. He and the other housing counseling agencies in southeast Michigan recognized by the Michigan State Housing Development Authority and the U.S. Department of Housing and Urban Development could also see escalating need if — and it's a big "if" — legislation that passed the Michigan House last week makes it through the state Senate.

Part of the three-bill package would require a 90-day period for lenders and borrowers to negotiate terms for loan modification or foreclosure avoidance with a certified housing counselor at the table. If the effort fails, a judge could decide terms of a loan modification.

Other proposed legislation includes bills that would: enforce one- or two-year moratoriums on residential mortgage and land contract foreclosures; create a home loan protection act that would require lenders to disclose the true costs of loans over time; and require a 30-day notice for tenants whose landlords have been foreclosed on.

But the remaining questions include how any state plan would dovetail with President Obama's housing assistance plans and what will ultimately reduce foreclosures and reinvigorate the housing market. Meanwhile, the crisis and the response to it continue to develop.

The Michigan foreclosure crisis is felt especially acutely in southeast Michigan. The 91,734 foreclosures in Wayne, Oakland and Macomb counties in 2007 and the first half of last year accounted for about 55 percent of all foreclosures in the state, according to U.S. Department of Housing and Urban Development data. That compares to the 40 percent of the state's population that lives in the three counties. Include Monroe, Washtenaw, Livingston and St. Clair counties and foreclosures number another 13,549, making up nearly two-thirds of the state's foreclosures in southeast Michigan, among just less than half the state's population in those seven counties, says Kevin Vettraino, a planner with the Southeast Michigan Council of Governments.

Within Wayne County, foreclosure rates range from 4.5 percent of homes in Livonia to 16.9 percent in Highland Park, which has the state's highest rate. In Oakland County, Novi has the lowest foreclosure rate at 3.2 percent, with the highest in Pontiac at 12.6 percent. Macomb's rates ranged from Sterling Heights' 5.9 percent to Eastpointe's 11.5 percent, according to HUD data.

Home prices are falling as well, according to Realcomp, a Farmington Hills multiple listing service. Its report released March 9 showed about 56 percent of home sales in February in the metro Detroit housing market were foreclosed properties. And the average price of a home sold that month, foreclosed or not? About $43,000, a 49.4 percent drop from the previous year.

Not only do foreclosed homes often sell for less, but they also create a tremendous expense to the neighborhoods and communities, says Andy Schor, assistant director of state affairs for the Michigan Municipal League, an organization of local governments.

The League is collecting data for future reports and testimony, but Schor doesn't dispute Lighthouse's findings about the overall costs of foreclosures that he calls "staggering."

"If a home is foreclosed but back on the tax rolls within three months, the cost to society per foreclosure is $22,330," Schor says. "If it is back on the tax rolls after 18 months, the cost is $258,400. This includes costs to homeowner, investor, municipality, neighbors. For municipalities alone, the costs of a three-month hiatus is $430 per foreclosure. For 18 months it is $34,200. This includes taxes, costs to maintain a foreclosed property (blight, cutting grass, etc.)"

Schor notes that costs compound dramatically the longer a property is in foreclosure. Municipalities have to provide more services, neighboring properties lose more value over time, banks may stop paying taxes, and all parties incur mounting legal costs.

Despite the impact, Lansing has done little to respond, charges Jerome Goldberg, a Detroit attorney who is active with Moratorium Now!, a group spun off from the Michigan Emergency Committee Against War and Injustice.

Goldberg has pressed for an outright moratorium on foreclosures and has called for the governor to declare a state of emergency to prevent them. "She's the only one who can declare a state of emergency under Michigan law," he says. "She has said the banks will never go for it. That's the idea of the moratorium: to compel the banks to keep people in their homes. It's not voluntary."

Goldberg has worked with Sen. Hansen Clarke (D-Detroit) to craft a bill calling for a two-year moratorium on mortgage foreclosures. During the 2007-2008 session, the bill went to the Republican-controlled Senate Banking and Financial Institutions Committee and never had a hearing.

Clarke re-introduced the measure just weeks into the current session along with other bills including plans to stay foreclosures for unpaid property taxes, allow housing development authorities to offer foreclosure extension guarantee programs, and require a 90-day notice for tenants whose landlords have been foreclosed on. The bills are in committees without hearings scheduled.

