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Facing Foreclosure? Get Counseling

An inexpensive part of the federal effort to dig America out of the subprime crisis appears to have promise.

Want to save $454 a month or more than $5,000 a year on your mortgage payment and escape foreclosure?

As a new study conducted by the Urban Institute for NeighborWorks America suggests, that’s the happy result for more than half of the clients of the National Foreclosure Mitigation Counseling program.

The legally mandated report, which studied the program’s first full year, 2008, found that homeowners who take advantage of the free counseling — it’s government-funded — are 62.5 percent more likely not to lose their homes to foreclosure than those who sail that legally fraught area alone.

Looking at 61,000 loans, about a fifth the NFMC workload that year, the authors asked, “Did the NFMC program help homeowners avoid foreclosure? Did the NFMC program help homeowners cure an existing foreclosure? Did the NFMC program help homeowners receive loan modifications that resulted in lower monthly payments than they would have otherwise received without counseling?

Their conclusion: “This preliminary evaluation of program effects indicates that the initial answer to these three questions is ‘Yes’.” Counseling wasn’t a cure-all, though — homeowners in or heading into foreclosure, as opposed to those merely delinquent on their loans, saw the most benefit.

“Homeowners who see a counselor have a better response than those who try to work it out on their own,” summarized Jeanne Fekade-Sellassie, who directs the NFMC program for NeighborWorks. “The counselor can be their advocate and can help them understand what their options are when they’re facing foreclosure.”

As any homeowner who has tried it knows only too well, going solo means hours of being put on hold (often with a disconnect at the end), months of waiting to hear the news (good or bad), and in far too many cases, delays caused by lost or out-of-date documents, not to mention information that’s incomplete or just plain wrong.

Marietta Rodriguez, who heads NeighborWorks’ foreclosure prevention efforts, explained the panicked homeowners’ point of view to an interviewer with the radio program Marketplace: “In many cases we will fax it and e-mail it back into that same system, just overloading them again because we don’t have a sense of did they get it? And if they did get it, it may be sitting there, so we’ll send it out again. It’s just this very vicious cycle of communication.”

Crest of a Save
The foreclosure crisis started biting in 2007, setting the stage for the larger national economic downturn as risky mortgage instruments (adjustable-rate mortgages, no-down-payment options, balloon mortgages, etc.) began taking their toll on individual homeowners (and those who had lent to them). Two years later, the foreclosure rate “shattered” old records with 2.8 million foreclosure notices posted, and 2010 is predicted to break that record.

The federal government established a foreclosure-counseling program in 2007 as part of the 261-page Housing and Economic Recovery Act. It authorized an initial $180 million “to make grants to counseling intermediaries … to hire attorneys to assist homeowners who have legal issues directly related to the homeowner’s foreclosure, delinquency or short sale.”

Another $230 million has since been allocated to the program, and ongoing funding for the program — it’s been folded into the Obama administration’s “Making Home Affordable” initiative — appears safe. This is good, says Fekade-Sellassie, because the rate of foreclosures is not expected to decline until 2012.

NeighborWorks, which has worked with the federal government since the 1970s under the moniker of the public/private Neighborhood Reinvestment Corporation, knows the territory. Operating through its network — 230 community development organizations in more than 4,400 urban, suburban and rural communities in 50 states plus Puerto Rico and the District of Columbia — it has helped 1.2 million low- to moderate-income families since 1991.

“The NFMC program clearly is reaching the homeowners who have been hardest hit by this housing crisis,” said Ken Wade, NeighborWorks America’s CEO. By mid-November 2009, NFMC had paid for 633,294 homeowners to receive counseling and 5,237 scholarships given to foreclosure counselors. (Compare those numbers to the first reports from the loan modification arm of Making Home Affordable, which by December had made 31,000 permanent changes to mortgages, although some 728,000 modification processes had been begun.)

The audience for NFMC services is, as might be expected, drawn from the desperate. The Urban Institute found that 75 percent were already delinquent on their mortgages when they sought counseling, and 22 percent had already received a foreclosure notice.

While the NFMC program “somewhat reduced” the likelihood that counseled homeowners would end up in foreclosure, it was “even more effective at helping homeowners cure an existing foreclosure,” according to The Urban Institute study.

“The number of homeowners who were moderately delinquent (2 or 3 months) and experienced a foreclosure would have been 4,975 compared to the 4,095 actual foreclosures estimated.” While those numbers pale compared to the scale of the problem, the savings from even those numbers starts to add up. “By helping to avoid these foreclosures,” the report stated, “the NFMC program created potential cost-savings of $33 million between January and December 2008.”

As for “curing” foreclosures, “During the first year of the program, counseled homeowners were about 1.6 times as likely to get out of foreclosure, and avoid a foreclosure completion, than they would have been had they not received NFMC counseling.”

NeighborWorks’ Fekade-Sellassie agrees. “Those who get counseling are 60 percent more likely to avoid a foreclosure than if they had not received NFMC counseling. It benefits the homeowner who is facing foreclosure to get help as early as possible so that they have as many solutions as may be available to them. To reiterate, the main significance of the report is that foreclosure counseling works.”

Wolves in Sheep’s Clothing
Foreclosure counseling isn’t solely a federal activity. Take Wisconsin, which has often served as a public policy lab. Within the city limits of Milwaukee, more than 10,000 foreclosures were initiated in 2007 and 2008, double the annual rate seen in 2000 to 2005, the year when predatory lending reached its own zenith.

The Milwaukee Foreclosure Partnership Initiative, launched within five months, issued a report on steps the city should take to prevent foreclosures, intervene once the foreclosure process had started and stabilize neighborhoods hardest hit. In that vein, Attorney General J.B. Van Hollen chose Marquette University Law School as the site of the Milwaukee Foreclosure Mediation Program, a decision made in part because he felt the school could scale its efforts statewide.

“More than 90 percent of homeowners who are subject to foreclosure filings go through court proceedings without an attorney,” the Milwaukee initiative reported. “Housing counselors also serve as advocates for homeowners during the foreclosure process but are currently stretched beyond capacity, and report that many homeowners are simply not aware of their services or reluctant to ask for help. As the surge in sub-prime lending was in part a result of a lack of financial literacy on the part of borrowers, expanding the capacity and reach of housing counseling agencies will be necessary to avert similar future problems.”

But not every non-federal counseling offer should be taken at face value. NFMC counselors are trained to warn homeowners about scam artists who claim to be foreclosure prevention experts.

Fekade-Sellassie says, “There are for-profit entities that prey on people who are in foreclosure situations. The only thing legitimate foreclosure counselors might charge for is the $40 cost of pulling your credit report; but the scammers charge anywhere from $3,000 to $7,000, and then their corporation dissolves, and you never see them or your money again.

She pointed to the sites and as reliable site where consumers can use to get information about these scams and report them.

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