Fraud Joins Unemployment as Big Factor in Foreclosure Rates

Increasing foreclosures is fast becoming the No. 1 problem facing their communities, with outright mortgage fraud, questionable lending practices and job loss all contributing factors, according to a new survey conducted by the National Alliance of Community Economic Development Associations.

The NACEDA, a national group representing local organizations who work with low- and moderate-income populations, said its member organizations are key participants in state-level initiatives designed to help families save their homes, including state legislation, to curtail abusive lending practices among other remedies.

Although foreclosure rates nationally have been falling, there are several states where they are rising, including Ohio, Michigan, Indiana, California, Florida, Nevada and Arizona. Subprime rate loans in the last four states are responsible for much of the foreclosures. The rate of foreclosures started on subprime ARM loans jumped from 2.7% to 3.23%, with most of that increase in those states, according to the Mortgage Bankers Association.

"In Indiana, a person could have a criminal record, including felony convictions and there was no oversight responsibility that would prevent this person from being a mortgage broker," said Christie Gillespie, executive director of the Indiana Association for Community Economic Development. "Our legislature passed legislation this year to address this."

NACEDA chairperson Diane Sterner said, "NACEDA members represent thousands of local organizations across the nation that are on the front line of this problem, serving as that key 'trusted advisor' who looks out for the best interest of the consumer and assists in finding a solution to this devastating foreclosure problem."

Ohio, Michigan and Indiana account for 19.9% of the nation's loans in foreclosure and 15% of all of the foreclosures started in the U.S. during the first quarter. All three states have suffered large declines in manufacturing employment.

NACEDA's survey asked 20 member states about foreclosure prevention activities. While 50% of respondents said job loss was a primary reason for foreclosure in their communities, all respondents said that poor mortgage products with escalating rates and other inappropriate lending products were a factor in foreclosure in their communities.

Subprime loans with adjustable rates and exotic ARMs were a particularly common factor. In addition, divorce, escalating property taxes and emergent or unexpected medical costs were also cited as major factors in foreclosure. In the first quarter of 2007, the percentage of loans in the foreclosure process was 1.28% of all loans outstanding, an increase of nine basis points from the fourth quarter of 2006 and 30 basis points from one year ago according to data released in June by the MBA.

As of June, the national unemployment rate was at 4.5%, about equal to this time last year.

However, unemployment in certain states is significantly higher, including those with high foreclosure rates. Michigan (6.9%), California (5.2%) and Ohio (5.7%) have among the highest unemployment and highest foreclosure rates.

In Indiana, the state legislature has passed a bill providing funding for a foreclosure-counseling network, counseling training, a help hotline and a foreclosure study committee that will convene in August.

In Michigan, where foreclosure rates are among the highest in the nation, several bills are in draft to regulate mortgage brokers, police mortgage fraud and create a rescue fund pool.

NACEDA represents more than 1,200 community development and community economic development corporations across the country as part of a 20 state network.

Snapshot: State Unemployment Rates

Michigan 6.9%

Ohio 5.7%

California 5.2%

U.S. Total 4.5%

Source: Dept. of Labor. Data as of June. (c) 2007 Mortgage Servicing News and SourceMedia, Inc. All Rights Reserved. http://www.mortgageservicingnews.com http://www.sourcemedia.com/

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