"The foreclosure crisis is really destabilizing the entire world economy now. That's why I'm making it a big issue. If we really want to slow down the rate of decline, especially of our economy here in Michigan, we have to help our homeowners," Clarke says. "The challenge is getting elected officials to have the political will to resist the special interest lobbying by the financial institutions. They've been very persuasive."

The way Goldberg sees it, banks shouldn't get to write the law, literally or representatively through sympathetic (mainly Republican) legislators. "People are losing their homes. People are losing their livelihoods. That's a real question for us. I'm not going to lie to you. We're not concerned about the banks so much," he says.

So far, the only package to move swiftly is the three-bill group — House Bills 4453, 4454 and 4455 — that would create a 90-day period for lenders and borrowers to get to the table with a housing counselor to renegotiate loan terms or a redemption payment procedure. If those discussions fail, a judge could oversee discussions.

"It's an incentive-based process which is good. It rewards good behavior on both sides of the coin, which is good," says Andy Coulouris (D-Saginaw) who was chief sponsor of one of the bills.

As chair of the state House Banking and Financial Services Committee, Coulouris held hearings on the three bills within weeks of their collective introduction.

The Feb. 26 and March 5 morning hearings were crowded with lobbyists, housing advocates and state officials. Supporters praised the legislation, calling it the first significant effort Michigan elected officials have put forth. The banking and lending industries opposed it, especially the judicial review provision.

Here are a few of the comments they made at the hearing:

• Shanelle Jackson (D-Detroit), the chief sponsor of one of the three bills, said, "There used to be an inclination for folks to say this disproportionately affects this group or that group. What we've learned in the last year and a half, two years, is there are very few families or communities across race lines, socioeconomic lines that have not been affected by the circumstances of mortgage foreclosure."

• Lisa Nuskowski, a co-chair of the Michigan Foreclosure Task Force, said, "I think the bills are really strong in that the emphasis is on the pre-foreclosure process. I think it's really important we reach out to folks before they head down the road to foreclosure."

• Murray Brown, director of development for the Michigan Mortgage Lenders Association and the Michigan Financial Services Association, said his groups supported the bills "in concept." But he opposed a provision in the bills as introduced that would have required personal service from the lenders to the borrowers notifying them of the 90-day negotiation period. "That really makes us uncomfortable," he said. "It's costly to repeatedly attempt to make personal service. We want to look at that and see what can be done to improve that part of the requirement." Brown's concerns were recognized. The bill as passed by the House requires notification only by certified mail.

• Joelle Demand, policy director at the Michigan Banking Association, said the real problem is borrowers don't go to their lenders as soon as possible when they begin to have trouble making house payments. "If there is something our members can offer them, they'll offer it," she told the committee. The MBA opposes the bills.

• Mike Kus, legal counsel for the Michigan Association of Community Bankers, said the group was neutral on the bills, supporting the idea of lenders and borrowers working to keep homes occupied but opposing the judicial process in the bills. "We're concerned about the time delay this causes," Kus said. The judicial process could add a year onto the foreclosure process, Kus said, making it two years before a lender could take possession of a foreclosed property. During that time, no payments — mortgages or taxes — could be made and if the owner leaves the home, it could be vandalized and otherwise lose value. "I'm not sure that's in anybody's best interest in the long run," he said.

The three bills passed out of committee earlier this month with Democrats approving them and Republicans abstaining. Last week, the full House, which has a Democratic majority, approved them on a 75-33 vote, mostly along party lines. The bills now go to the Republican-controlled Senate.

Jim Marleau (R-Lake Orion) was the only member of the Banking Committee to support the measure after abstaining from the committee vote. During discussions at the hearing, he agreed that studies showing the costs of foreclosures to communities raise legitimate concerns, but called legislation to stall foreclosures "uncharted waters."

He said one of the problems was borrowers failing to address their problems making payments. "It's denial," he said.

One of the requirements of the legislation, Coulouris responded, was that homeowners call housing counselors. If the borrower does not respond, he explained, the foreclosure proceeds according to current law.

