Foreclosure and Anti-Predatory Lending Reforms

There will be 2.4 million foreclosures in 2009 along with 9 million foreclosures between 2009-2012, according to the Center for Responsible Lending (CRL).  CRL also estimates that 69 million homes will lose property value because of nearby foreclosures for a total property value loss of $502 billion.

As part of our Multi-State Shared Agenda, the Progressive States Network is working with its partners and leading experts to promote reforms to stem the foreclosure crisis and put in place reforms to discourage predatory lending practices in the future. 

Through coordinated, strategic support, PSN and our allies will be working to introduce and advance legislation to address foreclosure and predatory lending reforms, providing model legislation, policy analysis, messaging and more - all of which has been gathered and will be constantly updated on our Foreclosure & Predatory Lending web page.

Our policy staff are also available to answer questions and supply information not on the website.  Legislators and advocates can contact us about supporting the Foreclosure Reform and Anti-Predatory Lending campaign through our website or by emailing foreclosure@progressivestates.org.

Table of Contents:

- Summary of Policy and Why It Matters

- Messaging on Anti-Foreclosure Policy

- Building a Campaign

- PSN Support in Your States

Summary of Policy and Why It Matters

Although record foreclosures are currently wreaking havoc in communities across the nation, the federal response has been weak and has so far failed to stem the rising tide of foreclosures.  Many borrowers have little or no contact with their creditor prior to foreclosure, not to mention attempts to modify the mortgage.

Why Anti-Foreclosure Policy Matters:   Mandating foreclosure mediation will bring the parties together, which will lower the number of foreclosures without allocating scarce resources.  Requiring lenders foreclosing on homes to maintain those properties and giving foreclosed homeowners the right to remain in their homes as renters for a specific amount of time will keep vacant homes from contributing to blight, and help prevent homeowners from having their families' lives disrupted.  By cracking down on illegal practices by predatory lenders, particularly giving whistleblower protection to front-line banking employees, states can stop the exploitation of moderate- and low-income communities. 

Based on the best of state policies enacted and recommendations of national experts, the following are some key model provisions for alleviating the crisis for families and communities due to the foreclosure crisis.

Key Provisions include:

• Mediation Before Foreclosure:  Mandatory mediation increases the chance that a mortgage will be modified so that the borrower can stay in their home, while not reducing the ability of the lender to refuse a modification request.  By getting the opinion of a neutral party and forcing the lender to the table, foreclosures can be avoided.
• Maintenance of Properties Before and After Foreclosure:  Legislation would require banks to repair properties before a home can be foreclosed upon, a key measure to preserving communities.  Requiring new owners to upkeep foreclosed property will contain the effects of the subprime foreclosure crisis since lack of upkeep on foreclosed homes brings down the appearance and property values of the surrounding area.  Upkeep requirements and penalties can offset this burden on communities.
• Notice to Tenants of Foreclosure:  Legislation would require that tenants and others with interests in any building would have to receive notice of any pending foreclosure action.  They would be given notice and greater protection from summary eviction with greater due process.
• Right to Rent after Foreclosure:  Instead of foreclosure leading to millions of vacant properties, this legislation would allow homeowners facing foreclosure the option of renting their home at fair market rate.  People facing foreclosure would be allowed to stay on as renters even if the foreclosure goes through, helping them keep a roof over their heads.  The proposal requires no tax payer dollars and would help preserve neighborhoods by keeping community members in their homes as long-term renters.
• Whistleblower Protection:  Legislation would protect the employees of financial institutions from retaliation when they reveal criminal or unethical conduct by their employers, which can help bring predatory practices to light.  Such free speech protection is essential to bringing these practices to light.  States should also empower workers to resist pressure to engage in illegal or unethical conduct when an employee reasonably believes the company "to be in violation of any law, rule, or regulation, or to be unfair, deceptive, or abusive and likely to cause specific and substantial injury to one or more consumers.”  This will empower the employee to stop the bad practice right away by refusing to cooperate.
  

Messaging on Anti-Foreclosure Policy

Address the Financial Insecurity of American Families:  Homeowners who thought themselves financially secure are now vulnerable in a way most never even contemplated.

• Because federal reforms have been slow, state leaders have a political opening to take strong action to address these concerns.
• Indeed much voter discontent is the result of anxiety from economic problems and voters should respond favorably to actions that are low cost, but effective, in reducing foreclosures and bankruptcies.

Tap the Public Anger Against Financial Institutions:  Average Americans are absolutely incensed about what appears to be a rigged financial system where businesses destroy jobs and wealth, only to be rewarded with government bailouts. 

• 74% of the public believes "The greed and risky decisions of banks and financial companies led to the financial crisis and recession" and that the government should crack down on them through regulations.
• The current economic turmoil has also sparked a significant increase in populist sentiment, which continues to grow as major bad actors in the financial industry swing quickly to profitability and reinstate obscene pay structures.
• A direct push on wayward financial institutions will bring predatory practices to light, reinforcing sentiment in favor of reform.

