Philadelphia pilot is model in U.S. housing crisis

By Jon Hurdle

PHILADELPHIA, Sept 25 (Reuters) - With the U.S. financial system in crisis due to surging mortgage defaults, a Philadelphia program designed to reduce foreclosure sales may provide a national model to keep people in their homes.

The program, based not on bailouts but reconciliation between borrowers and lenders, has been able to prevent at least temporarily the disposal of many of the properties in its purview.

The first such city-sponsored plan in the United States, it has also saved banks money because it is cheaper to renegotiate than foreclose.

Launched by city government and the Philadelphia Court of Common Pleas in June, the plan requires owner-occupied properties scheduled for sheriff's sale to be submitted to a conciliation conference of borrowers, lenders and the court before they can be sold.

Negotiators including housing advocates, lawyers and court officials seek agreements that allow arrears to be paid or forgiven and for loans to be modified so that borrowers can resume regular payments and remain in their homes.

Other cities hit by increasing foreclosures are watching, Philadelphia Mayor Michael Nutter told Reuters.

The program attacks the roots of the U.S. mortgage crisis that has threatened to bring the financial system to collapse, with homeowners unable to afford higher payments when adjustable-rate subprime loans reset or falling behind on fixed-rate loans with high interest rates. Housing advocates say mortgage lenders have been unwilling to renegotiate with struggling borrowers to avoid foreclosure.

Of 552 homes referred to the program that had been scheduled for sheriff's sale between April and July, 230 were permanently removed from the sale block; 200 were postponed for between one and five months; and 55 cases were rescheduled, said Judge Annette Rizzo of the Court of Common Pleas, who oversees the program.

Another 467 cases were referred to the Residential Mortgage Foreclosure Diversion Pilot Program but the homeowners failed to appear for their conciliation hearings, Rizzo told Reuters.

The beneficiaries are people like Debra McGrath, 52, a nursing assistant who refinanced her $64,000 loan at 9.75 percent to help pay medical bills from her treatment for uterine cancer.

When she fell $8,000 in arrears on her mortgage, she was in danger of losing her home of 23 years as it was scheduled for sheriff's sale in October.

"This has been nothing but a nightmare," she said.

But McGrath's distress turned to joy in the courtroom when her attorney told her that lender Franklin Credit agreed to accept a lump sum of $1,500 as payment for the arrears. She could then resume monthly mortgage payments of $1,406, the amount she had expected to pay when the mortgage began, instead of an increase to $1,406 monthly mortgage payments that were due to rise to $1,886. The interest rate was cut to 6 percent.

"I'm going to cry," she said on hearing she would be able to keep her home.

MAKING A DEAL

Foreclosure filings in Philadelphia rose 18 percent to 6,237 in 2007 and are expected to reach 8,000 this year, said Ian Phillips of Acorn, an advocacy group for low- and moderate-income families that has been active on the foreclosure crisis.

Phillips called the program "massively effective" because it has imposed reasonable standards on both lenders and borrowers under the auspices of the court which has the power to delay a sale if judges think there is room for compromise.

"It's not a bailout in any sense of the word," he said.

Nationally, the proportion of mortgage loans in foreclosure rose to 2.47 percent by the end of the first quarter, up from 2.04 percent in the fourth quarter of 2008, the highest level since 1979, according to the Mortgage Bankers Association.

Mike McKeever, an attorney who represents lenders in the Philadelphia program, said banks have cooperated because restructuring a loan or forgiving some arrears is cheaper than foreclosure.

"We are in favor of it," McKeever said. "It has brought both parties to the table."

Mayor Nutter said the program is protecting neighborhoods from falling property values, which typically happens when a house is abandoned. The city provided $2 million for the program and will provide more next year, he said. (Reporting by Jon Hurdle; Editing by Daniel Trotta and Eddie Evans)