With Millions of Foreclosures on Horizon, Should States Mandate Mods?

The foreclosure crisis is far from over. According to figures released by the ""Center for Responsible Lending"":http://www.responsiblelending.org (CRL), since the crisis took hold, 2.5 million homeowners[IMAGE] have already lost their homes and another 5.7 million are at imminent risk of foreclosure. Looking ahead, the nonprofit research group says it's projected that between 10 and 13 million foreclosures will have occurred by the time this crisis abates.

The federal government has implemented a mixed bag of foreclosure-prevention programs over the past two years in the hopes of stemming the tide, even incentivizing all parties involved, from lenders and servicers, to investors and the homeowners themselves. But housing analysts, watchdog groups, and industry insiders agree, they've yet to hit on a silver bullet solution.

CRL argues that the power to stop unnecessary foreclosures and stabilize local housing markets lies with state legislatures. With exclusive control over their state-specific foreclosure laws, the Center says lawmakers should impose mandatory loss mitigation standards for all servicers prior to foreclosure.

""A recent study"":http://dsnews.comarticles/nearly-two-thirds-of-delinquent-mortgages-untouched-study-2010-08-24?goback=.gde_2030907_member_28024546 by the State Foreclosure Prevention Working Group found that ""nearly three years into the foreclosure crisis…more than 60 percent of homeowners with seriously delinquent loans are still not involved in any loss mitigation activity.""

In a report written by Sara Weed, a policy attorney at CRL, and Sonia Garrison, a senior researcher for the organization, the Center ""outlines its proposal"":http://www.responsiblelending.org/mortgage-lending/policy-legislation/states/20101021-State-Loss-Mit-Brief-Final.pdf for state policymakers to apply ""common sense standards to any actor pursuing foreclosure.""

The authors argue state legislatures should mandate that mortgage servicers assess whether foreclosure is in the financial interest of the investor before proceeding to foreclosure.

To be effective, CRL says this mandatory loss mitigation standard should be combined with a requirement that the foreclosing party provide homeowners with a loss mitigation application in tandem with any pre-foreclosure notice or pre-foreclosure communication.

If after the loss mitigation assessment the servicer opts to move forward with foreclosure, the authors recommend states institute a requirement that the foreclosing party

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submit an affidavit disclosing their specific reasoning for the denial of a loan modification, including the inputs and outputs of any loss mitigation calculations.

In addition, homeowners should be granted a defense to foreclosure (or equivalent right in non-judicial foreclosure states) based on failure of the foreclosing party to engage in a ""good faith review"" of foreclosure alternatives, according to CRL.

""The reality is that many of these foreclosures can and should be avoided. All too often, troubled mortgages are sent to foreclosure, driven by a system biased in favor of foreclosure sales over sustainable loan modifications, even when foreclosure is more costly,"" the authors wrote.

The report notes that borrowers seeking a loan modification are often told that they have been denied due to “investor restrictions.” However, a recent CRL research report points out that modification is more often than not a win-win for the investor and the borrower.

The Center says in fact, investors themselves often claim that they are not standing in the way of modifications and have voiced concerns that servicers are not acting in _their_ best interest either.

According to the authors of the report, “spillover” costs extend throughout the neighborhood and the larger community. CRL estimates that by 2012, the foreclosure crisis will strip neighboring homeowners of $1.9 trillion as foreclosures drain value from nearby homes, pushing even more borrowers underwater on their mortgage.

Meanwhile, state and local governments continue to be hit hard by declining tax revenues coupled with increased demand for social services, according to CRL. The Urban Institute estimates that a single foreclosure costs $79,443 after aggregating the costs borne by financial institutions, investors, the homeowner, their neighbors, and local governments. But the Center says even this number understates the true cost, since it does not reflect the impact of the foreclosure epidemic on the nation’s economy.

“We cannot afford to wait any longer for the housing market to stabilize itself. If implemented quickly, states can prevent unnecessary foreclosures before it is too late,” authors Weed and Garrison said in the CRL report.

The recent news of some servicers circumventing state laws to push foreclosures through quickly has brought every attorney general in the country together and pitted them directly against the servicing community as one ""powerful and determined force"":http://dsnews.comarticles/all-states-to-take-part-in-coordinated-foreclosure-investigation-2010-10-13.

Some attorneys general have come out and said mandated loan modifications may be considered as part of a settlement with servicers who’ve filed improper foreclosure affidavits. But such a stipulation would only apply to those foreclosure cases where documentation was found to be defective, and it’s expected servicers will put up a strong fight against such terms.