Requiring Buyers to Maintain Foreclosed Properties and Allowing Former Owners to Rent Them can Preserve Communities. 

• Foreclosures have a "spillover" effect by depressing the value of nearby homes—most owned by families who are paying their mortgages on time.  This results in lower property values for homeowners and a reduced tax base for communities.  During the period 2009-2012, the Center for Responsible Lending projects that foreclosures will cost 92 million U.S. families some $1.9 trillion in lower home values--an average of $20,300 in lost wealth per household.
• Requiring lenders to maintain foreclosed property, and fining them if they don't, is a strong way to decrease the blight that the foreclosure crisis has brought to many communities.  These laws also help cash-strapped municipalities that have taken on the burden of maintaining these homes themselves in order to preserve their neighborhoods and property values. 
• The potential costs of maintenance may deter foreclosures from happening in the first place.
• As Dean Baker of the Center on Political and Economic Research wrote in the Los Angeles Times, "By keeping homes occupied, "right to rent" also would be a boon to communities that have been especially hard-hit by foreclosures.  Often foreclosed homes are abandoned, with unkempt lawns, broken windows and other property damage."  Keeping former owners in their homes as renters is a big step towards maintaining communities.

Whistleblower Protection for Bank Employees can Deter Bad Bank Practices:  Protecting the employees of financial institutions from retaliation when they reveal criminal or unethical conduct by their employers can help bring predatory practices to light.  Many tellers, loan officers and other retail banking employees report a culture of corruption with managers firing workers who don't engage in predatory practices.  Many of these employees want to do the right thing and put a stop to these practices, which undermine the financial well-being of their clients, but fear of losing their jobs keeps them from doing so. 

Building a Campaign

There are a few broad-based archives of policies adopted around the country to ease the foreclosure crisis, including:

• Center for Responsible Lending (CRL):  State & Local Foreclosure Prevention Policy Options
• NGA:  States' Foreclosure Response
• Attorneys General Take Action: Real Leadership in Fighting Foreclosures (ACORN)

Other Key Organizations Supporting Foreclosure and Predatory Lending Reforms:  Americans for Fairness in Lending (AFFIL), National Consumer Law Center Foreclosure Prevention,  ACORN Stop Foreclosures Campaign, DEMOS.

Key Information on the Foreclosure Crisis:  The Impact of Bad Lending State-by-State (CRL), State by State Foreclosure Fact Sheets (CRL), Snapshot of a Foreclosure Crisis: 15 Fast Facts (CRL).

Overall Analysis of Reform:  Beyond the Mortgage Meltdown: Addressing the Current Crisis, Avoiding a Future Catastrophe (DEMOS), Assets & Opportunity Special Report: Net Worth, Wealth Inequality and Home Ownership during the Bubble Years (CFED).

Malfeasance of Subprime Brokers:  For more specific information on the worst of the scams against home loan borrowers, see  Steered Wrong: Brokers, Borrowers, and Subprime Loans (CRL), Predatory Lending Scams Targeting First-Time Homebuyers (NEDAP).

Effects of Subprime Mortgages on Communities:  A number of reports detail the broad-based damage to communities from the foreclosure crisis, including Soaring Spillover: Accelerating Foreclosures to Cost Neighbors $502 billion in 2009 alone; 69.5 million homes lose $7,200 on average (CRL), Neighborhood and Individual Impact of the Subprime Mortgage Lending Crisis:  Reporter’s Guide (AFFIL), Home Insecurity: A set of reports on neighborhoods in trouble due to foreclosure (ACORN).

On Importance of Whistleblower Protection for Banking Employees:  For more on why free speech rights for bank employees can help blow the whistle on predatory lending practices in the future, see  Protecting Whistleblowers (Public Citizen), Protecting Consumers and Workers Fact Sheet and Whistleblower Protections Archive (SEIU).

Racial and Other Disparities in Subprime Lending:  A number of reports detail the racial and gender disparities involved in the lending industry, including:

• Unfair Lending: The Effect of Race and Ethnicity on the Price of Subprime Mortgages (CRL)
• The Impact of the Home Equity Lending Market on Latino Consumers (NCLR)
• Women are Prime Targets for Subprime Lending  (Consumer Federation of America)
• Foreclosure Exposure: A study of racial and income disparities in home shortage lending in 172 American cities (ACORN)
• Foreclosure Exposure 2: The Cost to Our Cities and Neighborhoods (ACORN)
• Paying More for the American Dream: The Subprime Shakeout and Its Impact on Lower-Income and Minority Communities (California Reinvestment Coalition)

PSN Support in Your States

PSN has already begun working with legislators and advocates to provide support for them as they introduce foreclosure reforms around the country. We'd like to work with many more!

Our policy staff are also available to answer questions and supply information not on the website.  Legislators and advocates can contact us about supporting Foreclosure and Anti-Predatory Lending campaigns through our website or by emailing foreclosure@progressivestates.org.

As bills are introduced and sessions begin, PSN will provide ongoing resources and updates on foreclosure reform and anti-predatory lending legislation, as well as help coordinate strategy and information sharing with our partners among sponsors and advocates.