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The Reinvestment Fund (TRF) is a leading innovator in the financing of neighborhood and economic revitalization. Central to its mission is a commitment to put capital and private initiatives to work for the public good. TRF is a development finance corporation with a wealth-building agenda for low- and moderate-income people and places through the strategic use of capital, knowledge and innovation.

TRF manages $217 million in assets from over 900 individual and institutional investors. It uses these assets to finance affordable housing, community facilities, businesses, renewable energy projects, and public policy research. TRF also provides human resource services to many of the companies it finances to help create quality job opportunities for low- and moderate income people.

To date, TRF has made more than $379 million dollars in loans and investments across its lines of business. TRF investments have created or preserved over 10,100 housing units, more than 10,800 childcare slots and 11,800 charter school slots. While much of its lending occurs within the Greater Philadelphia region, its market area extends across the entire Commonwealth of Pennsylvania and into the states of Delaware, Maryland and New Jersey.

TRF’s Policy Group has an expanding portfolio of projects and publications and has developed a solid reputation for its housing-related policy research.

n TRF investigated the sharp increase in foreclosures in Monroe County for the Commonwealth of Pennsylvania and analyzed the rate of African American homeownership in Pittsburgh for Housing Opportunities, Inc. and the Heinz Endowments.

n TRF is working with the Pennsylvania Governor’s office to develop the principles and strategies of a statewide housing strategy – as recommended in TRF’s Choices in Pennsylvania report.

n TRF has developed nationally recognized methodologies to identify and estimate the extent to which predatory lending occurs within an area. e methodology and preliminary results have served as effective testimony in legal action against predatory lending.

n TRF developed an innovative GIS-based methodology for analyzing urban real estate markets and has advocated for neighborhood-based data to drive public and private development decisions, paying particular attention to preservation within our communities. TRF is now active in the implementation of such a data-driven investment strategy in Philadelphia and in Camden, New Jersey with the significant support of the Ford and William Penn Foundations.

Pennsylvania now has some of the highest mortgage foreclosure rates in the nation. e prime foreclosure rate at .85% is the 9th highest in the nation; the subprime rate, which is orders of magnitude higher at 11.9% ranks 4th.. While economic factors and “triggers” traditionally used to explain foreclosure rates are relatively predictive of the prime rate in Pennsylvania, they are less so of the subprime rate. A more detailed analysis of foreclosure filings in Pennsylvania reveals that it is the subprime foreclosure rate that is driving rising foreclosure filings around the Commonwealth.

In sum, this study finds:

n In 2002, 9.9% of all loans originated in Pennsylvania were made by subprime lenders. Yet, sixty to seventy-five percent of all sampled loans in foreclosure were originated by subprime lenders.

n If traditional factors alone were driving the subprime rate, Pennsylvania’s, compared to other states, would be at least 3 percentage points lower.

n Growing foreclosure filings do not appear to be simply the result of an expanding mortgage market, as filings are outpacing any gains in homeownership or housing development.

n Foreclosures are typically concentrated in the modest income areas of Pennsylvania, as well as areas that are disproportionately minority. As a result, foreclosures have a disproportionate effect on these communities.

n Loans in foreclosure are an even mix of purchase money mortgages and refinances. e typical homeowner in foreclosure between 2000 and 2003 in Pennsylvania purchased their home in the mid-to-late 1990s.

Data, interviews with subject matter experts, and a review of foreclosure literature suggest that the combined impact of a set of factors, some of which are unique to Pennsylvania, is driving the trend.

National factors include:

n Increased consumer access to mortgage products which allow for lower down payments, lower savings balances, higher loan-to-value ratios and lower credit scores to buy a home may make long-term homeownership unsustainable.

n Borrowers and potential borrowers lack information about alternatives to high cost loans.

n Many borrowers lack financial education ranging from understanding the economics of interest rates to the importance of paying bills on time.

n Securitization of the residential mortgage market makes higher foreclosure rates acceptable to investors through proper pricing.

n Consumer expenditures on health care costs have risen faster than the growth in incomes. Subject matter experts consistently suggested that households are choosing to pay medical costs – at the expense of making mortgage payments.

Pennsylvania specific factors include:

n Regulations in Pennsylvania are not protecting homeowners as originally intended.

n e costs of homeownership in Pennsylvania are rising including costs associated with maintaining an older housing stock, property taxes and energy costs.

n Abusive lending practices are evident in segments of the mortgage industry.

Mortgage markets in Pennsylvania need to flourish. To do so, the Commonwealth must balance its interest in ensuring these markets work well with concern for the impact of these markets on consumers and communities. Any strategy to do this will likely need to attack more than just one of the eight causes identified here, but at a minimum should ensure that: 1) laws and regulations in Pennsylvania are designed and enforced to protect consumers from abusive lending practices, while not limiting legitimate lending and 2) consumers (and future generations of consumers) have the financial education necessary to make informed decisions about debt and personal finances. TRF hopes this study can help the Commonwealth and its legislature form such a strategy.

