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Housing Perspectives

Research, trends, and perspective from the Harvard Joint Center for Housing Studies

Lessons for Helping Distressed Homeowners – and Avoiding Distress in the Future

In April of this year, the Joint Center convened a symposium entitled Homeownership Built to Last: Lessons from the Housing Crisis on Sustaining Homeownership for Low-Income and Minority Families. With the financial, psychological, and social costs of the recent housing crisis fresh in mind, the symposium gathered policymakers, industry leaders, housing advocates, and scholars to examine how the nation can move forward to ensure safer homeownership opportunities for low-income and minority families, many of whom suffered disproportionately in the foreclosure crisis. (In an earlier blog, Sarah Rosen Wartell, president of the Urban Institute, presented thoughts she delivered in a keynote address at the event.)

The symposium featured new research and analysis from 15 leading scholars and practitioners on the value of homeownership post-housing crisis; consumers’ tenure and housing choices; ways to balance affordability, access, and risk; the government’s role in the evolving mortgage market; and strategies to help homebuyers sustain ownership over the long term. We have begun posting these papers to the Joint Center for Housing Studies website, starting with three on the theme of sustaining homeownership. In their papers, Mark Cole and Patricia McCoy each explore lessons learned in the housing crisis about helping distressed owners, while Jeffrey Lubell examines shared equity homeownership as a potentially safer and more cost-effective form of homeownership, one that can help individuals sustain homeownership and help communities maintain affordability.

In her paper, Patricia McCoy (Connecticut Mutual Professor of Law and Director of the Insurance Law Center at the University of Connecticut School of Law) draws lessons from a thorough critique of servicer and government foreclosure prevention efforts in the recent crisis. Among her findings, loan modifications that do not lower monthly payments often failed: early in the crisis, the majority of loan workouts increased owners’ monthly payments, a serious difficulty for those whose distress stemmed from disruptions to income such as job loss. In contrast, decreasing monthly payments through interest rate reductions, lengthening of loan terms, or – most effectively – principal reductions, have been shown to lower the chances of redefault. Going forward, McCoy emphasizes the need to rethink servicer incentives; as she notes, “Today, servicers are overpaid for servicing current loans and underpaid for processing delinquent loans.” And loan modifications should not be delayed: McCoy notes that redefaults occur less frequently when homeowners receive loan modifications earlier.

In his paper, Mark Cole also emphasizes the importance of early intervention to help distressed homeowners, in his case through counseling. Cole (former Executive Vice President and COO of CredAbility and now President of Critical Mass Solutions) offers insights learned from CredAbility’s work engaging and counseling distressed homeowners in early intervention and post loan modification support programs. Data gathered from 1.6 million first counseling sessions reveals how the profile of distressed owners changed over the 2007 to 2012 period: by 2012, the average owner seeking counseling was older (51 instead of 44), more likely to be middle class, and less likely to be a minority. Drivers of distress evolved too: at the start of the subprime mortgage crisis, overspending and over-obligation were the top reasons for mortgage delinquency and default, but as the recession took hold, reduction in income became a more important factor. CredAbility is also observing that financial troubles are increasingly stemming from multiple issues rather than single problems. Emphasizing that homeowner distress often originates from more than housing debt, the average CredAbility client over 2007 to 2012 had a 32.5 percent monthly housing cost-to-income ratio but a 54.1 percent total monthly debt payments-to-income ratio. Cole argues that one-time financial transactions such as loan modifications are not likely to change habits by themselves; rather, long-term contact with owners through counseling that takes into account households’ comprehensive financial picture is needed.

Finally, in his paper, Jeffrey Lubell urges us to think beyond the binary “own/rent” decision by considering “shared equity” options that fall somewhere in the middle of the continuum, such as community land trusts, limited equity cooperatives, deed restrictions, and shared appreciation loans to limit owners’ likelihood of becoming distressed. Not only can shared equity approaches limit downside risk, their loans often perform better: Lubell (former Executive Director of the Center for Housing Policy and current Director of Housing Initiatives at Abt Associates) cites data finding that less than half a percent of large sample of Community Land Trust homes were in foreclosure in 2011, while the rate for the broader market was 4.63 percent. In addition, most shared equity approaches involve long-term affordability provisions that can help successive owners. While they require a subsidy and implementation challenges are significant, Lubell estimates that shared equity could assist from two to five times as many households with the same amount of money as current grant programs.

Taken together, the three papers make the case for active, early engagement with distressed owners, with solutions that address their entire financial picture and make sense given the circumstances that have led to delinquency or default. Counseling can play a critical role, as the intervention of a trusted third party who knows the system can go far toward helping owners confront and resolve delinquencies. In the future, shared equity forms of ownership that offer more support and help contain downside risk can offer new opportunities for more affordable and sustainable homeownership.