Wednesday, October 24, 2007

Good Loans Going Bad!

Delinquent FHA loans mount in Michigan
Feds to offer counseling to struggling homeowners
Christine MacDonald / The Detroit News
Alarmed by Michigan's nation-leading rate of FHA foreclosures, federal officials are stepping in to arrange counseling for defaulting homeowners and may reward real estate agents for reselling properties.

Nearly 4 percent of Michigan's Federal Housing Administration loans -- 5,235 -- were foreclosed on in the 12 months ending Sept. 30, according to data compiled last week; payments on about 9,000 more are at least 90 days delinquent in Wayne, Oakland and Macomb counties. Michigan's rate is the highest in any state since at least 2002, and further cements the state as the center of the nation's housing crisis.

Experts say those numbers bolster the belief that Michigan's foreclosure problems go much deeper than the struggles seen nationwide with subprime and adjustable rate mortgages.

They blame Michigan's overall economic troubles for driving up the numbers in the somewhat less risky FHA loans, which require low down payments and are aimed at low- and middle-income borrowers.

"In Michigan, we have determined that the situation has just gotten so severe we need to get out front more," said Laurie Maggiano, deputy director of the U.S. Department of Housing and Urban Development's Office of Asset Management and Disposition. "We don't like the numbers and we want to see them go down."

City officials worry about the toll the vacant houses -- especially FHA homes, which can take longer to work their way out of foreclosure limbo than other conventional loans -- is taking on Metro Detroit. Some communities are taking steps to buy the houses from HUD, rehab them and sell them cheap -- just to get them occupied and back on the tax rolls.

"It's only a matter of time before something bad happens," said Taylor Mayor Cameron Priebe, who is concerned that the empty houses will become eyesores, suppress property values and attract vandals.
Mich.-only plans in works
People who buy homes insured by the FHA secure mortgages through private lenders, such as banks or mortgage companies, and the FHA insures the loan. If a homeowner defaults, FHA covers the lender's loss. FHA clients pay mortgage insurance; the program is self-sustaining and costs taxpayers nothing.

Officials with HUD say they will roll out special, Michigan-only initiatives in mid-November to tackle the problem.

For the first time, HUD is contacting by mail thousands of delinquent FHA borrowers in Metro Detroit who are on the verge of foreclosure and urging them to attend to a Nov. 15 financial counseling event with lenders to potentially negotiate a way to avoid foreclosure.

HUD typically doesn't contact borrowers directly, Maggiano said.

And HUD is considering additional ways to move homes off the HUD inventory, including
lowering down payment requirements even further from the standard 3 percent of the home's cost -- potentially as low as $100 -- to attract buyers. Maggiano said borrowers will still have to prove they will be able to repay the loan.

The maximum FHA-backed mortgage in Metro Detroit is $226,100.

As an incentive to move FHA-reverted houses, real estate agents may be offered bonuses for selling them. And the federal government is reaching out to cities and housing nonprofits to urge them to buy some of the unsold homes, -- anywhere from half off to just $1 -- restore and sell them to people for whom home ownership is otherwise unattainable.

Dearborn bought 60 FHA-foreclosed, derelict homes from HUD for $1 each this year, tore them down and divided the land between adjacent homeowners or combined vacant lots for new home construction, said David Norwood, the city's director of the building and safety department.

And city officials hope to buy and rehab additional homes soon.

Taylor is close to buying from HUD, for $1 each, 11 foreclosed homes that have sat unsold for six months, and has set aside $50,000 in seed money to start rehabbing them. Taylor plans to sell the houses to low- to moderate-income residents.

The HUD homes can sometimes sit longer in foreclosure than traditional loans because there are more parties involved -- the lending institution plus the government.

"We want to minimize this negative," Priebe said. "Every little bit is a start."

The news that Taylor is going to buy the foreclosed house next door to Clarence Schiller is bittersweet. Schiller, 51, has kept an eye on the house for the two years it's been vacant and tracks the nine other vacant buildings on the block that are empty.

But his house could be the next to go. Laid off from his automotive-related job in January, Schiller and his wife may lose their home to foreclosure soon. He is applying for temporary jobs in Alaska, in hopes he can make enough money to save his home.

"It's not good," Schiller said of Michigan's growing foreclosure crisis. "It's not good at all."
Derelicts a drain on area
Experts say it's key for cities and nonprofits to work on the problem because the longer a foreclosed house sits empty, the more it drains nearby property values and becomes a target for thieves and vandals.

FHA loans typically have lower interest rates than sub-prime loans and if the borrowers can't meet those payments, there is likely a broader issue at fault, such as a job loss.

"It's a signal and symptom of a bigger problem," said Pava Leyrer, a president of the Michigan Mortgage Brokers Association. "They don't have the money in general."

More money spent on financial literacy would help, particularly in schools, so that people are realistic about how much house they can afford, she said.

"For us as a nation, this is going to be one of the biggest problems we've faced since the 1930s," said Deborah Younger, executive director of the Detroit Local Initiatives Support Corp, which provides technical and financial help to housing non-profits and are working on solutions to the foreclosure problem. "The numbers are overwhelming."

You can reach Christine MacDonald at (313) 222-2396 or

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