Ka Wai Ola - Office of Hawaiian Affairs, Volume 26, Number 2, 1 Pepeluali 2009 — Assessing the FORECLOSURE Firestorm [ARTICLE+ILLUSTRATION]

Assessing the FORECLOSURE

Firestorm

Under a federal grant, five nonprofits are providing free counseling to help hom - eowners avoid foreclosure, and OHA is helping to promote the help to those who need it most - a disproportionately high number ofNative Hawaiians in 200 9.

Anita K. knew she was courting financial disaster when she began using child support payments to make overdue mortgage payments. The Honolulu retail store manager had a four-bedroom O'ahu home she had owned with her husband since 1977. They divorced two years ago, agreeing to hold on to the property as an investment. But their monthly mortgage payments increased to $3,400 from $2,000. Unahle to eome up with the money, she felt panicky when the delinquency notices started arriving. Finally, she reached out to a licensed housing counselor, who negotiated with her lender to sell the house to a new buyer at a price

helow market value. Though Anita made no profit, the deal erased her debt and brought her relief along with some hard-won lessons. "I'm living in a rental now. I thought this would feel like I was going backwards, but I am happy to be living within my means," said Anita, a Native Hawaiian mother of two. Most experts would agree that Anita's story has a happy ending. She avoided foreclosure, whieh would have meant a legal repossession of her home by the bank, plus a permanent blemish on her credit record that could have prevented buying or even renting another home. Foreclosure not only eompromises an individuaFs financial security, it contributes to the eeonomie downfall of the community by depreciating overall property values and slowing home sales and new home construction. In worst-case scenarios - notably in California and Nevada, foreclosure spreads through a neighborhood with domino-like speed, creating infrastructure decay and adding to a recessionary eeon-

omy. Financial institutions, saddled with the costs of marketing foreclosed properties, have responded by tightening up credit and limiting loan activity - further hampering eeonomie growth. "Preventing foreclosure is a priority for both govermnent and financial institutions, because the long-term effects of property lost to foreclosure are costly to everyone," said Brian Davidson of the Hawai'i Housing Finance Development Corporation (HHFDC). As a state agency, HHFDC has obtained a $398,470 grant provided by Congress under a nahonal foreclosure mitigation program administered by NeighborWorks America. The money will be used to provide counseling and legal assistance to Hawai'i homebuyers in financially troubled waters. Davidson said the funding will go directly to Consumer Credit Counseling Service, Hawai'i Homeownership Center, Hawaiian Community Assets, Legal Aid Society of Hawai'i and, on Maui, Hale Mahaolu. The five loeal providers, all nonprofit organizations, have been selected to work with Hawai'i homebuyers who need to contact lenders and develop satisfactory plans for avoiding foreclosure. The professional counseling assistance is free to all Hawai'i residents and aims to help people under the hanuner of home debt to navigate the complicated laws, finance products and possible penalties that comprise foreclosure mitigation. The grant also names Office of Hawaiian Affairs as an in-kind provider of outreach and media that will promote the help to those who need it most -

including what state housing authorities project will be a disproportionately high nmnber of Native Hawaiians in 2009. Hawai'i's funding award is a small portion of the $246 million dollars given out by NeighborWorks America to address the foreclosure problem that is growing to crisis proportions in other regions of the country. Davidson said HHFDC applied for the grant early last year, when Hawai'i's overall foreclosme rate ranked at the bottom among 50 states. Then last April, Hawai'i's foreclosure rate tripled, showing a 218 percent increase over the same period of 2007. The rise was attributed then to the esca-

lating fuel crisis, the state's slowdown in tourism and the rise in unemployment, driving borrowers to dig deeper into their pockets to make monthly payments. The subsequent world market meltdown has exposed loeal homebuyers to even more unforeseen eeonomie woe and foreclosme risk that has complex and varied origins - including so-called exotic loans, intended as tools for big property investors but sold instead to would-be frrst-time homeowners. "Because the average family home here is so expensive, mortgage lenders had to be innovative from the beginning to allow middle-income people to heeome homeowners," said Davidson. "So you had residents with annual incomes of less than $60,000 who were taking on mortgages of more than $600,000." Sheri Kagimoto, the managing director of the 0'ahu-based Mortgage Assistance and Mitigation Group said that the nation's finance industry supported a relaxed lending climate, where lenders sold off mortgages to investment institutions, whieh bundled and sold mortgage-backed securities at a huge profit. This relieved the lenders of liability, enabling them to qualify ever riskier customers for large loans. "In many instances, borrowers weren't asked to furnish proof of ineome or assets. This encomaged people with modest means to get caught up in the trend of using a home for its equity - like a giant ATM card, when a home should be a necessity," said Kagimoto, who adds the HHFDC grant - though small compared to what may be needed eventually - is a good start, because it adds oversight to negotiating reasonable