Speaking with Metro Times days after the measure passed the House, Coulouris predicted some foreclosure measure will pass the Senate, but realized the provision for negotiations to go to a judge are a sticking point.

"The point of the judicial force or threat, so to speak, is it's supposed to be a stick to get the lenders to actually do good loan modifications where there should be loan modifications. If it works well, it will never be used," Coulouris said. "Nevertheless, it's time that the lenders do not want [homeowners] to have."

The threat of judicial intervention, he explained, will act as an incentive for lenders to make loan modifications happen.

Randy Richardville (R-Monroe), the chair of the Senate Banking and Financial Institutions Committee — the same committee that has bottled up reform legislation introduced by Clarke — did not return telephone calls from Metro Times.

Elliot Spoon is scrambling to get his syllabus together for a course he teaches each summer at Michigan State College of Law, where he's a professor and an assistant dean. No textbook really works as well as he'd like for the class. His lecture notes and assigned readings — from just last year — can't keep pace with changes under way.

The course: Housing Finance.

Spoon developed it nearly a decade ago to help students understand the mortgage banking system, how loans are issued and securitized, and what state and federal laws are influencing the system. During the last six months, he's started revamping the course to reflect the housing collapse, the foreclosure crisis and President Obama's plans to help.

"It's changing a lot for this summer. The whole system is totally different now," he says. "Now we're talking about how to repair the whole system, what the government's going to do. ... There will be profound questions impacting our housing finance system."

Among the new topics for this summer's course is an examination of the "Making Home Affordable" plan that President Obama released last month.

The plan provides two programs: one applies to refinancing of some Fannie Mae- and Freddie Mac-held mortgages and the other prescribes some loan modification by lenders who received bailout money.

"I give the administration credit for attempting to be creative, particularly with respect to the modification side. It's not perfect, as I said. And not only is the jury still out, I don't think the jury is empanelled yet in knowing whether this will work," Spoon says.

The refinancing portion applies to mortgages held by Fannie and Freddie that amount to 105 percent or less of a home's value. (Homeowners can see if Fannie and Freddie own their mortgages by checking at www.fanniemae.com or www.freddiemac.com. Other information is at tinyurl.com/cos2kk.)

But with housing values in southeast Michigan having fallen significantly over the past few years, that legislation does nothing to help all those who owe more than their homes are worth.

"We know up front there's a whole class of loans that would not qualify," Spoon says. And with Michigan property values continuing to decline, the number of people able to qualify will inevitably shrink even further.

Still, Spoon is cautiously optimistic about the effort.

"The borrowers need help, the lenders can't afford more losses, and nobody wants more real estate coming onto the market and pushing prices down further," he says. "The interests are never completely consistent, but at some point the interests overlap and we have to take advantage of that."

Congress, for its part, generally recognizes the importance of the housing market crisis to the overall economic picture, says Gary Peters (D-Bloomfield Township). "There is a pretty broad consensus that the foreclosure issue has to be dealt with," says the freshman congressman, who sits on the House Financial Services Committee. "There are a variety of approaches that are being taken, central to getting the economy moving forward. The real estate markets have to be stabilized."

Meanwhile, the real answer to what ails Michigan housing markets is major economic improvements with jobs. And no one can say when that might happen.

For Fred Miller, an attorney with the United Auto Workers, the mandated negotiations between lenders and borrowers are an improvement to what he's seen happen when individual homeowners sometimes have tried to work out deals.

Miller is one of 280 attorneys around the country who provide legal services for UAW members and retirees. "In the last five years, accelerating in the last two or three, we've had a lot more people facing foreclosure and a lot fewer people having problems with construction, which was big for a while," he says.

Since 1990 he's worked for the UAW, finding foreclosures always involve people in the financial distress, but the types of mortgages his clients have "changed drastically."

With money available from securitization and foreign lenders backing "risky" loans — people with poor credit or no down payments — mortgage brokers got busy. "Bait and switch, very common," he says, describing his clients' loan processing. He's had clients who described what they were told about their mortgage at closing — the type of loan, the costs involved and other terms. But when they tried to modify loans or refinance, the documentation of the original loan showed a different and more costly plan.

