Foreclosure prevention/mitigation for affordable mortgage lending
The following is a description of programs and practices that may help an institution to prevent and/or minimize the negative impacts of foreclosure in low and moderate income communities. Please note that the following do not constitute legal requirements. Please also note that no representation is made as to the impact that such actions would have on an institution's safety and soundness.
1. Foreclosure Prevention Practices
- One-on-one pre-purchase and post-purchase residential mortgage counseling:
Most commonly, this activity is performed by a not-for-profit organization engaged in the promotion of opportunities for affordable housing. The counseling is typically designed to help the borrower to understand the lending process, including his or her legal rights and responsibilities as a mortgagor, and to help the borrower to prepare for the financial commitment of becoming a homeowner. Banking institutions can provide grants to support these activities.
- Pre-purchase and-post purchase residential mortgage seminars:
This generally involves a group setting, with seminars conducted either by a not-for-profit entity, a bank representative, or a partnership of the two. Pre-purchase seminars typically include modules on preparing a household budget, while post-purchase seminars may include training in home maintenance. Some institutions require borrowers under certain programs to complete such seminars as a condition of obtaining a mortgage loan. More recently, a few organizations have begun providing training for landlords of small multi-family buildings. Banking institutions can support these activities with grant dollars, in-kind donations of materials or space, or by making officers available for the training.
- Early warning system/intervention/delinquency counseling:
Some banks are involved in arrangements under which they agree to make a referral to a third party not-for-profit counseling agency, each time that a borrower has a 15-day delinquency. The agency then contacts and works with the borrowers to re-organize their finances and address the delinquency. This type of arrangement would require a signed waiver from the borrower giving the lender permission to notify a third party. A bank can cover the counseling agency's costs of operating such a program, or might volunteer staff time to do budget/credit counseling workshops.
- Gap financing:
A bank might fund a nonprofit intermediary that would provide "gap financing" to borrowers who face a temporary interruption of income. For example, if a borrower has recently found a new job after being out of work for three months, and is thus three months delinquent on a mortgage, these funds would be used to cover a portion of the delinquent mortgage amount.
2. Property Disposition Practices
- Facilitating a transfer of the building to tenants or community groups:
In lieu of foreclosure, a bank may develop a process for turning over a troubled building to a community organization interested in maintaining the building as affordable rental housing or converting it to a limited equity cooperative and assign the mortgage to the organization. In the event that a property falls into foreclosure, a lender might agree to give a right of first refusal (to purchase the property) to tenant associations and community groups in the neighborhood, while also offering financing to these groups for the building's purchase and/or rehabilitation.
Likewise, a bank can also provide technical support to organizations seeking to purchase such properties.
3. Practices during foreclosure
- Public notice
Several institutions provide regular notice to community groups, in which they identify all properties upon which foreclosure proceedings have been commenced. Early notice provides an organization with sufficient opportunity to approach and work with tenants in multifamily buildings, to address concerns or to purchase the building. This approach is further enhanced by providing tenants with plain language notice of the consequences of the commencement of a foreclosure proceeding.
4. General recommendations 1
- Enhanced borrower information:
Banks can enhance a borrower's "readiness" to assume the responsibilities of ownership, by helping him or her understand the underwriting process, and by providing a basic understanding of the responsibilities and related costs of maintaining a property. This can be particularly useful with respect to purchasers of multifamily properties, who take on the additional obligation of providing adequate tenant services.
- Loan products and programs:
By directly offering or providing referrals for borrowers to programs that provide emergency, home improvement, or acquisition-rehab loans, a bank can help homebuyers/homeowners ward off problems that might later impact their ability to maintain the property.
- Right to cure:
Although not required by law in New York State, a lender can provide to borrowers advance notice of acceleration that indicates: what the default is; the actions that can be taken to correct the default (i.e., if the default is non-payment, and if the lender agrees, then the borrower can bring the mortgage current to that date, plus any incurred costs); and, that the borrower has 30 days to correct the default or the lender will then be able to demand payment in full and seek to foreclose on the property. The Fannie Mae and Freddie Mac residential mortgage instruments that are used in New York include such a provision.
- Investigate prospective purchasers:
Regardless of whether the purchaser is a community group or a private investor, a bank may seek to investigate the ownership history of the prospective purchaser, including its financial management record, its record of repairing violations in other buildings and it record of paying city taxes and other charges in the buildings.
- Appointment of receivers:
If tenants are not interested and/or lack the capacity to manage a building during foreclosure, then the lender should appoint a receiver to manage the property and to make repairs. If properties are vacant, then the buildings should be properly sealed while the foreclosure process is completed.