Legislative Action: Taking Steps to Prevent Foreclosures
Rates of mortgage delinquencies and foreclosures are increasing rapidly, imposing large costs on borrowers, their communities and the national economy. Speakers at the recent real estate law section of the New York State Bar Association’s annual meeting in New York said the federal government is building momentum to be proactive and fight foreclosures by figuring out ways to persuade lenders that loan forgiveness is important.
Vincent DiLorenzo, a professor at St. John’s University, School of Law, said WaMu is considering loan forgiveness in the loans it owns. He said more companies could be moving in that direction as well. “We cannot predict the outcome of these legislative initiatives,” Mr. DiLorenzo told conference attendees. “We could see a demand for loan forgiveness in exchange for TARP funds and incentives offered for loan modifications.”
TARP is being used to fix and improve Hope for Homeowners program, which was too restrictive when it first came out. Mr. DiLorenzo described how it was authorized by the Economic and Housing Recovery Act of 2008 to refinance mortgages for borrowers who are having trouble making their payments but can afford a new loan insured by the Federal Housing Administration. Under the program, ending Sept. 30, 2011, banks have to write down the existing mortgage to 90% of the new appraised value of the home.
At the conference, speakers quoted a revised report from Credit Suisse, which says a whopping 10.2 million homes could be in foreclosure in the next four years. “Half of subprime borrowers are underwater and people own more than their home is worth,” said Kirsten Keefe, a senior attorney with the Empire Justice Center in Albany.
For the third quarter of 2008, she said almost 45,000 New York homes were in some stage of foreclosure. One-third of ARM loans were 90 or more days past due. New originations dropped by 22%.
Foreclosures for prime fixed mortgage loans rose dramatically to 0.71% in the third quarter of 2009 compared to 0.34% in the first quarter of 2006. The increase is based on life circumstances, including job losses and not bad adjustable-rate mortgages, Ms. Keefe said. Queens and Brooklyn were likely to have the highest concentration of foreclosures by the end of 2008.
“The writing is on the wall that the industry has to see a trend to do more loan modifications — anything to get us out of the current mess we are in,” she said.
According to Ms. Keefe, the paperwork for loan modifications often does not properly explain the terms clearly to borrowers. And often, the payments are not more affordable for consumers. “Servicers won’t talk to borrowers until they are behind three months.”
In November 2008, the average foreclosure loss on a first mortgage was $145,000, about 55% of the amount due, she said. “The market will not see a change until lenders start doing significant mortgage principal reduction.” New York government is reaching out to homeowners, although this state was not hit with the foreclosure problem until after California and Florida, where the no-doc, stated-income loans and more riskier products were offered earlier to borrowers.
The New York State Department of Banking kicked off the Halt Abusive Lending Transactions and Mortgage Fraud Campaign to fight against the epidemic of foreclosures stemming from predatory lending.
In 2008, $25 million was allocated in New York to increase legal assistance to homeowners who are in trouble and to create local outlets for borrowers to go to that provide foreclosure defense work. She said the state government is teaming up with local housing agencies to offer counseling services, and lawyers are being trained to help homeowners.
Under the Foreclosure and Responsible Lending Act of 2008, the state of New York took action to help homeowners in foreclosure and prevent abusive lending practices. The state is required to regulate “distressed property consultants” and a 90-day pre-foreclosure notice must be sent out to borrowers. This notice must provide how much the borrower owes, the phone number of the servicer and the status of the loan.
The servicer has to attach a list of at least five counseling agencies located near the borrower that they can go to for assistance. “The problem is that borrowers have had no where to turn. Free services are available. This piece of information is the greatest piece of advice to give them. It is information they should get and read before they get a flood of mail from distressed property consultants who say their services are free, but they aren’t free.”
Ms. Keefe said she is optimistic that the industry can beat the continuing subprime crisis, thanks to all that is happening at the federal level, including two loan modification bills, and the action that many states are taking, including New York, to combat growing defaults and foreclosures.
Also, as part of the lending law, there is a unique settlement conference procedure that is required for loans made Jan. 1, 2003 through Sept. 1, 2008. A meeting must take place within 60 days of the foreclosure complaint to discuss workout options with the borrower.
"It is my hope the settlement conference procedure will get all of the right parties together to talk about a resolution. It is a last-ditch effort to reverse the current problems and prevent the future wave of foreclosures.”
Someone from the servicing side must be in the room that can make a decision on the loan. If it’s clear the borrower cannot afford the loan, they can be advised to sell, do a short sale or deed-in-lieu or enter into a forbearance agreement.