NHS Phoenix reviews all loans accompanying subordination requests made to the city of Phoenix, giving NHS an opportunity to intervene with first-time homeowners to assess whether they are being subjected to abusive lending practices and to provide appropriate counseling.

NHS Phoenix opened in 1975 to revitalize the Coronado neighborhood in the city of Phoenix. It now serves the entire city and provides low- and moderate-income households with a range of services that promote homeownership. They include pre- and postpurchase education, home maintenance training, delinquency counseling, new construction, and house rehabilitation. NHS Phoenix became a NeighborWorks HomeOwnership Center in 1999.
 
More recently, a very aggressive subprime lending industry has begun operating in the Phoenix area. When the city’s Neighborhood Services Department asked NHS to review the loan attached to a subprime lender’s subordination request, NHS found the terms of the loan to be unfavorable and advised the city to review the subordination request. Subsequently, the city asked NHS to review all loans related to subordination requests and provide appropriate counseling to loan applicants.
 
A subordination request is a petition made to the city by a lender that wishes to be placed in first-lien position on a client’s loan. The city’s lien position is usually second behind a traditional interest-bearing first mortgage loan. However, when a new lender attempts to refinance the first mortgage, the city automatically moves into first position. Lenders always want to be in first position, hence the need for a subordination request.

Program Operation.  Upon receiving a subordination request, the city requires that all applicants contact NHS Phoenix and set up a face-to-face meeting. During a single, hour-long meeting at NHS’s office, terms of the loan are reviewed and explained in full and the borrower is asked to elaborate on the purpose of the loan, what it will be used for, and so on.
 
Based on the facts, the counselor determines whether the loan offers a “net-benefit” to the borrower and advises the borrower and city accordingly. Importantly, neither the city nor the borrower is bound by the recommendation of the loan counselor.
 
In short, the process looks like this:
 
• Lender contacts city to get instructions from them about the subordination requirements.
 
• City faxes lender a cover letter and a list of items that must be delivered prior to the review.
 
• Lender then forwards the basic underwriting file to NHS Phoenix for review.
 
• Upon receipt, NHS forms a detailed checklist and proceeds with the counseling session.
 
• A report is prepared and the loan file is copied and delivered to the city.
 
• City reviews NHS report and brings it to a full committee review.
 
• City notifies the client and lender of its decision.

Staffing and Cost.  All the requests are handled by two NHS Phoenix loan counselors, one of whom speaks Spanish. The services of the Spanish-speaking counselor are required approximately 20 percent of the time. NHS charges each applicant a fee of $100 for the review. The cost of the program is fully covered by the $100 service charge.
 
On average, each counselor devotes two hours of their time per client; one hour of preparation and one hour for the meeting. Due to the low annual level of commitment (80 hours), there is no negative impact on other NHS programs.

In 2004, 40 subordination requests were reviewed. Of these, 30 were deemed ill-advised or unnecessary. Based on information from the city’s loan processing division, NHS Phoenix reports that requests for subordinations were approved 20 percent of the time in 2004.
 
According to lending supervisor Cindy Espinoza, “There have been a few incidents, maybe 5 percent of the time, where the borrower actually declined the loan offer while at the counseling session. We also will see the same clients, probably 15 percent of the time, who gained useful knowledge during the counseling session, shopped for a much better deal, and return with a new subordination request.”

• The NHS Phoenix/city of Phoenix subordination-request review program is an effective way to reduce the threat of loss of homeowner equity from poor choices in borrowing. The high percentage of subordination requests denied by the city suggests that the program is preventing people from entering into bad loans.
   
• Additionally, due to its low cost and time commitment, this program can be implemented fairly easily.

Agency interview on 01-04-05 with: Cindy Espinoza, Lending Supervisor