Testimony of John Dodds, Director of the Philadelphia Unemployment Project
before the Subcommittee on Housing and Community Opportunity of the House Banking and Financial Services Committee
September 15, 1999

I would like to thank the Committee for giving me the opportunity to appear before you today on the critical issue of homeownership in the United States. The Philadelphia Unemployment Project, under my Direction, has been deeply involved in helping families preserve their homes ever since the early 1980’s. We are all too aware of how temporary economic problems such as unemployment or illness can lead to the loss of a families most basic and important possession, its home.

We are a HUD approved housing counseling agency and provide mortgage default counseling to families threatened with foreclosure. We have also been deeply involved with policy regarding foreclosure prevention. We drafted and played a key role in the passage and implementation of Pennsylvania’s Homeowners Emergency Mortgage Assistance Program (HEMAP), which has provided assistance to nearly 25,000 Pennsylvania families since its passage in 1983. We have been involved with discussions with HUD on reform of its Assignment program and the implementation of the new Loss Mitigation Program. We have worked with Representative Luis Gutierrez on HR 595 to provide foreclosure assistance to FHA homeowners.

We think that the purpose of HR 1776, which is to expand homeownership in the United States, is extremely important. We have been working on this issue from the standpoint of helping American families to maintain their dream of homeownership. Unfortunately, in the FHA market foreclosures have been rising dramatically since the elimination of HUD’s former foreclosure prevention program, the Assignment Program. Since that time HUD has been implementing a new Loss Mitigation Program. Our experience and research have indicated to us that this program has not been effective and has led to an increase in foreclosures despite a booming national economy.

To illustrate, in 1996 there were 60,884 FHA foreclosures, the forth-consecutive year that foreclosures dropped following the 1991-92 recession. However in 1997 there were 71,599 FHA foreclosures, a 15% increase and in 1998 foreclosures rose again to 76,033. Current numbers show that foreclosures in 1999 should be no lower than in 1998. This rise in FHA foreclosures has occurred during a period of ever decreasing unemployment in the country. These foreclosures are very costly to the FHA insurance fund as each one costs FHA on average $31,000. Preventing foreclosures saves money and maintains homeownership for American families.

The Assignment Program had several flaws but it did help many families preserve their homes. It gave deserving families up to 36 months to recover from an economic problem and resume making their mortgage payments. 62% recovered and were able to maintain their homes according to HUD’s Office of Policy Development and Research in a 1995 study. The program was eliminated in 1996 in an effort to save funds for HUD and reduce staffing. It was replaced by the Loss Mitigation Program, which is based on the concept that market forces will prevent foreclosures. Homeowners apply to their mortgage companies for help in preventing foreclosures and HUD offers lenders modest financial incentives to use the Loss Mitigation Tools to prevent foreclosure.

Unfortunately the tools have not been effective. Housing counselors who attempt to assist families to use the tools have had little luck in getting mortgage companies to offer help under the program. Almost invariably a family must already be back on its feet financially to have any hope of getting help under the Loss Mitigation Program.

HUD did not design Loss Mitigation to prevent foreclosures but to reduce costs by cutting staffing. Of the families who formerly had been provided ongoing assistance under the Assignment program HUD anticipated that 69% would lose their homes. Under pressure from members of Congress HUD is now pushing for homeownership retention under Loss Mitigation. However, surveys of mortgage default counselors from around the nation have found that the foreclosure prevention tools have been difficult to use. The people on the front lines know that this program only helps people who are back on their feet. Over 25 local housing counseling agencies have signed on to a letter urging support for HR595 to provide longer term aid to deserving families.

HUD is pointing to an increase in use of the Loss Mitigation tools. However, we have seen no indication that these tools are being used for the family most in need of mortgage assistance, the family facing a period of extended unemployment or illness who cannot project an ability to make a full mortgage payment at the time of application for assistance. While the use of loss mitigation for families who have recovered is positive, the families who most need help and are most in jeopardy of loss of their home are not being assisted.

The Loss Mitigation tools are 1) Special forbearance, which means that a reduced or suspended mortgage payment is allowed for a period of time, 2) Loan Modification, where interests rates are reduced on the mortgage and arrears included in the new loan, 3) Partial Claim, which allows defaulted mortgage payments of up to 12 months to be loaned to the family, 4) Deed in lieu of foreclosure, where the deed is returned to the lender, and 5) Pre-foreclosure sale where the family is assisted to sell their home and foreclosure is delayed.

