Struggling With the Mortgage Crisis

Foundations and charities face new challenges as more and more homeowners get in financial trouble

As the country’s once-booming housing market enters its third year of decline, the home-foreclosure rate is soaring. Last year more than 400,000 families facing financial distress or holding problematic loans lost their home to foreclosure, a 50-percent increase over 2006, according to RealtyTrac, an Irvine, Calif., firm that tracks real-estate data.

Another 2.2 million or more families face foreclosure over the next few years as the crisis deepens, says the Center for Responsible Lending, a consumer-advocacy charity in Durham, N.C.

Despite the scale of the problem, which can shatter families’ lives, drag down neighborhoods, and increase the pressure on social services, foundations and other nonprofit groups are only beginning to explore the roles they can play in dealing with the challenge.

Among the few sizable grants so far is a $2-million commitment from the Open Society Institute, in New York, to help establish the Center for New York City Neighborhoods, a charity focused on foreclosure solutions.

“Philanthropy, I think, has been in a little bit of a loss about what to do about foreclosures,” says Rip Rapson, president of the Kresge Foundation, in Troy, Mich. “What’s so frustrating is that no one seems to have identified the one or two things that will make this situation better.”

Though foreclosures began to spike more than three years ago, some charity leaders acknowledge that the growing issue has caught them a little off guard.

“When something comes up as quickly as this issue has, there isn’t always the infrastructure in place to address it,” says Bob Eckardt, senior vice president for programs and evaluation at the Cleveland Foundation, which has so far made $300,000 in foreclosure-related grants. “You can’t directly intervene with banks; you have to develop and work through intermediaries to try and work on the issue.”

‘Predatory Lending’

Many foreclosures are spurred by sudden disruptions in household income, such as illness, job loss, or divorce.

Also vulnerable to foreclosure are the more than seven million families with “subprime loans” — mortgages given to those with imperfect credit or income histories.

Many of these complex loans, created amid the frenzy of the housing boom, feature adjustable interest rates, where an initial low interest rate eventually resets to a much higher rate. Some of these mortgages were the result of “predatory lending,” where lenders willfully steered borrowers into loans beyond their financial means.

“What we are seeing right now is quite a number of households that have sought loan products for which they were not necessarily suited,” says Jeanne Fekade-Selassie, homeownership specialist at NeighborWorks America, a Washington community-development charity that has more than 240 affiliates nationwide. “While they may have been able to meet their mortgage obligations based on the terms of the loan at the beginning, when the loan resets they don’t have the means. This is one of the biggest influences driving foreclosures right now.”

Housing counselors who work for social-service and community-development charities, such as Catholic Charities and the National Urban League, are on the front lines in the effort to keep people from losing their homes.

Such counselors are trained to help homeowners who fall behind on their mortgage payments explore their financial options, which may mean trying to sell a house before foreclosure. Their services are free.

Some counselors can also work directly with lenders to restructure loans and develop alternative payment plans.

The demand for such services is skyrocketing.

A nationwide toll-free number — (888) 995-HOPE — that connects distressed homeowners with housing counselors received more than 140,000 calls the final quarter of last year — a tenfold increase over the call volume in the first quarter of 2007. The 24-hour hotline is run by the Homeownership Preservation Foundation, a five-year-old Minneapolis charity financed largely by the lending industry.

Part of the increase in calls can be credited to a major advertising campaign started last spring promoting the hotline, and created in partnership with NeighborWorks and the Ad Council, a New York charity that produces public-service advertisements.

“We’re averaging 15 to 20 calls a day for counseling and it’s hard to talk to everyone — our entire staff takes down information,” says Helen Moore, executive director of Neighborhood Housing Services of the Inland Empire, a San Bernardino, Calif., charity that serves distressed homeowners in an area where the foreclosure rate is more than three times the national average. “We need more help. We need more counselors.”

In December, as part of a federal appropriations bill, NeighborWorks received a $180-million grant aimed at bolstering charity-counseling services nationwide. The charity, which began distributing the money to counseling nonprofit groups last month, hopes it will help nonprofit groups assist an additional half-million households facing foreclosure.

Similarly, in November, Catholic Charities USA, in Arlington, Va., received a $1-million federal grant to pay for housing counseling services at more than 30 of its affiliates. Last month, Wells Fargo, the San Francisco bank, announced that it was giving $1.5-million to NeighborWorks and other charities that counsel homeowners.

Beyond Counseling

Mr. Rapson, of the Kresge Foundation, says just in the past few weeks foundations and charities in the Detroit area have begun meeting to brainstorm about additional ways nonprofit groups might focus on foreclosures.

“There just has to be something more proactive and impactful than simply providing housing counseling,” Mr. Rapson says.

One idea under discussion is to create a “foreclosure czar” in Detroit.

“City hall is increasingly interested in having one dedicated person that would be supported by the banks, foundations, and the community and stand outside city structures,” Mr. Rapson says.

The Center for New York City Neighborhoods, a $5.5-million charity effort begun in January by the City of New York, the Open Society Institute, banks, and other foundations, will offer counseling services and serve as a think tank to devise ways to deal with foreclosure issues, its supporters say. The charity has a board in place and is currently hiring staff members.

“We felt it important to create a charity with board leadership and a range of groups represented that could evolve over time and come up with new solutions and new directions in attacking the foreclosure problem,” says Shaun Donovan, New York City housing commissioner.

“Partnering with foundations gives us the ability to try new things and take risks in a way that can be hard for government to do.”

Legislative Options

Ultimately, some in the foreclosure fight say, the financial scale of the crisis — there are $1.3-trillion in subprime loans outstanding — requires new federal legislation and changes in lending laws.

But almost everybody engaged with the issue of rising foreclosures can agree on one thing: The problem is going to get worse before it gets better. And the crisis is now having a spillover effect, with implications for a wider array of charities.

For instance, the Women’s Center of San Joaquin County, a domestic-violence charity in Stockton, Calif., saw calls to its help line increase 12 percent last year, a jump the group says is directly connected to the region’s high number of home foreclosures. Foreclosure, or the threat of it, can destroy families, says the group’s executive director, Joelle Gomez.

“The housing market is still bottoming out and we are really bracing to see far more clients utilizing both our shelter services and our help lines and counseling,” she says.

It’s a similar story in Central Florida, another area particularly hard hit by foreclosures.

“Demand for all of our counseling services are on the uptick,” says Scott George, president of the Compassion Outreach Center, a religious social-service charity in Orlando. “When people face the stress of foreclosure it can come out in substance abuse, physical abuse, depressed kids.”

“Hope,” he adds, “has just been ripped out of so many people.”