Subprime lending & Foreclosure

1. Policy Briefings “Do you have any questions?” vs. “What questions should we be asking?”

2. Policy Briefing:Loan Modifications GCI Civic Leadership Workshop April 2, 2011

3. The Problem: Borrower Distress

5. Designed to help homeowners stay in their homes by providing a consistent framework for mortgage modifications.

6. It gives incentives to servicers to reduce monthly payments to borrowers.

7. Eligible owners can have their monthly mortgage payments reduced to 31% of income.In default or foreclosure Borrowers who are current on their loans but are struggling to make payments may also be eligible for HAMP if they: Have a documented hardship – decrease in income, increase in expenses, facing interest rate increase within the next four months, etc. Do not have sufficient savings or other liquid assets to make future payments.

8. Loan Modification Program (HAMP) The HAMP Waterfall Servicers must apply the sequential steps (“The Waterfall”) as needed to cut loan payment to 31% of eligible borrower’s monthly pre‐tax income. Capitalize outstanding interest, escrow advances, out‐of‐pocket servicing expenses (no late fees) Cut interest rate to as low as 2% Extend loan term up to 40 years Defer portion of principal, interest‐free, until loan is paid off Accrued interest and expenses are tacked onto extended loan terms; any principal forbearance is set as a balloon payment.

9. Loan Modification Program (HAMP) Outcomes: Servicers apply NPV formula: NPV is a mathematical model used to analyze the cost/benefit of investment decisions MHA NPV factors include: Home value relative to mortgage amount Likelihood of foreclosure Home price trends Cost of foreclosure and cost of modification Default rate and discount rate Fannie Mae and Freddie Mac Loans: Servicer must pursue modification whether the NPV calculation is positive or negative Non-GSE Loans: NPV positive: Servicer must modify loan NPV negative: Servicer may modify loan but is not required to do so

12. Nick saves $65,580 in the first five years

13. Recent Additions HAMP Principal Reduction Incentives FHA Principal Reduction Program Principal reduction initiative  geared toward borrowers with 115% or higher loan-to-value (LTV) ratios. Investors will write down the loans to 97.75 % of the appraised value, at which point FHA. will refinance them through new lenders. After refinance, the combined first mortgage and any secondary liens cannot surpass 115% of the current value of the home. Promoting principal forgiveness within HAMP  requirement that servicers consider “principal relief” including write-downs. Pay-for-success structure  tied to loan-to-value. For reductions below 115%, the payment increases to 21 cents on the dollar. The write-downs are to take three years, with the borrowers in essence being rewarded for making their payments on time.

14. Recent Additions 2nd Lien Program (2MP) Short Sales (HAFA) Eligibility: First mortgage is modified through HAMP 2nd lien lender is participating in 2MP 2nd lien originated on or before January 1, 2009 Borrower must consent to share 1st mortgage modification data with 2nd lien lender (if the lenders are different) Provide financial incentives to lenders, servicers and borrowers to allow a property to sell for less than the outstanding mortgage (“short”) Borrowers would receive $1,500 from the government in relocation expenses. Servicers receive $1,000. Second liens holders can receive up to $3,000 of the sales proceeds for releasing their liens. First lien investors can receive $1,000 from the government for signing off on payments to subordinate lien holders.

15. Recent Additions Hardest Hit Fund (HHF) HHF provides $445 million in federal funds to assist Illinois homeowners dealing with job loss or income reduction. Illinois’ program - the “Hardest Hit Fund’s Homeowner Emergency Loan Program” (HHF HELP) - will assist LMI families with temporary mortgage assistance while they work to regain sufficient income to pay their mortgage. HHF HELP aims to reduce the number of mortgage delinquencies and avoidable foreclosures caused by unemployment and underemployment and to preserve homeownership for Illinois’ moderate and low income families. IHDA is not currently accepting any applications, but anticipates opening the application period during the spring/summer of 2011.

