The other day I was watching the nightly local news like I usually do and they said that the city I work in was just given over 6.5 million dollars from the Federal Government that is earmarked to help stop foreclosure in the city. This is a city of 400,000 and is in Arizona, the state with the third most foreclosures. I figure the city of Glendale has had a bit under 1000 foreclosures this year. (Yes we were the city that hosted the Super Bowl this year, if you were wondering.) The thing that made this meeting pop out to the local media was the fact that the city council had NO idea what to do with the money so they were asking the General public to think of ideas and to go to the council meeting on Nov 25 to present their ideas.
For me this was a challenge. I have been thinking about this for a long time, now there is a forum where I can actually be heard. Very cool. So I have been thinking about it for a week or so now, I will write down in this blog all of my ideas.
The federal government has mostly been focusing on the banks and helping them by buying bad loans or doing other things that really have not worked much so far. For all this effort they have spent billions and the rate of foreclosure is still going up. Some banks have stopped putting many clients info foreclosure simply because they can not afford the write downs. The best hope of stopping it is really focusing on the people who are going into foreclosure.
Foreclosure happens for two main reasons. The first reason is that a house is too far upside down, and the owner simply makes a business decision and walks away, willing to let the bank take the loss because then he does not have to. Many of the houses that fit into this reason are owned by investors who simply are making a business decision that is hurting all of us. There is little we can do in these cases, for these people it is simply a numbers game. The best thing we can do is find a way to help this person sell this house through a short sale. The best buyer may be the tenant that is currently living in the house. As a city we could help these tenants with their down payment and get the bank to lower the amount of the loan enough so that their new payment will be the same or lower than what they have been paying in rent.
The second main reason for foreclosure is because the payments are more than the home owner can afford, this is either because the payments went up or the income went down. There has been a lot of focus on loans that have “Adjusted” and spiked to a much higher payment amount, but only about half of foreclosures are this type. In many cases the home owner has had a change in income from a business failure or job loss and can not afford the payments at this time. Remember it only takes 90 days of missed payments to be put into foreclosure but it takes much longer to replace a job or a business.
So what is the solution? It is in everyone’s best interest to avoid the foreclosure process and banks are very willing to work with customers that ask for help. The best way to help people is to help them take action and to give them the tools to help themselves out of the situation. I would propose that some of the money would be set aside to create an office where people can come to and help writing a hardship letter to their lender, this office would also give advise. There would also be a city website where this information could be accessed. This office could also hold seminars for the public and market these events. All of this should cost well less than $250k per year to run. Once a hardship letter is written most banks will apply 3 months of payments to the account and simply move them to the end of the term. Also many banks are also willing to lower interest rates, reduce payment amounts and even reduce the total outstanding balance. By writing these letters alone it could stop as much as 50% of the foreclosure in the city.
But then we need to go a step farther, I would propose that once the hardship letter is submitted that the city would help would help these people get a loan. Most of these home owners are good hard working people and they will find a way out of their situation soon by either starting a new business, getting a job, or solving their problem another way. By the time people pay late on their house they usually have already paid late on everything else and in our current system that means they can not get a loan to save their house. Miss a few credit card payments, or a car payment, then get a bit behind on your mortgage the only loan you can get it either a short term payday loan or a credit card for $500 at 24% interest, and both of these help little to stop foreclosure. The loan that these people need would be a line of credit that is easy to qualify for, has good terms and is long term so that they don’t need to worry much about it until after they have fixed their problems. In most cases a loan in the amount of 10-15k would be enough to ensure that that household would not go into foreclosure.
Of course the City is not in the business of giving loans to its citizens. But financial institutions are not willing to give loans to these people who need them the most because of lack of credit or income. The solution is a guarantee by the city to pay these loans. I think that the best idea would be to select one financial institution, that already has at least two offices in our city. I would also go a step further and look for a locally owned institution. It should also be a credit union because these non-profits give back to the community more than out of state banks do. You then deposit $5,000,000 of the funds into a CD at the financial institution and make that the guarantee for the loans. With long term, loans that are fairly easy to pay back the defaults could be quite low, well under 20%, and the financial institution could loan out 15 or even 25 million dollars and still not loose a penny on these loans because the first losses will be taken from the $5,000,000. The financial institution also stands to gain because they will only have to pay 1-2% interest on the $5,000,000 but will receive 9% interest on the loans. This interest will allow them to pay for the marketing and administration of the program while making a fair profit. You should select the financial institution based upon the criteria above but mostly on how much they are willing to lend out to Glendale citizens once this $5 million security is in place. Most any financial institution would be willing to write 20 million or more in loans based on a government guarantee of covering the first 5 million in losses.
So who should qualify for a loan? If we give out loans to the wrong people it will not be as effective. Well the plan is to stop foreclosure in Glendale so they first would need to be a homeowner of a house located in Glendale. Next they should actually live in the house, investors should simply do a short sell and give the house to the tenants. Next they should be people who are at risk of default, people who are at least 60 days past due on their mortgage. They also should be people who can not afford their payments, people with payments more than 40% of their household income. Right now there are probably less than 2000 home owners in the city who meet all of these requirements, and if they all received loans for $10,000 it would total only $20 million. There should be no check of credit history or income sources. A credit check could be done but only used to establish that they are using a valid SSN and that they live in Glendale.
So what should the rules regarding this loan be? We should create a system that helps people stay in their house so this is what I suggest. The loan can only be used for making mortgage payments, homeowners insurance payments, property tax payments, and to cover electrical bills and city service bills. When the loan is originated the homeowner would provide a list of these companies. Money can only be withdrawn by going to the financial institution and getting a cashiers check directly payable the company, or by using the financial institutions bill pay service. The loan would be a line of credit with a set limit. People could choose to pay down the loan at any time and even pay it off. For the first 3 months there would be no payments required. After that and for the first 3 years a payment of only 2% (Or $25, whatever is more) would be required. After that the customer must pay 4% (Or $50 whatever is more) each month until it is paid off. The homeowner would only be able to withdrawal for the first 2 years under this program. Using this system all loans that are paid on time will be paid off in under 8 years from the date withdraws stop. These loans would also have a clause that if the house is sold or refinanced some time in the future these loans would be paid off in full from that sale. If a payment is made late there will only be a late payment fee equal to 10% of the missed payment amount or $10 whatever is more. The customer would then have to make up this payment by paying extra on the next two months. In the case of the first mortgage still going into foreclosure in the future this loan would be paid by the security (The $5,000,000). If there are any clients who are more than 90 days past due then the minimum payments for these accounts will be paid for by the security until the homeowner starts paying again or until the loan is paid off. The security would still retain the right to collect funds from any future refinance or sale of the property. An added benefit for the homeowner would be the reporting of this larger loan on their credit reports, for most of them this could be the largest non mortgage they have and if they pay on time could give them a needed boost.
With such a system it will be easy for the financial institution to manage, easy for the client to get a remedy to their problem and it would be the best use of the governments money to help as many people as possible avoid foreclosure. After 10 years the program will be over and there is a very good chance that the city will still have much of the $5 million left, allowing other programs to be done at that time. This system will help between 1,500 and 2,500 household, a number higher than the amount of foreclosures in the past year, putting a stop to most avoidable foreclosures. This is a total win win situation, the city win, the home owners win and even the financial institutions win with lower foreclosure rates and for our partner institution new customers and income from the loans. We also must act fast because every day the situation is getting worse and our fix should not be kept on hold.