tenns of affordable homeownership. After a consmner-driven home sales boom from 2002 to early 2007, Hawai'i's red-hot real estate market cooled and home values began an unexpected slow downward slide. Loeal homebuyers with adjustable rate mortgages had counted on refinancing their loans in tandem with an anticipated appreciation of the market value of their homes. But for many, the dip in Hawai'i home values led to ballooning interest rates and drove up monthly mortgage payments beyond what they could afford. Research from the U.S. Department of Housing and Urban Development (HUD) also shows that more than half of Hawai'i's

first-time homebuyers during the recent real estate boom invested in subprime mortgages, subject to relatively higher interest rates and fees. Many with subprime loans and other so-called "exotic" loan products have found themselves in negative equity - meaning that the amount owed on their loan has begun to exceed the now depreciated value of their house, possibly docking their credit rating and definitely diminishing their chances of borrowing against or unloading their property in order to reduce home debt liability. After all these developments, it's no surprise that at the end of 2008, RealtyTrac, an onhne listing of foreclosed properties, showed Hawai'i had climbed from its 2007 spot of 48 to No. 29 in the nation for the number of foreclosures - a ranking that is especially alarming because it represents an unprecedented 294 percent increase in foreclosure activity over the previous year. But the worst may be yet to eome, said Legal Aid Society of Hawai'i board president George Zweibel during a roundtable discussion on foreclosure mitigation aired locally lan. 15 on Ho'oulu Lāhui Aloha, OHA's puhlie access television program. Zweibel cited data projections indicating that in the two years one in every 29 Hawai'i residential properties will go through foreclosure, exceeding the projected national average of one in 38. New eeonomie research by the Federal Reserve Bank of San Francisco shows that the highest percentages of seriously delinquent home loans are located in the following areas: Wai'anae and Hau'ula on O'ahu; Ele'ele on Kaua'i;

Nā'ālehu and Pāhoa on Hawai'i Island; and Kahului on Maui. Large numbers of Native Hawaiians rent but don't necessarily own homes in these same eonununities, whieh some observers say have been the target of outside real estate speculation or second-home buyers from the U.S. continent. When mortgage delinquency slips into foreclosure, then all residents of the affected properties are eventually required to vacate, raising the prospect of a foreclosure-fueled affordable housing problem for residents. Under state law, borrowers who are a single day late on payment are technically in default. After a second missed

payment, a lender is likely to eall the delinquent borrower for an explanation. Anyone who has failed to meet a mortgage obligation for 90 days will receive a "demand letter" with a request to make payment arrangements. Failure to respond at this point brings a "notice to accelerate" - a requirement that full payment or special arrangements be made. The lender may also issue a notice of intent to begin foreclosure at this point. After 120 days, the borrower in default is referred to the lender's attorney, incurring court fees as part of the delinquency. At this juncture, a sheriff may schedule a sale of the home where it is publicly auctioned off to the highest bidder. Foreclosure is now offieial. The sheriff evicts residents of affected properties. Lenders ean press civil charges against the delinquent borrowers who are liahle not only for principal owed but also for fees and court costs. How to avoid this unwanted scenario? At any time before the home auction, a housing counselor ean help. Counselors emphasize the importance of reaching out for help- no matter how impossible a situation seems. "More than anything don't be shame, because the longer you wait, the less options you have," said Keri Kalilikane, a mortgage assistance counselor at Maui's Hale Mahaolu, one of the agencies tapped by the state to receive the new grant funding. "Feeling afraid, alone and embarrassed is understandable. But don't let the emotion get in the way of seeking help from a housing counselor, because this will make a difference."

Kalilikane said most of her clients work in tourism and have been hit by unexpected job loss in Maui County's declining visitor industry. "They feel overwhelmed. They've ignored the letters from their lenders for so long that they feel too hopeless or intimidated to make that first eall," she said. Kalilikane often helps jobless borrowers to write hardship letters to their lenders, mostly located on the U.S. eontinent. Her clients must be able to give detailed documentation of mitigating circumstances such as ineome loss or medical expenses, but the outcome ean be good. In best-case scenarios, the lenders

will say that delinquent borrowers are eligible for a loan modification. This might extend the tenns of the loan over a longer period, reducing monthly payments to an affordable amount, or it could defer delinquent payments, giving the distressed borrower a fresh start. "Many say they are relieved that they have faced down their worst fear. They are surprised that the lender would rather make arrangements to settle the money matter than to take away their home," Kalilikane said. Some consumer advocates would like to see goveinment put pressure on lenders to go beyond loan modification and do more to forgive the delinquent debt of distressed middle-income homebuyers. In a lan. 8 interview on Nahonal Puhlie Radio, U.S. Rep. Barney Frank (D-Mass.) proposed that the second half of the Congress' $700 hillion hnaneial bailout fund be applied by banks to reduce the prineiple owed by distressed homeowners. Without goveinment intervention, our lending institutions will not have any motivation to forego their own profit-

