Dealing with the Foreclosure Crisis at the State Level

The statistics are shocking. The current mortgage crisis is expected to result in the foreclosure of 3 million homes. In Stockton, CA, one in every 27 homes has been hit by the foreclosure crisis. And, Countryside, the largest U.S. mortgage lender, just released figures showing that foreclosures and late payments rose in December to the highest on record. Calls to helplines by homeowners facing foreclosure have skyrocketed.  As a corollary, local animal shelters are seeing a sharp increase in intake due to owners having to surrender family pets when they lose their homes.

However, the impact on financial markets and the economy far exceeds the losses from the mortgage foreclosures. A recent report by the Center for Responsible Lending conservatively estimates that the cost in declining property values due to home foreclosures is estimated at $233 billion. Not to mention a loss of almost


400,000 jobs in the housing business.

Standing by on the sidelines watching was the Bush Administration, who didn't offer any kind of foreclosure relief until last month and what was offered was full of concessions to the lending industry. The burden is now on the states to implement effective policies to stop the tidal wave of foreclosures.  This dispatch highlights three easy policies that states can adopt to keep people in their homes and fight the foreclosure crisis.

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Moratorium on Home Foreclosure

As we highlighted last week, states have begun to call for moratoriums on home foreclosures. Moratoriums give lenders incentives to restructure loans on more fair terms. Moreover, a moratorium gives borrowers the time and space necessary to work with loan counselor to ensure that their loans have fair terms-- and can actually help preserve housing wealth threatened by foreclosures.

Massachusetts was the first state to pass a de-facto moratorium on foreclosures back in May. Governor Deval Patrick directed the state's Commissioner of Banks to seek delays in foreclosure activities from mortgage lenders for any Massachusetts homeowner who filed a complaint with the Division of Banks. The delay can be up to two months time. In addition, in July, the state's Attorney General entered into an agreement with one of the state's largest subprime lenders to cease foreclosures to allow for a 90-day review period. During that time, the Attorney General's office may object to any of the foreclosures it determines to be tainted by unfair or deceptive lending practices. And, just a few weeks ago, Governor Patrick signed into law a bill requiring a 90-day notice of intent to foreclose that must be filed with the Division of Banks before a home can be foreclosed.

In New York, a much longer moratorium is being proposed. Republican State Senator Frank Padavan is partnering with Democratic Assemblyman James Brennan to introduce legislation that will impose a one-year moratorium on court-ordered mortgage foreclosures. The court would require the homeowner to make a fair and equitable minimum payment that would not alter the financial position of all parties involved.

In Ohio, a coalition of community groups in Cleveland asked the local sheriff to give homeowners a 60 day foreclosure moratorium by holding off on auctioning homes that are occupied. The Deputy Sheriff presides over the sale of foreclosed homes. The coalition also asked the sheriff to stop evicting owners, which is currently being considered by the sheriff to give owners a chance of reaching repayment agreements with their lenders.

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Right to Rent instead of Eviction

Foreclosing on millions of homes means millions of vacant properties. Vacant properties cause increased fire hazards, increased criminal activities, and can discourage neighborhood stabilization. Now take that effect and multiple it by about two million.  

Instead of creating millions of vacant properties, states can adopt policies that keep people in their homes. The Center for Economic and Policy Research proposes allowing homeowners facing foreclosure the option of renting their home at fair market rate. The fair market rate would be determined by an independent appraiser in the same way that an appraiser determines the market value of a home when a bank issues a mortgage.  People facing foreclosure would be allowed to stay on as renters even if the foreclosure goes through, helping them keep a roof over their head as renters. The proposal requires no tax payer dollars, but would help preserve communities by keeping community members in their homes as long-term renters. The Massachusetts bill that requires a 90-day foreclosure notice, also allows tenants of foreclosed properties to become tenants at will at the time of foreclosure, allowing the possibility of them to stay as renters.

