Comptroller Dugan Expresses Concern over Subprime Mortgage Foreclosures; Receives "Making-the-Difference" Award from Credit Counseling Foundation

WASHINGTON—Comptroller of the Currency John C. Dugan, in a speech to an organization for non-profit credit counselors, focused on the risk of widespread foreclosures among subprime borrowers and the resulting costs for homeowners, communities, and financial institutions.

"The loss to lenders has been pegged at between $40,000 and $50,000 per foreclosed home, and some lenders report losing 50 cents on the dollar," he said in a speech to the National Foundation for Credit Counseling, which presented him with its annual "Making-the-Difference" award for his commitment to financial literacy and education.

"The loss to prospective homeowners who reach for their dreams—and maybe overreach—is more profound," the Comptroller added in his remarks.

Mr. Dugan noted that the cost to other stakeholders, including local communities, is equally significant and may have longer lasting consequences. "Foreclosures drag down neighborhood property values and make it harder to refinance or obtain new financing. Leaving a property vacant while in foreclosure often creates a negative cycle of disinvestment and decline for entire communities."

The federal banking agencies are taking steps to deal with the prospect of increased foreclosures, Mr. Dugan said. First, the agencies have advised the institutions we supervise that we encourage them to work constructively with borrowers who experience difficulties in meeting their mortgage payment obligations.

A joint statement issued last week encourages financial institutions to consider prudent workout arrangements that increase the potential for financially stressed residential borrowers to keep their homes. It also recognizes that these arrangements can vary widely based on the borrowers' financial capacity, but with the appropriate intervention strategy and resources, many troubled borrowers can avoid the loss of their homes.

In addition, the agencies emphasized potential benefits under the Community Reinvestment Act. Programs that transition low- and moderate-income borrowers from higher cost to lower cost loans in a safe and sound manner may receive favorable consideration when an institution's CRA performance is evaluated.

Mr. Dugan said delinquent borrowers would benefit from credit counseling, but many are unaware of their options because they avoid mailings and phone calls from their lender.

"Experience shows that the sooner a delinquent borrower is engaged, the more likely the chances of avoiding that loss," he said. "The earlier a lender is contacted, the greater the opportunity to address each homeowner's circumstances individually through counseling."

The Comptroller praised the work of credit counseling services for helping distressed homeowners find help.

"Your good work has increased call back rates by over 30 percent and reduced foreclosures by up to 60 percent," he said. "That type of work provides us with many best practices to model to help troubled borrowers turn to their lenders and trusted third party intermediaries to act responsibly on their behalf."

Mr. Dugan said the OCC will co-host several forums over the coming months to introduce financial institutions to the range of delinquency intervention services that community-based counseling organizations can provide.

"Our Community Developments spring 2006 newsletter (PDF), which is available on OCC's Internet site, describes many of these initiatives and provides a more detailed analysis of several loss mitigation strategies used by lenders, government-sponsored enterprises, and mortgage insurers," he added. "It also contains guidance on ways banks can receive CRA consideration for their foreclosure prevention and mortgage loss mitigation initiatives."

Related Links

• Remarks before the National Foundation for Credit Counseling Spring Meeting
• Comptroller of the Currency John C. Dugan