By Dave Gatton
July 16, 2007

The increased rate of foreclosures, especially among subprime mortgage borrowers, was the major topic of discussion as the Council for the New American City met at the 75th Annual Conference of Mayors on June 25 in Los Angeles.

The Council brought together major mortgage lenders, including Countrywide and Wells Fargo along with the Mortgage Bankers Association (MBA) to assess the extent of the subprime foreclosure problem that has been the subject of intense press coverage and congressional interest over the last several months.

“This is a problem that is hitting the Midwest particularly hard,” said Council Chair Detroit Mayor Kwame M. Kilpatrick. “We need the lenders, all levels of government and community organizations to encourage families in financial difficulty to seek help early, when there is still time to find solutions.” Kilpatrick just two weeks ago held a Homeownership Fair in Detroit to assist families who were exploring homeownership or were having trouble staying in their homes because of late mortgage payments.

The MBA and Countrywide both encouraged borrowers to call 888-995-HOPE, run by Neighborworks America, a non-profit that will help serve as an intermediary between borrowers and their lenders. Families who find themselves unable to make mortgage payments are often reluctant to call their lender or loan servicer directly.

All the mortgage lenders present said it was in the best interest of the lender and the borrower to work toward a solution that would avoid foreclosure. Foreclosure, on average, costs a lender over $40,000 and creates an extremely negative credit history for the borrower.

Mary Jane Seebach of Countrywide Financial, who helped Kilpatrick with the Detroit Homeownership Preservation Fair, reiterated that lenders were anxious to work with homeowners to avoid foreclosure. “We need help in spreading the word that families in trouble should call us or an intermediary non-profit as soon as warning signs occur. The sooner we know, the more options we have to assist the borrower preserve homeownership,” she said.

Paul Richman, Senior Director of Government Affairs at MBA, indicated that subprime lending with adjustable rate mortgages (ARMS) represented just 5.1 percent of all homeowners in the U.S. Historically, the highest foreclosure rate that the industry has seen among subprime ARMS is ten percent. According to Richman, half of all foreclosure proceedings find a solution that avoids foreclosure sales.

Louisville Metro Mayor Jerry Abramson told the industry about the negative consequences of foreclosed property. “The grass grows, windows are broken, copper is stripped, it becomes a horrible eyesore for the neighborhood that drags down property values and threatens public safety,” he said. “In a foreclosure situation, how do cities find out who owns the title so we can get owners to take care of the property?” he asked. Abramson encouraged the industry to work with the mayors to prevent foreclosures from denigrating neighborhoods. “This is a classic example of the broken window theory,” he said.

Richman indicated he would be willing to work with the mayors in devising a system that brought more accountability to property maintenance during and after foreclosure sales.

In an impassioned plea to the group, East Point (GA) Mayor Joe Macon said his city had been decimated by predatory lending. “We have blocks upon blocks of destroyed neighborhoods from predatory lending that have ruined families,” he said, as the room fell to a hush. “We just have to do something; we cannot let this happen again; we need help,” he implored.

During the Conference, the mayors passed a resolution calling on stricter federal regulation of the subprime market, the lending industry, and mortgage brokers.

On June 29, federal regulators issued stricter guidelines on underwriting standards for subprime loans. The new guidelines, which affects over 8,000 lenders, will require them to determine a borrower’s ability to pay based on the loan’s future adjusted rate, not a lower initial interest rate. The lenders are also required to collect more information on a borrower’s ability to pay and must offer the opportunity for the borrower to refinance, without penalty, 60 days prior to interest rate adjustments to a higher rate.

The guidelines come on the heels of two Bear Stearns hedge funds facing difficulty because of securitizing subprime loan pools.

Kilpatrick and Abramson, along with Columbus (OH) Mayor Michael Coleman who serves as Chair of the Conference’s Housing and Community Development Committee, pledged to continue the Council’s work on foreclosure prevention and the negative effects of foreclosure in the coming months.

In other news before the Council, Global Insight Senior Vice President James Diffley reviewed the latest in the Council’s metro economy series. The report showed that mortgage subprime delinquencies were most prevalent in the Midwest where unemployment was the highest and wages are stagnant.

San Francisco City and County Treasurer Jose Cisneros reviewed the Bank on San Francisco initiative that the Council plans to replicate in other cities as part of its Mayors National DollarWi$e Campaign. The initiative is an effort to help unbanked residents open checking and savings accounts.

John Talmage, CEO of Social Compact, the Council’s newest member, reviewed how their efforts in Detroit and Miami had uncovered significant census undercounts in those cities. “By correcting their population undercount, cities can be far more competitive in luring private investment, particularly in retail, and increase their allocations of federal funds,” he said.