AGA Today
States Tackle Foreclosures
In Absence of Federal Help
By
Dina ElBoghdady and Renae Merle
The Washington Post
Wednesday, April 16, 2008; A01
This month alone,
Philadelphia's
sheriff delayed foreclosure auctions of 759 homes at the city council's
urging.
Maryland
extended the time it takes to complete a foreclosure. State leaders in
Ohio
recruited more than 1,000 lawyers to aid distressed borrowers.
Frustrated by the
slow pace of federal action on behalf of struggling homeowners, some
states and cities have struck out on their own to stem an alarming rise
in foreclosures that has depressed home prices in most parts of the
country and eroded local governments' revenues as property taxes and
utility bills go unpaid.
Nine states have
committed more than $450 million to "loan funds" aimed at refinancing
the mortgages of at-risk borrowers, according to a study by the
Pew
Charitable Trusts.
A handful have brokered deals with major lenders who have pledged to
ease terms for some troubled loans. A few states have lengthened the
time it takes to complete a foreclosure.
"What the states
are saying is: 'We can't wait any longer for the federal government. We
have to get ahead of this,' " said Tobi Walker, a senior officer at the
Pew Charitable Trusts. "The states are experiencing this pain more
directly than the federal government is."
Their efforts
have yielded mixed results but underscore the pressure local lawmakers
face. The number of homes entering foreclosure nationwide is the highest
since the
Mortgage
Bankers Association
started tracking the data in 1979. Nearly every state has been hit to
some degree. New foreclosures climbed at least 20 percent in 47 states
from December 2006 to December 2007, according to Pew.
In some ways,
states and cities are better positioned to tackle the fallout than the
federal government, housing experts said. They are more familiar with
their communities and better able to tailor responses. Local governments
lack the resources and clout, however, to effect large-scale change.
At the root of
the problem are the lax lending standards that enabled borrowers with
little money or poor credit to take out loans they could not afford when
home prices shot up in the first half of the decade.
After the housing
market softened in late 2005, an increasing number of borrowers could
not sell their homes or refinance their way out of trouble. Mortgage
default rates started rising.
Some states
responded by creating loan funds they could use to refinance the most
distressed borrowers.
Pennsylvania
created two new funds in November to cope with the recent mortgage
problems.
One fund offers
refinancing for troubled borrowers who have adjustable-rate loans if
they meet certain criteria, including a cap on household income and
limits on debt relative to income. These borrowers are offered cheaper,
more predictable, 30-year fixed-rate mortgages.
The other fund is
more aggressive, purchasing loans outright from lenders and then setting
up affordable repayment plans with homeowners. In those cases, the
agency works with lenders to reduce the mortgage's principal, instead of
just rescheduling payments or temporarily reducing the interest rate.
Pennsylvania has
refinanced 40 loans and negotiated principal reductions for an
additional 38 under the two programs since they were adopted in
November, said Brian Hudson, executive director of the state's Housing
Finance Agency. In most cases, lenders have agreed to cut the principal
by 15 to 30 percent.
"That is not a
bad effort" for a few months of activity, Hudson said.
But loan funds
have financial constraints. These funds can help only a limited number
of borrowers, and even then they tend to have the greatest impact in
states such as Pennsylvania that have not been overwhelmed by
foreclosures.
They are less
effective in previously overheated markets -- such as
California,
Florida
and
Nevada
-- where borrowers grossly overpaid for their homes and now owe far more
than their homes are worth, said
Michael
Collins
of the PolicyLab Consulting Group, a mortgage research firm based in
Ithaca,
N.Y.
Through their own
programs, New York has refinanced only three borrowers since September,
and
Massachusetts
has refinanced 12 since July. These two loan refinancing initiatives do
not help borrowers whose mortgages exceed the value of their homes.
"Once people are
in that situation, there's not much that any state or local program can
do unless the lenders make concessions," Collins said.
A few governors
tried pushing lenders to do just that. California's
Arnold
Schwarzenegger
attracted national attention in November when he announced that some of
the state's largest lenders had voluntarily agreed to temporarily freeze
interest rates on some adjustable loans.
The results have
disappointed consumer advocates. The number of loan modifications, which
could involve changing either the principal or interest rate of the
mortgage, declined 30 percent from November to January while
foreclosures climbed, said Paul Leonard, director of the
Center for
Responsible Lending's
California office.
"These kinds of
agreements are potentially very important but have not yielded the
results people have hoped for," Leonard said. "That's the problem when
you have bully pulpit negotiations as opposed to legislation."
For troubled
borrowers in California, foreclosure remains the most common outcome,
the California Reinvestment Coalition found after it surveyed 38
counseling firms in December that worked with 8,000 borrowers. Even some
of the lenders that pledged to work with Schwarzenegger did not come
through for borrowers, according to the coalition.
"We need
something bigger and bolder, like some of the proposals in Congress,"
said Kevin Stein, the coalition's associate director.
Those proposals
include providing $10 billion in new tax-exempt bonding authority for
state and local housing agencies to refinance mortgages and $4 billion
for cities to buy vacant foreclosed properties. Some proposals support
expanding the role of the
Federal
Housing Administration
so it can help refinance more troubled borrowers.
While the
proposals wind their way through Congress, foreclosures keep mounting
and local policymakers keep churning out ideas. An increasingly popular
strategy is revamping the foreclosure laws in favor of borrowers.
Maryland has
extended the timetable for foreclosure from 15 days to 150.
Massachusetts has arranged temporary reprieves for more than 600
homeowners over the past year. Philadelphia is setting up a program that
allows borrowers to get financial and legal counseling before auctions
of their property are scheduled. The Ohio Supreme Court approved a
mediation program in January.
Under the Ohio
initiative, lenders who want to foreclose must first try to work out
payments with homeowners. Only then will courts turn over the documents
that companies need to sell the homes.
"That gives us
leverage," said Richard Cordray, Ohio's treasurer. "To get what they
need from our courts, they have to sit down and go through a mediation
process as in all other civil cases. It slows down the process and gets
everyone to the table."
In Ohio,
manufacturing job losses have exacerbated the state's mortgage woes.
Last year, more than 80,000 foreclosure cases were filed in Ohio courts,
a 40 percent rise from four years ago. But that has not discouraged the
state's relatively new leaders.
"I'm not at all
pessimistic that we'll make a real dent in this problem," said Cordray,
who took office a year ago. "It's just that we've got many bad loans to
work through."
Staff
researcher Richard Drezen contributed to this report.