In the summer of 2007, the Attorneys General of 11 states (Arizona, California, Colorado, Iowa, Illinois, Massachusetts, Michigan, New York, North Carolina, Ohio, and Texas), two state bank regulators (New York and North Carolina), and the Conference of State Bank Supervisors formed the State Foreclosure Prevention Working Group to work with servicers of subprime mortgage loans to identify ways to work together to prevent unnecessary foreclosures.
The reports note that foreclosure prevention continues to fall short, despite widely-publicized campaigns to encourage homeowners in trouble to seek help and initiatives by servicers to fast-track loan modifications.
The major findings of the State Foreclosure Prevention Working Group include the following:
- 70 percent of homeowners who are two months behind on their mortgages still aren’t getting help and are still not on track for any loss-mitigation.
- While the number of borrowers in some kind of loss mitigation program has increased, it has been matched by an increasing level of delinquent loans; thus, the relative percentage has remained about the same. “This large gap suggests a systemic failure of servicer capacity to work out loans.”
- Only one in three delinquent borrowers completed a workout within 45 days. Slow assistance is partly why the number of homeowners facing foreclosure increased 16 percent. Servicers’ loss-mitigation departments are severely strained in managing the current workload. “We are concerned that servicers overall are not able to manage the sheer numbers of delinquent loans…the burgeoning numbers of delinquent loans that do not receive loss-mitigation attention are clogging up the system on their way to foreclosure…We fear this will translate to increased levels of vacant foreclosed homes that will further depress property values and increase burdens on government services.”
- Homeowners who do receive loss-mitigation help are most likely to receive some form of loan modification. Such modifications are a solution that seems to offer better long-term prospects for successful resolution of problem loans. Many servicers are replacing their use of repayment plans in favor of loan modifications.
- The Hope Now Alliance — a coalition of mortgage lenders and servicers backed by the Bush administration — has not provided borrowers with very much hope.
Based on their findings, the State Foreclosure Prevention Working Group made the following recommendations:
- Develop a more systematic loan work-out system to replace the intensive, individual, “hands-on” loss-mitigation approach. “Initial efforts to develop systemic approaches are far too limited to make a difference in preventable foreclosures. Without a systematic approach, we see little likelihood that ongoing efforts will make a serious dent in the level of unnecessary foreclosures.”
- Slow down the foreclosure process to allow for more work-outs. “Targeted efforts to slow down subprime foreclosures may give homeowners and servicers more time to find solutions to avoid foreclosure.”
“Progress is being made, but there is a long way to go,” said Iowa Attorney General Tom Miller, a founder and leader of the State Foreclosure Prevention Working Group. “We still see a tremendous gap between the need for loan work-outs and the options in place today.”
“Foreclosures are costly, further reduce real estate values, and harm not only borrowers, but also neighborhoods and communities,” said Massachusetts Attorney General and Working Group member Martha Coakley. “In most cases, and particularly where mortgage loans contain payment terms that were not structured to be sustainable in a real estate downturn, loan modification and other loss mitigation should be done much more actively.”
We would point out that the states involved in the Working Group have nearly half of the nation’s electoral college votes — and that several of these states are crucial “swing” states in the 2008 presidential election. The candidates need to pay close attention to the Working Group’s findings and recommendations.