Miller acknowledges that, when home prices were soaring and interest rates dropping, some refinanced their mortgages, borrowing against the inflated value of their homes to pay off credit card debt. That worked as long as home values continued to rise. But now, with home prices plummeting, they owe more than the homes are worth. It's called being "upside down," and leads to people simply walking away from homes they can't sell. "Obviously that's poor understanding of finances on their part," he says.

But the biggest problem with the UAW members has been the decline of income. "What you've seen with our clients is the end of overtime pay, that essentially standards of living have dropped even among those who have kept their jobs. Spouses have lost jobs or pay has dropped or work on the side that a lot of people have done has dried up," he says.

Sometimes clients reach him after they've tried loan modification on their own. Many failed, some were "excellent," and Miller believes the new federal housing plan will help because it gets people to the lender, not just the servicer of the loan who may not have the same interest in modifying the deal.

"I think some of the big lenders are serious about not accumulating more empty houses and they're helpful," Miller says.

Sterns, as a housing counselor, says that's exactly what he's seen in the last few months.

"If you had talked to me four months ago, I would say there's an awful lot we can try to do," he says. "Today we're a lot more successful than we were four to six months ago. A lot of that I think is a realization from lenders, particularly in this market, that homes are not going to be sold if they foreclose on them and take over."

Sterns has a file folder of phone numbers he describes as "gold." It's full of counselor-only lines set up by lenders, and the list has grown in just the last several weeks. "I can call that number and get through to somebody who's going to talk to me and, today, probably listen to me," he says. "It's improving dramatically."

With the federal help for homeowners starting this month and the Legislature poised for possible passage of the new process, Michigan homeowners might see some relief and lenders might stem the tide of toxic assets, says Charles Steele, assistant professor of economics at Hillsdale College.

But how, exactly, will it be funded?

"Someone is going to be stuck with the cost of this," he says. "I think ultimately it's going to go back to taxpayers, who will be stuck with it. How it works out remains to be seen."

Pending legislation

Here are summaries of a few of the bills related to foreclosures and home purchases that have been introduced in the Michigan Legislature since January.

Senate Bill 29
Sponsor: Hansen Clarke (D-Detroit)
Would provide a two-year moratorium on foreclosures. Identical to a bill introduced last year that was never able to get a hearing.
Status: Referred to Committee on Banking and Financial Institutions.

Senate Bill 30
Sponsor: Dennis Olshove (D-Warren)
Would allow a stay of foreclosure for unpaid property taxes.
Status: Referred to Committee on Banking and Financial Institutions.

Senate Bill 32
Sponsor: Hansen Clarke (D-Detroit)
Would require a 90-day notice to tenants for eviction after foreclosure on the rental property.
Status: Referred to Committee on Judiciary.

Senate Bill 370
Sponsor: Gerald Van Woerkom (R-Norton Shores)
Would require a disclosure statement stating the anticipated amount of taxes following a transfer of ownership that would be required to be signed by buyer and seller, real estate agent or closing agent. The legislation, if passed, would give buyers a better idea of their future tax situation, reducing the likelihood they will be buying a home they may not be able to afford.
Status: Referred to Committee on Commerce and Tourism.

House Bill 4033
Sponsor: Shanelle Jackson (D-Detroit)
Would establish a one-year moratorium on residential and land contract foreclosures.
Status: Referred to Committee on Banking and Financial Services.

House Bill 4065
Sponsor: Michael Switalski (D-Roseville)
Would create consumer protections against predatory lending.
Status: Referred to Committee on Banking and Financial Services.

House Bill 4271
Sponsor: Richard Hammel (D-Flushing)
Would require a separate disclosure statement with the anticipated amount of taxes following transfer of ownership, to be signed by buyer and seller, real estate agent or closing agent.
Status: Referred to Committee on Commerce.

Source: Michigan Legislature

County by county

Estimated Foreclosure Rate, January 2007-June 2008

County - Percent
Livingston - 5.6
Macomb - 7.8
Monroe - 6.5
Oakland - 6.3
St. Clair - 8.2
Washtenaw - 5.0
Wayne - 11.2

Source: U.S. Department of Housing and Urban Development, Neighborhood Stabilization Program