Austin King, National Director ACORN Financial Justice Center firstname.lastname@example.org February, 2008
The foreclosure crisis sweeping across America is as tragic as it was entirely avoidable – strong anti-predatory lending protections would have
prevented the worst abuses that led to loans that were simply unaffordable for millions of homeowners. Now the question facing policy makers is what to do to stem the foreclosure crisis, prevent homelessness, stabilize the economy, and save the American Dream for millions of families. This report discusses policy options both large and small that many states will consider this year and next. With the Option ARM crisis threatening to supplant the subprime crisis as a leading cause of foreclosures, this problem shows no signs of abating. Policymakers will be rewarded who look forward and seek to stem the problem before it gets even worse. Foreclosure Moratorium The most muscular version of this bill is being sponsored by Assembly Member Jim Brennan in New York, and is a full 12-month moratorium on residential foreclosures. In a sign of the new political realities around foreclosures, Brennan, a Democrat, has a Republican sponsor of his bill in the GOP-held Senate. One essential purpose of such a moratorium is to create an environment in which the parties are encouraged to find a mutually agreeable solution on their own, as well as to actually save someone’s house. This moratorium will force lenders to work with homeowners and review the current mortgage document and determine the homeowner’s true financial status. Courts will determine based on the mortgage, what the minimum amount should be for the monthly payment schedule to preserve the relative financial position of both parties during the moratorium. Other versions are for shorter periods of time, like six months or three months. In response to the growing calls for a moratorium, the industry alliance Hope Now recently announced a new program that will provide for a voluntary 30-day stay on a foreclosure when a borrower contacts the lender. “Protected homeowners” receive stay under judicial discretion Connecticut has an existing statute that allows a judge to stay an order for foreclosure for up to six months if the mortgagor has recently become unemployed or is currently underemployed. The purpose of the delay, as with the moratorium described above, is to allow time for financial circumstances to improve leading to a refinancing, or allow time for the parties to reach an agreement on a loan modification. A proposal introduced in Connecticut will expand the definition of “protected homeowner” from just those who are unemployed to also include those who have had any loss of income, increase in fees or interest rate on their mortgage, or other good cause to have fallen behind. It also extends the period that a judge can order a stay from six months to twelve. Borrowers must make less than 150% of the Area Median Income in order to qualify. This creates what is essentially a moratorium, but one that requires judicial review instead and does not apply to all cases like the New York proposal.
Require mortgagee show of good faith in loss mitigation prior to foreclosure Another proposal in Connecticut will require mortgagees to make a “demonstrable and documented reasonable effort” to work out a home retention solution with the borrower. Standard loss mitigation work includes but is not limited to “capitalizing arrearages, extending the term of the loan, waiving late and other fees, and modifying the interest rate.” This proposal, needless to say, would put substantial pressure on servicing companies to actually produce the kind of loss mitigation that the industry has claimed to be engaging in for some time. Protections for tenants of investment properties that get foreclosed Evictions of tenants from properties that become foreclosed upon are often invisible victims in the current subprime crisis. A recent California bill that narrowly lost in the Senate (because of urgency provisions requiring 2/3rds supermajority) requires notice to tenants at 90 days prior to foreclosure as well as homeowners. Lenders and banks are required to honor existing rental contracts. State Funding for Foreclosure Victim Outreach & Loan counseling Freddie Mac estimates that close to half of all foreclosures in 2007 resulted from loans in which lenders were never able to contact borrowers. In relation to both costs to the court system and costs to the economy, there is no more cost-effective investment a state can make than funding community organizations to contact delinquent borrowers. Many lenders and servicers have a financial stake in this contact as well, so there are prime possibilities here for public/private partnerships in terms of a funding base. Outreach that is most successful will involve door-to-door efforts as well as the staging of low-pressure events like “foreclosure workout fairs” designed to bring in delinquent borrowers to get information and have the opportunity to meet with counselors and their lenders. States also have a direct interest in funding HUD-certified housing counseling agencies, all of which are facing a deluge of requests that they cannot meet in the current crisis. Funding sources for outreach and loan counseling include CDBG, CSBG, affordable housing trust funds, and rainy day “emergency” funds. Several states and cities have already funded outreach grants with great results, including Massachusetts and Minnesota, and numerous states already support some level of housing counseling. Automatic notification of counseling agencies upon delinquency Included in a package soon to be released by Minnesota Rep. Joe Mullery that contains a number of changes to the foreclosure process is a provision that requires lenders and servicers to alert HUD-certified housing counselors once their clients have reached 30 day delinquency. In order to address potential privacy concerns, borrowers have the right to “opt out” of such notice, but given that this is intended to address the huge number of
foreclosures that result from no-contact borrowers, it is doubtful that many will opt out. Given such early notice, counselors can intervene with borrowers with a “safer” approach than the collections department, and get the borrower into the best home retention strategy available. Accountability for property maintenance Foreclosures are creating neighborhood nuisances when banks and lenders neglect to maintain them properly. Many states and cities are beefing up their penalties for poor maintenance and increasing enforcement efforts. Foreclosures are less viable economically when penalties for poor maintenance (or the actual cost of good maintenance) are factored in, making servicers and lenders more likely to modify and seek home retention solutions. “Foreclosure consultant” reform Scam artists are popping up all over the country. Many states are responding by incorporating criminal fraud penalties for “foreclosure consultants” that advise homeowners against their best financial interests. Maryland’s SB 218, sponsored by Governor O’Malley, cracks down on scam foreclosure consultants and provides for potential criminal penalties for all actors in deceptive and fraudulent rescue transactions. Mandatory data reporting A California bill requires lenders to report to the state the number of loan modifications they are making on a monthly basis, as well as authorizing the state to look over the books of mortgage brokers. This type of transparency in the machinations of the financial players in the current mess is a great means of creating accountability and understanding which companies are grossly behind and potential targets for regulatory action based on other bills discussed above. FOR MORE INFORMATION Austin King is the National Director of the ACORN Financial Justice Center, which works with ACORN chapters and members to directly engage financial institutions in the fight to save homeownership as well as pursue legislative solutions to stem the current crisis and prevent predatory lending in the future. ACORN is the nation’s largest community organization of low- and moderate-income people, with 100 chapters in 40 states, and has been a leading voice in opposition to foreclosures and predatory lending. The ACORN Financial Justice Center is available for assistance with drafting model language and research. Contact Austin King at email@example.com or (504) 304-2790 x 2536