The decision to utilize loss mitigation tools is made by the lender, who has little interest in servicing a troubled loan. This is especially so since HUD provides a complete loan guarantee and takes the property off the lender’s hands. Very often a collection mentality pervades the decisions of lenders and homeowners have no recourse to a lender’s refusal to offer loss mitigation. Homeowners usually don’t even know there is a program. On top of this, funding for housing counseling to help families through the Loss Mitigation process is limited and a further reduction in funds has occurred in the FY 2000 HUD budget.

The individual Loss Mitigation tools have serious problems when it comes to preserving home ownership. As I have previously mentioned they only work for families who have already recovered financially. Also, the foreclosure process proceeds at the same time that Loss Mitigation is being considered, which means that large legal fees begin to accumulate. The homeowner must pay these legal fees before they can be approved for one of the tools. These fees range from $1,000 to $5,000 or higher, which puts a tremendous burden on the already financially strapped homeowner.

The Loan Modification tool is the most heavily utilized of the home preservation options. However, it only works when the homeowner’s interest rate is higher than the current rate. Since rates have been low for several years and are now rising this tool will be less effective in the future, even for families who have recovered from their financial losses. Only those families who can make a full mortgage payment can qualify for a Loan Modification.

The Special Forbearance tool, envisions reduced or suspended payments for delinquent homeowners. Our experience, and that of dozens of counseling agencies throughout the country, is that lenders expect a full payment plus additional funds or the total arrears from the defaulting homeowner. Reduced payment plans are extremely rare

The Partial Claim has also had very limited usage according to our research and the partial claim can only be advanced to a family who is prepared to resume full mortgage payments. Recently HUD increased the amount of income needed for families to qualify for a partial claim making it even less likely to be utilized.

The Pre-foreclosure sale and Deed in Lieu of Foreclosure are designed to move the family out of their home quickly, not to preserve the home

It is very important to consider the implications of this program when the next economic downturn hits the country and millions of hard working people are thrown out of jobs for extended periods of time. Loss mitigation, with its imperative that people be back at work in order to receive assistance, will be even more inadequate and thousands more will lose homes. The FHA insurance fund will also be greatly impacted with increased claims and costs if families aren’t given time to make it through until a new job can be found.

What I am pointing out is that there is a large gap in the Loss Mitigation Program. It has led to increasing foreclosures, loss of hundreds of millions of dollars to the FHA fund and great misery to thousands of American families.

This is why we have been working with Representative Gutierrez and many members and organizations across the country to add another level to the Loss Mitigation Program. We want to assist the family who is not back on its feet and may need a period of time before they can resume their mortgage payments. HR 595 is modeled on Pennsylvania’s highly successful Homeowners Emergency Mortgage Assistance Program (HEMAP). If added to HR 1776 it would be a feature that would make the bill an even better vehicle for increasing and preserving homeownership in the United States.

HEMAP was enacted in Pennsylvania in 1983 during the recession of that year. It was signed into law by Governor Richard Thornburgh and has been reauthorized four different times by unanimous votes of the state Legislature. The last time it was made a permanent Pennsylvania program. Families facing foreclosure through no fault of their own are offered loans of up to 36 months. The program gives families the time to recover and operates on the assumption that working families, if given enough time will get back on their feet and maintain their homes. This confidence has been rewarded by the fact that 90% of the 25,000 families assisted since 1983 have been able to maintain their homes. Homeowners apply for assistance at housing counseling agencies located throughout the state and foreclosure actions are stayed pending a decision, thus eliminating legal fees. The program is run by the Pennsylvania Housing Finance Agency.

In contrast to HUD, Pennsylvania has no direct financial incentive to prevent foreclosures. However Pennsylvania has appropriated $177 million over the life of the program. Over $100 million has been repaid to date by assisted homeowners. The program has run with no new state appropriation for FY 1998-99 and the current fiscal year due to repayment of loans. Approval rates for the program have ranged between 29% and 43% depending on the state of the economy and other factors.

We believe that adding the content of HR595, which is modeled on the Pennsylvania program, to the American Homeownership Act will fill in the gaps that make Loss Mitigation ineffective and save the homes of thousands of deserving families. It will reduce losses to the FHA fund associated with foreclosures and reduce the numbers of abandoned houses and blight in our neighborhoods. I thank you for inviting me to add this perspective into these important hearings.