Lenders Get Help to Prevent
Foreclosures Among Borrowers

Mortgage lenders are finding themselves a strong ally in preventing foreclosures: community groups.

Consider East Side Organizing Project, a Cleveland neighborhood organization founded more than a decade ago to focus on improving local schools. J. White, among hundreds of other local residents, credits the group for preserving homeownership in the community by serving as a liaison between financially strained borrowers with their mortgage lenders.

Mr. White, 57 years old, turned to East Side a year ago as he was seeking help with negotiating with his lender about modifying the terms of an adjustable-rate loan that Mr. White says he and his wife were duped into by a mortgage broker. The Whites accepted the loan in 2003 out of the desire to lower their monthly payment and pay off other bills that had piled up since Mr. White lost his job a year earlier because of the shutdown of the commercial-printing company where he worked.

Two years after the refinancing, the couple saw their mortgage payment almost double to $2,035 a month. "We did a stupid thing by refinancing with the people we refinanced with and not recognizing the fact that we had an option to just get out of the chair and not take the loan," Mr. White says.

Facing the prospect of turning their house over to the lender, Mr. White and his wife contacted the Department of Housing and Urban Development, the local United Way, and then East Side. "They are very good at working out deals with lenders," Mr. White says of the neighborhood group. Under an agreement brokered by East Side, another lender came through for the couple, agreeing to lend them $147,000 to pay off their existing $167,000 mortgage, and the original lender agreed to waive the $20,000 difference. The Whites got to keep their home.

Amid rising mortgage delinquencies and defaults, community groups like East Side, together with some nonprofit housing counselors, are becoming valuable to financially stressed homeowners to battle against foreclosure. A powerful tool in their arsenal, says Mark Seifert, executive director at East Side, is the fact that "contrary to the common myth, the lender loses, too, when someone goes to foreclosure."

A Federal Reserve study estimates that foreclosure can cost a lender anywhere between 30% and 60% of the outstanding loan balance because of legal fees, forgone interest and property expenses.

"Every party to a foreclosure loses -- the borrower, the immediate community, the servicer, mortgage insurer and investor," says Mike Fratantoni, a senior economist at the Mortgage Bankers Association, of Washington, D.C.

According to the industry group's analysis, three out of four borrowers who enter the foreclosure process leave it through something other than a forced foreclosure sale, in which a lender repossesses a borrower's house and sells it. It means that through lenders' "loss-mitigation" efforts, they either pay off the arrears through agreed-upon payment plans with their lenders or sell their homes to avoid foreclosure and to protect their credit ratings and their ability to borrow again.

Foreclosure prevention has proved challenging for borrowers and lenders. Delinquent borrowers may feel too wary of creditors to reach out to them, while lenders often find borrowers hard to reach. That is where community groups and nonprofit housing counselors come into play.

The East Side group is affiliated with the National Training and Information Center, or NTIC, a Chicago resource center for community organizations that has conducted several studies on financial companies' lending practices. The East Side group is able to help homeowners negotiate with lenders such as Citigroup Inc.'s CitiFinancial Credit Co., J.P. Morgan Chase & Co., and Ocwen Financial Corp. by tapping into the partnerships they have formed over the years with them. The partnerships call on the lenders to be committed to combating predatory lending and foreclosure.

"It's not in the corporate mind-set to work with community groups," says David Rose, a director at NTIC. But lenders "see us as a bridge to reach out to their troubled customers as early as possible." When a lender calls a homeowner about a delinquent loan, Mr. Rose says, the homeowner may not call the lender back. "Borrowers don't see lenders as partners, but as somebody only trying to get money out of them."

That may explain why borrowers never contact their lenders in more than half of all foreclosure cases. A study conducted last year by Freddie Mac, of McLean, Va., and Roper Public Affairs and Media, a unit of market-research company GfK NOP LLC, of New York, found that nearly two-thirds of delinquent borrowers surveyed weren't aware of lenders working out options to avoid foreclosure. Among the common options are forbearance, which temporarily delays or reduces payments, and loan modifications, which changes the payment terms for a fixed period.

If the borrowers knew about those options, "they would be more willing to work with servicers," says Bill Merrill, director of default-asset management at Freddie Mac. Other reasons cited by borrowers for not contacting lenders included embarrassment, fear and "not knowing whom to call."

The survey results, mortgage-industry executives say, serve as a reminder to lenders of the need to strengthen their borrower outreach-and-education programs -- especially when national delinquency and foreclosure rates, though historically low, are creeping up from their year-ago levels.

"We're working to move that contact much earlier," Donna Sheline, head of J.P. Morgan Chase's homeownership-preservation office, says of the interaction between lenders and delinquent borrowers. "The earlier the detection," she says, "the easier the prevention" of foreclosures.

A recent report by online foreclosure-data service RealtyTrac, of Irvine, Calif., showed that nationwide, there was one foreclosure filing for every 1,030 households in September. It projected that more than one million borrowers would see their properties put in foreclosure by the end of the year. The Midwest rust belt has the highest foreclosure rates because of the loss of manufacturing jobs in recent years.

In addition to partnering with community groups, an increasing number of mortgage lenders are embracing the idea of appointing a senior executive as an ombudsman to listen to customers' complaints and make recommendations to senior management as to how to resolve the disputes. More mortgage companies -- such as Freddie Mac and General Motors Corp. finance unit General Motors Acceptance Corp.'s ResCap residential-mortgage arm -- are sponsoring outside housing counselors to offer free foreclosure-prevention and financial counseling to borrowers.

Latisha Carlisle, a housing counselor at NID-HCA, an Oakland, Calif., community-based counselor network, says lenders have become "more receptive" in terms of working with housing counselors. "They realized that we're not trying to get into a blame game for why the borrower enters foreclosure," she says. "We are able to realistically discuss the potential...solutions for the borrower."

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