Foreclosure Is Not an Option
Given the grim news in lending and home financing in recent months, it would appear that little can be done to stem the tide of foreclosures sweeping the nation.
Nationally, some 4 million homeowners are facing foreclosure this year and another 11 million are “underwater,” meaning that they owe more on their mortgages than their homes are now worth. During the past quarter, foreclosure filings were reported on more than 930,000 properties, with September 2010 being the first time banks repossessed more than 100,000 homes in a single month. The Obama administration took a positive step last year when it established the Home Affordable Modification Program, an agency devoted to helping homeowners in trouble, but by most accounts, it has been a disappointment. To date it has yielded only 520,000 active permanent modifications.
That’s why I’m focusing today on ESOP, an organization headquartered in downtown Cleveland that has been unusually successful in helping struggling Ohioans to hold onto their homes. Last year, ESOP, reported that about 70 percent of those who completed its process received loan modifications that allowed them to avert foreclosure. The organization, which honed its strategy fighting predatory lending in the inner city, has now become an important destination for suburban homeowners desperate for help.
Bank officials say that they try to avoid foreclosures, but the recent “robo-signing” scandal indicates that many have sought to repossess homes as cheaply as possible, even if it has sometimes meant sidestepping the law. (Last month, 50 attorneys general launched a joint inquiry to examine charges that banks used deceptive practices to accelerate foreclosures.) So how has ESOP, a not-for-profit organization with about 50 employees and 10 offices across Ohio, been beating the odds?
ESOP (which stands for Empowering and Strengthening Ohio’s People) engages loan servicers or lenders and borrowers, acting as a good-faith intermediary between the parties, so it can effectively negotiate sustainable mortgage “workouts.” There is no secret to this. For lenders, it means reducing interest rates, knocking off principal, or stretching out loan terms, or some combination of the three. For borrowers, it means making realistic budgets and income forecasts, exploring assistance from governments and other sources, and making reduced payments faithfully.
One thing that distinguished ESOP from the government’s program, as well as other mortgage counselors, is how it holds lenders accountable. It has gotten several large companies, including Bank of America, CitiMortgage, Ocwen Financial Corporation, and Litton Loan Servicing, to sign “fair lending agreements” which spell out the terms of their working relationship. In its agreements, ESOP requires that lenders provide a single point of contact, someone with decision making authority. Without this access, ESOP says, homeowners get bounced around the bureaucracy, making little progress, and files simply vanish, frequent complaints from borrowers who seek to take advantage of the government assistance. ESOP also insists on a defined escalation process for cases it believes are mishandled. Some agreements give it the right to appeal all the way to a lender’s chief executive.
ESOP also succeeds by adding a human element. They bring executives from banks and loan servicers on community tours, where they get to meet their homeowners and see the effects of their policies. These neighborhood tours almost always strengthen ESOP’s partnerships with lenders. Countrywide (now owned by Bank of America) signed an agreement after senior executives took a tour of Slavic Village, an area on the east side of Cleveland where a third of homes, many of them foreclosed by the lender, remain vacant, boarded up, stripped and ransacked, demolished, or occupied by squatters and drug dealers.
So why don’t the banks refuse to sign the agreements or take the tours, and just foreclose? ESOP uses both a carrot and a stick.
The carrot is that ESOP genuinely helps its lenders do something they are not structured to do well: communicate effectively with a large number of distressed borrowers. “[ESOP has] been instrumental in completing that last link of the communication chain without which we’re dead in the water,” explained Paul A. Koches, the general counsel for Ocwen, which services a half million mortgages, and was one of the early companies to form a partnership with ESOP.
Communication between borrowers and lenders remains a significant problem. The state of Ohio’s foreclosure prevention program, “Save the Dream,” forwards its applications from homeowners to loan servicers and tracks the companies’ response rates. In its 2009 report (pdf, p. 16), the response rates for Chase, US Bank and Wells Fargo were all less than 2 percent. By contrast, Countrywide’s rate was 72 percent and Ocwen’s was 85 percent. The latter two have signed agreements with ESOP.
When it comes to dealing with borrowers, ESOP has two major advantages over lenders. First, while lenders have many competing interests, ESOP specializes in saving homes. Second, borrowers tend to trust ESOP ─ which is a free service ─ so they provide more comprehensive and truthful information, the key to a solution. They also know that ESOP can tell when a lender is offering a reasonable deal or trying to take advantage of their situation. In many cases, ESOP gets better information than lenders do — clients are more forthcoming about things like credit card debt and cell phone bills, for example. “Our ability to contact everyone and have a response from everyone can be challenging at times,” notes Joe Ohayon, senior vice president at Wells Fargo Home Mortgage. “And it may be that customers are more comfortable talking to someone local, a trusted third party in their eyes.” Finally, ESOP doesn’t press lenders to do workouts that homeowners can’t sustain, which builds trust among their partners, too.