ability and bear the costs of helping needy consumers, Frank told NPR. In the meantime, housing and legal counselors say don't count on inunediate changes in the mortgage or finance industry. "Even if you just suspect you are going to be late on a payment, give your lender a eall and then eall us," Kalilikane said. Counselors ean identify several options in addition to loan modification. One is to arrange for a short sale, where the delinquent borrower negotiates with the lender to sell a home to a new owner for less than the amount identified in the original promissory note. As in Anita K.'s case described above, the borrower gets nothing but avoids foreclosure with a relatively unscathed credit score and may soon be eligible for another home loan. But borrowers would do well to work with a counselor or legal aid in negotiating a short sale, because lenders reserve the right to eome back with a deficiency judgment and file suit against the borrower to recoup the higher value of the home, according to Miehelle Kauhane, executive director of Hawaiian Conununity Assets. Kauhane adds that Hawai'i law allows lenders to practice nonjudicial foreclosures, whieh by-pass court involvement and don't go after a delinquent borrower's assets but still leave many individuals houseless and with ruined credit scores. Delinquent homebuyers may also work with counselors to see if they are eligible to qualify for a "deed in lieu of foreclosure." This would involve an agreement See F0RECL0SUREon page 28

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Hawūiian Community Assets Executive Director, Miehelle Kouhone ond Keoni RowlinsFernadez discuss the best plan of action for helping dients avoid foredosure. - Photo: Nelson Gaspar

FŪRECLŪSURE Cūntinued fram page 17

where a borrower conveys the home title to the lender who then relieves the borrower of liability for the original promissory note. For anyone treading close to foreclosure, other options - less desirable because they carry financial and legal costs and uncertain outcomes, include filing in court for bankruptcy or contesting the validity of the debt by making a elaim against the bank and suing for damages.

Whichever option is chosen, a delinquent borrower ean also receive support from a counselor in making lifestyle changes to avoid ruinous debt again. "You'd be surprised at how many people struggling to pay mortgages are unwilling to let go of a new car with an $800 monthly payment," said Mortgage Assistance and Mitigation Group's Sheri Kagimoto. The job of a good foreclosure-preven-tion counselor then becomes getting clients to thoroughly assess their debt-to-assets ratio to find ways to cut spending and possibly increase revenue. "Clients in foreclosure counseling need to decide what their priorities are, but it's clear that the right information or education is the greatest gift that allows you to make the best decision for yourself, even if it means exiting your residence with dignity and grace," said Kagimoto, who also stresses eonnnunieation as key in stopping foreclosure. "Hawai'i homeowners also face some unique challenges that counselors ean help to explain to lenders," said Kagimoto, pointing out that island geography and market conditions makes it difficult for residents to up and move to a new city with more affordable housing. Despite the availabihty of qualified counselors, the specter of possible foreclosure drives some to look for assistance in all the wrong places. Anita K. recalls that just before she

found her way to professional mortgage debt counselor, she was tempted to try a service that guaranteed foreclosure mitigation - for a considerable fee to be paid at a first appointment. "Someone was handing out cards in the parking lot and he made it sound so easy." But charging money up front for mortgage debt relief is now prohibited under the Mortgage Rescue Fraud Prevention Act signed into law by Gov. Linda Lingle in lune. "The legislation was necessary, because what we have seen is that people who are in serious financial distress are vulnerable to the adverse consequences of predatory practices,"

said Steve Levins of the state Department of Conunerce and Consumer Affairs, whieh has advocated for the stepped-up government protection of consumers, as the sour economy breeds more eon artists who capitalize on the misfortune of others. The DCCA has recently done enforcement in five cases after completing investigation into complaints involv-

ing scanuners who targeted Hawai'i residents facing foreclosure. Levins said the phony counselors targeted people with valuable home equity. The victims were conned into signing over the titles of their homes to the scanuners, who convinced them they could heeome renters for a short period of time and avoid mounting debt. Instead they lost their homes - equity and all to the crooks. The new legislation not only prohibits housing counselors from collecting up-front fees for mortgage debt relief, it also outlaws the misrepresentation of vital homeowners contract information. However, for many observers the fact that the scanuners have been able to find several unsuspecting victims underscores the torrent of emohon associated with foreclosure and the critical need for legal and hnaneial experts to inject a "buyer beware" mentality in the picture. As DCCA's Levins puts it: "Sometimes people just assume that real estate eontracts will be written in dense legalese that they won't understand. They are afraid to admit that they are in a position where they need help. But the solution is to never bury your head in the sand. Find a certified counseling agency to work with your lender to restructure or refinance your housing loan, and avoid anyone who pretends to be the white knight with easy answers." E3

Sheri Kagimoto of Mortgage Assistance and Mitigation Group offers a list of activites thay help borrowers survive housing debt. - Photo: Courtesy ofSheri Kagimoto