In July of 2003, the Legislature of Pennsylvania took official notice of the growing mortgage foreclosure rate in Pennsylvania and passed House Resolution No. 364, which called upon the Secretary of Banking “to study residential lending practices in Pennsylvania, to identify trends in foreclosures and to document lending practices which are disadvantageous to Pennsylvania’s consumers and submit a report to the General Assembly.” 1

To understand what was driving the growing foreclosure rate in Pennsylvania, the Secretary of Banking hired e Reinvestment Fund to gather as much data as possible about foreclosures in Pennsylvania and systematically analyze trends and potential causes. Simultaneously, the Secretary convened an Advisory Group of representatives from the mortgage industry, legal services, advocacy groups and state government to provide the Secretary with guidance during the course of the study.

e fundamental goals of this study presented are to understand how Pennsylvania foreclosure trends compare to other places; develop a set of facts regarding overall foreclosure trends in Pennsylvania; and conduct a detailed analysis of foreclosure activity in communities across Pennsylvania upon which the Secretary of Banking can rely to make (or propose) requisite changes to law, regulation and policy. To do this, TRF:

n Conducted literature reviews of issues related to foreclosures, including traditional triggers of mortgage foreclosure, abusive lending, loss mitigation, and efficacy of housing counseling.

n Analyzed how traditional economic indicators affect foreclosure rates in Pennsylvania and across the nation.

n Collected and analyzed recorded information regarding the last four years of mortgage foreclosure filings in Pennsylvania.

n Conducted one-on-one interviews and focus groups with industry representatives, representatives of relevant county offices and housing assistance providers.

DATA SOURCES AND METHODOLOGY

U.S. Census Data & Census Estimates 1980, 1990, 2000, 2003 - e U.S. Census Bureau 1990 and 2000 Summary Files 1 and 3 data permit a categorization of counties in terms of any number of relevant social, demographic and economic characteristics (e.g., income level, housing value, owner occupancy rates, etc.). Census data is analyzed using statistical software known as e Statistical Package for the Social Sciences (“SPSS”) and GIS software known as ArcView. e U.S. Census also provides estimates of some of the characteristics for 2003.

U.S. Census 1980, 1990 and 2000 5-Percent Public Use Microdata Sample (PUMS) for Pennsylvania - PUMS is a compilation of a sample of individual Census forms collected by the Census. is form of the data allows for a very detailed and customized examination of the data.

Property Specific Sale and Mortgage Data- TRF developed a methodology employed in studies of both Philadelphia and Monroe County foreclosure activity. Unlike methods used in most studies of loans in foreclosure which look only at the loan in foreclosure, this technique allows TRF to trace a foreclosure filing back to the originating loan and lender and review the transactional history of a property in foreclosure. is distinction is important as most loans – particularly subprime loans - are not held by originating lenders anymore, but sold oftentimes more than once, in the secondary market.

To obtain this data, TRF queried each foreclosure property studied in the First American Real Estate Solutions (FARES) database. is database allows TRF – where property information is available – to document the transaction history on each property. e database records when a property was sold, at what price, and to whom; recorded liens; lenders or mortgage lenders involved; and the assessed value given the property by the County. is data allows TRF to determine the types of lenders involved in originating loans now in foreclosure, if the owner owes more on the house than it is likely worth, how long people in foreclosure have lived in their home, how much of the foreclosure activity is associated with loans to purchase a house or refinance an existing loan(s) and the geographic concentration of foreclosures.

A fuller study of Pennsylvania’s foreclosure activity is constrained, however, by the number of counties reflected in the FARES database. At this time, 14 of Pennsylvania’s 67 counties have property specific information in the database (see Map 1 for the locations of the 14-county study area). ese counties do, however, represent all or part of the larger metro areas in the Commonwealth and together account for almost 60% of the occupied housing units (homeowners) in the Commonwealth.

1) Philadelphia, Bucks, Chester, Montgomery and Delaware Counties (Southeastern PA)

2) Allegheny and Washington Counties (Southwestern PA)

3) Erie County (Northwestern PA)

4) Berks, Lehigh and Northampton Counties (Southeasten PA)

5) Dauphin and Lancaster Counties (Southcentral PA)

6) Monroe County (Northeastern PA) (TRF recently completed a study of foreclosure activity in Monroe. A copy of that study can be downloaded from the Department of Banking’s web site at http://www.banking.state.pa.us)

Foreclosure Filings - For the 14 areas with FARES coverage, TRF obtained listings of all mortgage foreclosure filings for the four year period from 2000 through 2003, inclusive. is represented a time consuming process as there is no centrally located office in the Commonwealth that collects filing data - instead, Prothonotary Offices in each county do. Complicating the effect is the fact that different counties capture different pieces of information regarding filings and, while some counties were able to provide filing data electronically to TRF, others have paper-based record keeping processes. e sheer volume of paper required TRF to systematically analyze only a sample of filings in some of these counties.