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You Foreclose on it, You Maintain it

Requiring banks and other homeowners to upkeep foreclosed property is essential to containing the effects of the subprime foreclosure crisis. The Center for Responsible Lending study cited earlier, found a "spillover effect": a decline in property values in houses that were one eighth of a mile from a foreclosed subprime property. Not surprisingly, lack of upkeep on foreclosed homes brings down the overall appearance, and property value, of the area surrounding the foreclosed home. 

In Buffalo, NY, city prosecutors hold banks responsible for fixing peeling paint, broken masonry, and overgrown or trash-filled yards at houses that the banks have foreclosed. Alternatively, the city may try to get lenders to donate properties to community groups or pay for demolition when the houses are beyond repair. City Prosecutor Cindy Cooper says, "At least in Buffalo, the days are gone when you can do a foreclosure and walk away without taking care of the property." 

In an example of legal genius and, more importantly, courage, city prosecutors and judges have interpreted a 2004 New York statute that amended the definition of "owner" in its property maintenance code to include those that had "control" over the premises.  Once banks send letters to defaulting homeowners threatening eviction, they have begun to assert "control" over the property, and are therefore responsible under New York code.  The measure began to get the notice of banks when Judge Henry Nowak began entering default judgments for code violations and imposing the maximum fine, which can reach $10,000 to $15,000. While that may not be much for a big bank, the fines give the city a lien that impedes the banks' ability to buy or sell other properties in the area. Further, when lenders come to Judge Nowak's court to get residents evicted, he refuses to grant the request until the bank addresses the outstanding violations on the property.

Other jurisdictions have explicitly required upkeep on foreclosed properties. The Manteca, CA city council approved foreclosure upkeep rules that require homeowners to keep up foreclosed properties after tenants have moved out. Homeowners that neglect their homes would be fined up to $1,000 a day. Also, homeowners are required to maintain yards outside homes built after 1993. If they don't, the city can hire contractors for the upkeep and pass the bill onto the owners. 

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Policy Options with Funds

Imposing a moratorium on foreclosures, allowing homeowners to switch to renters, and requiring upkeep by owners of foreclosed properties stop the foreclosure crisis without cost to taxpayers. Other states have provided funds to set up a foreclosure hotline for counseling loan holders, refinancing programs, and outreach programs  to help homeowners struggling to pay their mortgages.

Last summer, New York Governor Eliot Sptizer pledged $100 million to create the "Keep the Dream" program to offer homeowners with risky mortgages the opportunity to refinance their loans and avoid possible foreclosure. The program also requires eligible borrowers to complete a homeowner education course with a federally approved not-for-profit organization.

Simple measures, such as Baltimore's public education campaign, can be a relatively inexpensive  first step to foreclosure prevention. In the $37,000 public education campaign, the Baltimore Homeownership Preservation Coalition placed messages on billboards, posters, newspaper advertisements, and city buses to let home owners know that they can get help to prevent the loss of their homes. The cost of foreclosures is expected to reach almost $3 billion in Maryland state and over $122 million in Baltimore. 

The city of Baltimore also filed suit against Wells Fargo Bank for predatory and discriminatory lending.  After reviewing foreclosure data, the city attorneys concluded that Wells Fargo was steering African American homeowners into high-cost, subprime loans. Cleveland, one of the epicenters of the foreclosure crisis, also filed suit against 21 banks claiming that subprime lending in inner-city neighborhoods has created a public nuisance that hurt property values and city tax collections. Several other cities and states are also considering legal action against the banks.

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Many right wing talking heads have argued that victims of subprime and predatory loans should bear the consequences of their decisions. Yet, the reality is that lenders preyed on and exploited working families by dangling the carrot of the American dream of homeownership in front of them to mask the abusive terms of the loans. And if economic irresponsibility is supposed to be punished, why did bonuses for Wall Street executives rise 14%, despite those firms having a direct hand in the subprime crisis, with the top four investment banks paying out almost $30 billion in bonuses? A moratorium on foreclosures doesn't even begin to address this imbalance, but it will give working families a chance to see if they can piece back together their lives.

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