Fixing foreclosure's ground zero

ESOP's Mark Seifert with houses stripped of their aluminum siding in the foreclosure-devastated neighborhood of Slavic Village, Cleveland.

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CLEVELAND (CNNMoney.com) -- Foreclosures may have reached a crisis point in Cleveland, but grass-roots efforts are sending some relief to troubled homeowners.

Counselors from more than a dozen non-profit community organizations are working with delinquent borrowers and lenders to help people keep their homes, and they say it's getting easier.

It's a growth industry funded by charitable foundations, individual contributors, the local government and the lending industry itself. Cleveland Housing Network (CHN) hosts group counseling sessions of about 30 people three times a week, up from one a week a year ago. Another organization, the East Side Organizing Project (ESOP), has gone from two foreclosure counselors to six during the past year.

They say their relationships with lenders, once adversarial, have grown more co-operative. The kinds of loan workouts available are changing and improving, according to Mark Seifert, executive director of ESOP. In the past, he said, lenders did little more than toss crumbs.

"As little as six months ago," he said, "90 percent of workouts lenders offered were forbearance agreements," which give a borrower extra time to clear up missed payments, but they postpone problems without solving them.

"We'd see the same people six months later," said Seifert.

Now lenders are offering more comprehensive programs, like refinancing subprime adjustable rate mortgages (ARMs) into fixed-rates, lowering rates or balances or both.

Many lenders are also providing counselors with lists of borrowers facing ARM resets. The agencies themselves then mail out warnings to borrowers, who respond to them better than they would from lenders.

Said Seifert, "We did this back in March for [mortgage servicer] Ocwen Financial, sending out 100 letters; 30 people showed up. We did 25 workouts, mostly switching borrowers to fixed rates from ARMs."

A significant part of putting borrowers back on track is teaching financial responsibility. "They [often] have lifestyle issues," said Seifert. "Do you really need five cell phones?"

One recent ESOP client was being evicted, even though she had found the cash to make back payments. Two counselors, James Jones and Samantha Williams, went to her house to help. In her driveway sat two big motorboats and an expensive minivan.

That's why one refi program, established by local bank Third Federal Savings & Loan, requires six weeks of financial education. It then switches borrowers from ARMs into reasonable fixed-rate loans. Of several dozen people ESOP enrolled there, only one later re-defaulted, according to Seifert.

For the lenders, work-outs are self-protection, Seifert said, "We're getting more successful solutions because lenders are scared." It's cheaper for them to work out a troubled mortgage. A foreclosure costs more than $50,000 on average, according to the Center for Responsible Lending, citing a Joint Economic Committee Report.

But not all lenders have stepped up, according to Jeanne Morton, CHN's director. "Some look to make something from the situation, only offering refis with full charges and fees attached," she said.

ESOP, according to Seifert, had been having little luck with Countrywide Financial, the nation's biggest mortgage lender. His counselors had suggested 26 work-outs from June to November, but Countrywide (Charts, Fortune 500) had not approved a single one, he said.

But that's changed. This week, Countrywide came up with 11 workouts for ESOP's clients. Seifert attributed the change of heart to increased media attention as well as a new contact there, who has a background in non-profit community organization.

Positive outcomes have also increased, agree counselors, because media and government spotlights have made homeowners more aware of looming problems and that getting help early is essential.

ESOP counselor Samantha Williams said. "Borrowers are more proactive," coming in before they fall behind. About 30 percent to 40 percent of her clients now are current with payments, up from almost none in the past.

Counselors may be getting more loan workouts, but it's still not enough to stop Cleveland's foreclosure meltdown. Last quarter, more than 16,000 properties were in some stage of default, according to RealtyTrac. And the number is likely to grow before it slows down. Mortgage data provider First American CoreLogic ranks Cleveland as the nation's sixth riskiest major market.

"People still tend to wait until it's too late," said Mark Wiseman, who directs the Cuyahoga County Foreclosure Prevention Program. "A paralysis takes hold."