16. Do these programs work?

20. Disposition of Canceled HAMP Trial Modifications (as of September 2010)

21. Characteristics of Modified Loans Based on a dataset of 51,674 loan modifications reported from 01/2008 to 11/2008

22. Principal Reduction Has the Lowest Re-default Rate (Estimated 9-months FC Rates in Different Markets) Note: * Sand states include CA, FL, NV, AZ. All loan mods result in a payment reduction from 50% DTI to 31% DTI.

23. Obstacles to principal reduction Investors Principal reductions force losses onto different classes of investors – produces resistance or legal actions (Countrywide). Sheer numbers of investors make agreements difficult to reach. Servicers Friction from securitization - “pooling & service agreements” transfer responsibilities for problem loans to mortgage servicers. Servicer compensation tied to loan balance – produces a disincentive for principal reductions. Moral hazard By making it less costly for borrower to default, e.g., reducing the principal owed, principal reductions may result in more defaults than otherwise would have occurred.

25. Policy Briefing:Neighborhood Stabilization Program GCI Civic Leadership Workshop April 2, 2011

26. The Problem: REO Neighborhood Stabilization Program:

33. Background NSP-1 NSP-2 Title III of Division B of the 2008 Housing and Economic Recovery Act, (HERA). Section 2301-Emergency Assistance for the Redevelopment of Abandoned and Foreclosed Homes, aka “Neighborhood Stabilization Program” $3.92 billion allocation, with amounts determined by formula established by HUD using criteria specified by HERA Treated as CDBG Funds under Title I, but alters several key CDBG provisions. References NSP funds authorized under the American Recovery and Reinvestment Act (ARRA) of 2009. Allocates $1.93 billion on a competitive basis to states, local governments, and non profit organizations. Program objectives and eligible uses did not change, but the allocation process and some regulations on the funds have changed. Also includes a further $50 million for technical assistance (NSP-TA).

34. Background Eligible Uses Requirements NSP funds may be used for activities which include, but are not limited to: Establish financing mechanisms for purchase and redevelopment of foreclosed homes and residential properties; Purchase and rehabilitate homes and residential properties abandoned or foreclosed; Establish land banks for foreclosed homes; Demolish blighted structures; Redevelop demolished or vacant properties NSP grantees must use at least 25 percent of the funds to house individuals or families whose incomes do not exceed 50 percent of the area median income. All activities must benefit low- and moderate-income persons whose income does not exceed 120 percent of area median income. Money has to be obligated within 18 months.

36. Create financing mechanisms for purchase & redevelopment

37. Establish land banks

38. Demolish blighted structures

39. Redevelop demolished or vacant propertiesAcquisition Disposition Eligible rehabilitation and preservation activities, for homes and other residential properties New construction Clearance, for blighted structures only Relocation Direct homeownership assistance Housing counseling (for end users only) The Neighborhood Stabilization Program, a CDBG Component

40. Local Requirements Neighborhood Stabilization Program:

41. Local NSP Targeting All funds must serve households less than 120 Percent of Area Median Income. HOME Program “Safe Harbor” – allows PJs to exceed CDBG limits Area Benefit: This requirement can be met by targeting funds to neighborhoods where more than 51% of persons are less than 120 percent of Area Median Income. VLI set-aside: 25% of funds must go to serve individuals or households less than 50% of Area Median Income. Area benefit DOES NOT APPLY for this group. You can only meet this requirement by providing direct assistance to a person or household with income less than 50 of Area Median Income. Must target areas with greatest needs due to foreclosure crisis.

42. The statute also provides direction to grantees that they should give priority emphasis in targeting the funds that they receive to “those metropolitan areas, metropolitan cities, urban areas, rural areas, low- and moderate-income areas, and other areas with the greatest need, including those— with the greatest percentage of home foreclosures; with the highest percentage of homes financed by a subprime mortgage related loan; and identified by the State or unit of general local government as likely to face a significant rise in the rate of home foreclosures.” (2301(c)(2)) Local NSP Targeting