Home Mortgage Disclosure Act (HMDA) - TRF analyzed HMDA data for the period 1998-2002. ese data, together with the Census data, allowed an examination of the types of mortgage loans made and the characteristics of areas in which they are made.

Homeowners’ Emergency Mortgage Assistance Program Applicant Data - TRF acquired a full state set of data on applicants to the Commonwealth’s Homeowners’ Emergency Mortgage Assistance Program (hereafter, “HEMAP”) covering the last several years. Each record contains a date of application as well as the foreclosing lender and disposition by HEMAP. TRF analyzed all HEMAP applications, spatially and statistically, to reveal trends, geographic concentrations within the state and reason for each homeowner’s mortgage crisis.

Focus Groups and One-on-One Interviews - All TRF studies use interview or focus group results to inform and complement findings revealed by data analysis. Data findings can many times be confirmed or better understood by learning from practitioners and those who are experiencing first-hand what we observe statistically. TRF held a number of focus groups and interviews for this project including those with the following:

n Prothonotary and Sheriff Offices

n Mortgage industry representatives (local and national)

n Pennsylvania realtors

n Housing counselors

n Attorneys representing lenders and consumers

n Consumers over the last two years for this and related studies

Literature Review - TRF conducted a literature review to outline what is working in other parts of the country or in other industries to address problem trends identified in the analysis. Some of the following areas are discussed in this report:

n Causes of foreclosure

n Efficacy of housing counseling

n Mortgage loss mitigation programs

n Predatory lending laws and other laws designed to address abusive lending practices

Analysis - TRF collected and analyzed all of the above data – statistically and spatially – in an effort to produce a set of findings about why households are facing foreclosure in Pennsylvania, and where residents have been affected. e result of these analyses is the subject of this report and includes:

n Maps of foreclosures and HMDA analysis;

n Complete database of information regarding the 4-year foreclosure list;

n Written analysis of findings;

n Fact-based findings upon which the Commonwealth can act;

n Legislative, administrative and legal remedies revealed by the literature reviews, focus groups, and task force recommendations that relate to the causes of foreclosure in Pennsylvania.

Over the past few years, a variety of data began to signal expanding financial trouble for homeowners in Pennsylvania. Foreclosure rates were growing, Sheriff Offices around the Commonwealth were overwhelmed by the volume of transactions, the number of applications to the state for HEMAP assistance was increasing, bankruptcy rates were rising and more owners were cost-burdened (paying more than 30% of their income for housing costs) than ever before.

FORECLOSURE RATES STATEWIDE

Pennsylvania’s foreclosure rates continue to grow. In 2003, Pennsylvania had the 9th highest foreclosure rate among prime loans; and the 4th highest rate among subprime loans.

As a general matter, a mortgage foreclosure is a legal action that is defined in part as:

e process by which a mortgagor of real or personal property, or other owner of property subject to a lien, is deprived of his interest therein. A proceeding in equity whereby a mortgagee either takes title to or forces the sale of the mortgagor’s property in satisfaction of a debt. Black’s Law Dictionary (6th ed. 1990)

At the most basic level, a mortgage foreclosure action is usually started after an individual has stopped making payments on their mortgage (voluntarily or involuntarily). Unless those payments begin again, an arrangement is made with the lender, a consumer seeks and receives bankruptcy protection, or some other extraordinary event occurs, the individual is going to lose their home. e loss of a home through foreclosure adversely affects the homeowner and community in which they live along with the lender or investor who holds the loan.

Data obtained from the Mortgage Bankers Association of America (MBAA) show that the trend in foreclosures for the Commonwealth of Pennsylvania has been on the rise. Looking back to 1979, the typical quarterly percent of conventional loans in foreclosure was less than one-half of one percent. at figure rose steadily during the decades of the 80s and 90s. Since the year 2000, the percent of conventional loans in foreclosure rose from about one percent to one and one-half percent (see Figure III-1: Trend in Conventional Loan Foreclosures).

According to the MBAA, Pennsylvania’s percent of prime loans in foreclosure was .85% in 2003 and ranked the state as having the 9th highest prime foreclosure rate in the nation (see Figure III-2: Prime Foreclosure Rate by State). By comparison, though, Pennsylvania’s percent of subprime loans in foreclosure – orders of magnitude higher than the percent of prime loans in foreclosure at 11.9% - ranks it among the top four states in the country (see Figure III-3: Subprime Foreclosure Rate by State). FHA-insured mortgages had a foreclosure rate in 2003 of 4.5% (see Maps 2, 3 and 4: National Maps of Foreclosure Rates by State).

