The news that U.S. employers eliminated 533,000 jobs in November, the largest monthly decline in 34 years, is another worrying sign that the nation's economy continues to weaken rapidly. This deterioration, with the unemployment rate now at 6.7% and certainly heading higher, is a big threat to U.S. homeowners: Moody's estimates that between 2008 and 2010, 4.3 million homeowners could lose their homes to foreclosure.
How should mortgage lenders respond?
Major banking companies, including JPMorgan Chase, Bank of America, and Citigroup, as well as the Federal Deposit Insurance Corp. through the failed IndyMac Bank, are working with borrowers who have missed several monthly payments to restructure loans and reduce foreclosures. But an ounce of prevention is worth a pound of cure. Some of us in the industry believe we can accomplish a great deal more by focusing on early intervention. The banking industry and other mortgage lenders should expand their efforts to actively engage with at-risk homeowners before they miss any payments.
These homeowners are often too embarrassed or worried, or simply don't know how, to ask their mortgage company for help. If we can reach them before they become "distressed borrowers," we can greatly reduce future foreclosures, keep people in their homes, help stabilize prices to the benefit of all homeowners, and — ultimately — help get the economy on the road to recovery. Early intervention not only can avoid the loss of a home, helping the individual homeowner, the neighborhood, and the community, it can also protect homeowners' credit scores and borrowing potential, since loan modifications outside of delinquency do not affect a borrower's credit rating.
Mortgage lenders know that the sooner discussions begin with borrowers who have lost a job, suffered a major illness in the family, or encountered some other jolt to their finances, the greater the prospects for favorable outcomes on both sides. Borrowers usually have more flexibility to either maintain or resume regular payments or to agree with their lender on changes before heavy losses mount. Typical adjustments include reducing monthly payments, deferring past-due payments to the end of the loan or until a temporary personal financial crisis abates, extending the amortization period, or lowering the interest rate.
The plan Citi announced on Nov. 11 is designed to preemptively reach out to a select group of 500,000 homeowners over the next six months whose mortgages Citi holds, who are not currently behind on their mortgage payments but may, in some cases, require help to remain current on their mortgages. We estimate that these preemptive efforts will result in workouts of $20 billion in underlying mortgage balances and, in turn, will greatly reduce the number of foreclosures on our books, along with the associated credit losses, that otherwise might have occurred in future months.
Citi's workout processes are similar to those in the plan developed and implemented by the FDIC in recent months to help distressed borrowers of IndyMac Bank. The agency's IndyMac model, like ours, incorporates a set of streamlined evaluation criteria, such as designing an affordable monthly payment that does not exceed 38% of a borrower's gross income. The FDIC believes ultimately it may be able to help as many as two-thirds of 60,000 delinquent IndyMac borrowers. We hope to do as well, comparatively, or better, and look forward to working with the FDIC on future foreclosure prevention efforts. Since the beginning of 2007, Citi has been able to prevent approximately 370,000 foreclosures by implementing programs already in place.
We are focusing particularly on borrowers who live in states that are likely to face extreme economic distress, such as California, Nevada, Arizona, Florida, Michigan, Indiana, and Ohio, where falling home prices and rising unemployment have been more pronounced. We are reaching out to people regardless of their loan type to determine if they have had material changes in their financial circumstances that would warrant early intervention to help them stay in their homes. To be fair to everyone, and to expedite the process, we are applying systematic criteria for determining whether to rewrite a loan.
In the long run, fewer foreclosures will reduce the number of vacant homes, strengthen communities, and substantially reduce costs to taxpayers and to those investors now holding at-risk or delinquent mortgages. The national imperative must be to stop the tsunami of foreclosures that is driving home prices lower, narrowing credit options, and weakening the economy amid accelerating job reductions.
Stabilizing home prices is instrumental to pulling the U.S. and global economies out of recession. Keeping borrowers in their homes wherever possible — whether before or after they have missed payments — is the best way to do this. It is good for the borrower, good for the lender, and good for the economy.