43. Local NSP Targeting Get the biggest bang for your buck – program goal setting: Identify neighborhoods with a problem HUD’s “predicted risk” data on HUD website (on same file with area benefit information) Local data on bank and tax foreclosures Local data to show if a home is vacant, such as water utility data Develop a Strategy for Immediate Impact Use flexibility under land banking activity to maintain abandoned properties you have not yet acquired (legal authority to maintain properties must be local, but NSP funds can be used to pay for the maintenance under certain circumstances) Prioritize neighborhoods for different uses of funds Preservation neighborhoods – acquire and resell Opportunities for mixed income affordable housing – acquire and rent Shrinking neighborhoods – acquire or swap and demolish

44. Affordability Periods Rental properties Owner-occupied properties Rehabilitation or acquisition of existing housing (investment per unit) Under $15,000  5 years $15,000 to $40,000 per unit  10 years Over $40,000, or rehabilitation involving refinancing  15 years New construction  20 years Amount of permanent per-unit subsidy: Under $15,000  5 years $15,000 to $40,000  10 years Over $40,000  15 years The Neighborhood Stabilization Program, a CDBG Component

45. Chicago’s Plan(s) Neighborhood Stabilization Program:

46. Overview NSP-1 NSP-2 $55.2 million allocated by formula Funds available from 01/2009 – need to be spent by December 2010. Targets 25 of 77 community areas Estimated impact: 585 units Competitive program – Chicago submitted its $98 million bid in July 2009. Focuses on 12 community areas divided into three categories Estimated impact: ???

47. NSP Process & Adm. Structure A seven-step process was developed for NSP1, as follows: Map vacant properties and conduct research to refine redevelopment focus areas. Establish purchase and sales agreements for Real Estate Owned (REO) properties. Conduct feasibility analysis; choose properties; purchase properties. Leverage funds, resources and partners to create housing, jobs, stabilization. Market the properties; offer financing options; support sales or rental of finished units. Monitor and evaluate the program. Provide reports to HUD.

48. City of Chicago Objectives I Given the scale of the foreclosure issue, its adverse impact on neighborhoods, the following neighborhood stabilization goals have been established: Stabilize neighborhoods by getting vacant and foreclosed homes up-to-code and occupied as quickly as possible. Strategically target interventions to protect neighborhoods impacted by foreclosure, preserve public and private investments, and make a measurable impact in targeted areas. Create efficiencies and economies of scale by acquiring vacant, foreclosed properties in bulk at a discount from lending institutions and redeveloping those properties with a broad network of qualified development partners. Prioritize interventions on vacant, foreclosed 1-6 unit properties and other larger buildings that adversely impact neighborhood stability and quality of life in targeted areas. Ensure compliance with affordability restrictions on rehabilitated homeownership and rental housing units. - City of Chicago, NSP II Final Narrative

49. The proposed NSP-2 plan would bring different levels of impact in the three neighborhood types: Green “growth” neighborhoods will bounce back quickly from the current crisis rather than suffering a prolonged downturn and loss of confidence. Orange “stability” neighborhoods will cut the bottom off their downward trajectories and stabilize around the targeted investment areas. These neighborhoods were chosen because their local markets are likely to collapse without strong and focused intervention. Yellow “caution” neighborhoods will consolidate investments on the strongest blocks near transit, St. Bernard Hospital and a college campus, and use demolition to reduce the negative impacts of blighted structures. City of Chicago Objectives II

50. NSP 1 The City of Chicago identified 25 out of a total of 77 community areas as areas of greatest need, representing the top quartile of areas based on the following: (1) foreclosures completed to become Real Estate Owned properties (REOs) per 1,000 mortgageable properties in the area; (2) percent of loans in each area that are high cost; and (3) risk factors for rising foreclosure rates, including current price compared to 8-year maximum and unemployment rates.

52. NSP-1 Proposed Activities

53. NSP-2 Proposed Activities

54. Targeting NSP 1: 25 community areas. Targeting NSP 2: 36 census tracts clustered in 11 community areas. Targeting NSP 3: five areas of greatest need located within the following community areas: Belmont Cragin Chatham East Garfield Park North Lawndale West Pullman

56. Need for public sector intervention

57. Capacity for a comprehensive approach based on an established plan

58. Community capacity

59. Parallel capital investmentsCensus tracts were grouped into three types based on the challenges, market conditions and opportunities of each community