SHERIFF SALES

In just the last three years, an estimated 55,163 homes have been lost to Sheriff Sale in Pennsylvania.

Sheriff Offices report increases in the numbers of properties being exposed to and sold at Sheriff Sales across the Commonwealth. Data from 43 of the Commonwealth’s 67 counties indicates that 35,980 properties were sold at sheriff sale during the last three years. is represents an increase of over 14% during this three year period.

By comparing the total number of housing units in each reporting county with their actual number of properties sold at Sheriff Sale, TRF estimated the number of properties likely sold in the non-reporting counties and found that a total of 55,163 properties were likely sold in all 67 counties during this time period. is exceeds by some 20% the number of households in the City of Allentown (Pennsylvania’s 3rd largest city below Philadelphia and Pittsburgh).

An even greater number of properties have been exposed to sheriff sale, but not actually sold. Sheriff Offices report that many are simply not equipped to handle the volume of properties being brought to auction (see Maps 5,6 and 7: Sheriff Sales Completed).

FORECLOSURE FILINGS BYCOUNTY

In just the last four years, the number of foreclosure filings in the 14-county study area grew from 15,610 in 2000 to 20,737 in 2003 – an increase of 33%.

TRF collected foreclosure filing information from Prothonotary offices in 14 counties throughout the Commonwealth for the four year period, 2000 through 2003. (While foreclosure filings are known to have been rising for years before 2000, this four year period was the point of time analyzed for this study.)

Filing numbers indicate that, without exception, the number of foreclosure filings has risen in each county during the four-year period. Foreclosure filing increases were most dramatic in Erie, Washington and Allegheny counties where the number of filings grew by over 60% (see Figure III-4: Filings by County).

HEMAP APPLICATIONS

In 1996, almost 5,700 households applied to the Commonwealth for mortgage assistance. In 2003, 8,881 did so.

e Pennsylvania Housing Finance Agency (PHFA) operates a program called the Homeowner’s Emergency Assistance Program (HEMAP). Designed to help homeowners keep up with mortgage payments during periods of unemployment or illness, the HEMAP program is one of the most lauded housing programs in the state.2 Applications for mortgage assistance have almost doubled since 1996 and growth has been relatively even across the Commonwealth. e four maps shown here are standardized to show applications per 1,000 owner occupied housing units. (see Maps 8, 9, 10 and 11: HEMAP Applications Over Time).

Additionally, between 2000 and 2003, 4,222 households were approved for HEMAP assistance. Simply put, the presence of HEMAP saved (or postponed) 4,222 households from being subject to foreclosure and likely underestimates the true numbers of households in serious mortgage- related distress in the Commonwealth.

As the chart here shows, 2,527 residents within the 14-county study area and 4,222 residents in the Commonwealth as a whole remained homeowners as a result of HEMAP (see Figure III-5: HEMAP Approvals by Year).

e success of HEMAP can contribute to an understatement of the total number of failing loans within the Commonwealth. If a resident with a delinquent mortgage is approved for HEMAP, a foreclosure will not be filed. e number of foreclosure filings reported in this study would actually be higher were it not for the HEMAP program.

BANKRUPTCY FILINGS

Bankruptcy filings in Pennsylvania have grown at one of the fastest rates in the country over the last 10 years.

Research suggests that changes in the personal bankruptcy filing rate tend to mirror changes in the risk of default to a household. e logic is that the same set of consumer burdens which make a household more likely to default on a mortgage loan are the same burdens which make them more likely to declare bankruptcy. Personal bankruptcy filings nationally continue to be uniquely high and economists are debating its cause. One side of that debate believes a significant share of the rise in filings is due to the current law and to a lessening of the stigma associated with filing for bankruptcy.

e other side of the debate argues that the rise primarily reflects an increase in financial distress within the consumer sector.3

Bankruptcy filings in Pennsylvania have grown exponentially. Between 1990 and 2001, the number of bankruptcy filings in Pennsylvania grew by over 200% - the 5th fastest rate in the country (see Figure III-6: Change in the Number of Bankruptcy Filings).

HOUSING COST BURDENS

More homeowners are paying over 30% of their income for housing costs.

According to the U.S. Census Bureau, 16.7% of all homeowners were paying more than they could afford to own a home in 1990; by 2000 20.8% were. 7.3% of all homeowners are most severely burdened (paying over 50% of income) in 2000. Lower income households are far more likely to face housing cost burdens than any other income group.

Together, these data suggest that more homeowners are financially distressed. More are applying to the state’s HEMAP program for help in paying their mortgage, more are filing for bankruptcy, more are facing foreclosure and more are losing their home to Sheriff Sale. Understanding the nature and potential causes of this problem in Pennsylvania is the subject of this report.