In its dealing with homeowners, ESOP is both compassionate and tough. The goal is to help clients take control of their lives, not to cushion them from reality. If three phone calls to a client go unanswered or a document requested fails to arrive within five days, the file is closed. The tough love approach works. In 2009, 5,011 homeowners walked into ESOP’s offices and 63 percent complied with all information requests.
But perhaps the biggest reason for ESOP’s success is that, when push comes to shove, it knows how to focus the attention of lenders. That’s the stick — and it harkens back to ESOP’s early days as a take-no-prisoners community organizer that fought to improve education and policing in Cleveland’s poorest neighborhoods. (ESOP, established in 1993, originally stood for “East Side Organizing Project.”) In the late 1990s, when ESOP began focusing on housing and mortgages, it found numerous lenders engaged in predatory practices. In one case, it launched a campaign against a company called Fairbanks Capital (now called Select Portfolio Servicing), accusing it of failing to apply payments and then charging big penalties. As a result, the Federal Trade Commission sued the company and Fairbanks settled in 2003 by refunding $40 million to borrowers.
ESOP reached out to dozens of lenders on behalf of its clients, hoping to save their homes. “We’d write letters. We’d make phone calls,” said Inez Killingsworth, ESOP’s founder. “The lenders would totally ignore us. And then we would have to pay them a visit.”
That’s a euphemism for a “hit.” They would organize a demonstration in front of a lender’s offices. If that failed to elicit a response, they would fill a bus with community members, drive out to the suburban house of a regional vice president and demonstrate there. ESOP’s signature tactic was to throw hundreds of two-inch plastic sharks on the lawn and circulate flyers saying, “Your neighbor is a loan shark.”
It didn’t make them popular — but it worked. Some lenders came to the table after one or two hits. Others took more time. Countrywide took 18 months, but eventually signed an agreement. After the Fairbanks campaign, Ocwen approached ESOP. Later, Select Portfolio Servicing (formerly Fairbanks) even signed an agreement.
“Once we make contact, they say, ‘Inez, you didn’t have to do this,’” said Killingsworth. “And I say, ‘We don’t do confrontation just to do it. We do it because you’re not listening. We tried to communicate with letters and phone calls and we were totally ignored. Our community has been devastated by foreclosures. Why are you ignoring us?’”
ESOP rarely does hits these days. “The word has gotten around,” Killingsworth said. “Now, most of the time we ask for a meeting we get a meeting.” At those meetings, ESOP makes clear that it wants to help lenders make money — by resuscitating loans wherever possible. The real absurdity in the mortgage saga is that lenders often do better financially in the long run by modifying loans quickly rather than foreclosing or prolonging delinquencies. (Unfortunately, in the short run, foot dragging and foreclosing can make a bank’s books look better.)
Ocwen’s general counsel, Koches, said his company approached ESOP for this very reason. “Foreclosure in virtually every single case results in a major loss for the investor,” he said. “We found that you actually make more money if you can resolve loans and get them cash flowing even at a lower payment.” Now Ocwen sends reports to ESOP when their shared clients miss two payments, and ESOP follows up to try to catch problems before they snowball. With so many people remaining unemployed, the work is getting tougher.
One of the couples ESOP helped was Danny and Kristy Lawson, from a small town about 90 miles southwest of Cleveland. After Danny had to switch to a lower paying factory job and Kristy was laid off from her position in an employment agency, the couple could barely make their $800 a month loan payments. Kristy tried to do her own modification with her lender, Chase, but they offered her a horrible deal: slightly lower payments but at the end of the 25 year loan, a balloon payment of roughly $60,000 would be due. A friend told her about ESOP. She contacted them and in less than two months she had a real modification: $675 payments for the life of the loan representing a fixed 5 percent interest rate — and no balloon. “The $675 is still hard for us,” Kristy said, “but we always make sure that’s the first one we make.
On Saturday, I’ll share some of ESOP’s homeowner stories and respond to some of your comments. If you’ve had experience getting help to avoid a foreclosure, let us know about it.
This column was originally published in The New York Times. Fixes appears on Tuesdays and Fridays in the Times Opinionator section.
Photo credit/caption: Associated Press; An abandoned chair sits in front of a foreclosed home in the Mount Pleasant section of Cleveland, Ohio in January 2008.