Weekly Briefing

Can state lawmakers keep up?  

The news on the mortgage foreclosure front remains grim. In 1998, there were 16,661 mortgage foreclosures in North Carolina. Last year, the total was 49,754 and some experts expect this year’s number to approach 60,000. The grand total over the last decade exceed 340,000. California, Florida, Nevada and several other states are experiencing per household foreclosure rates that are even higher.

According to a recent presentation prepared by the Office of the Commissioner of Banks, foreclosures are at historically high levels and national mortgage losses are estimated at somewhere between 300 and 400 billion dollars. Last year, the average American home suffered its first annual price decline since the Great Depression. As many as two-million more foreclosures may occur between now and the end of 2009.

State officials respond

The occasion for the presentation was a meeting at the General Assembly last Wednesday of a new House Select Committee on Rising Mortgage Foreclosures. As reported last Thursday on the Progressive Pulse blog, the committee meeting was encouraging news on a sobering subject. Though there’s only so much the state can do, most lawmakers and executive branch officials in attendance seemed genuinely committed to discovering exactly what those actions are and in setting the policy wheels in motion to make them happen.

Adding to the weight of the event was the fact that the committee is chaired by former House Speaker, Dan Blue. Blue, of course, is a longtime voice for vulnerable consumers and a legislator who has few, if any, peers when it comes to shepherding complex legislative initiatives through the legislature. Last year, Blue was the lead sponsor on three foreclosure related bills that won the support of consumer advocates, state regulators and the lending industry. Indeed with so many of the same players who came together last year addressing the committee– the Commissioner of Banks, the Attorney General’s Office, consumer advocates and the N.C. Bankers Association – there is good reason to expect that more progress will occur in 2008.

The root of the problem

While the roots of the foreclosure crisis spread out in several directions, no single factor goes more directly to the heart of matter than the explosive growth of predatory, “subprime” loans. Too many Americans have been placed in too many loans that, absent explosive and unsustainable inflation in the housing market, they simply could not afford.

Here’s how the nonprofit Center for Responsible Lending put it in a recent report:

“Subprime mortgages are high-cost home loans intended for people with weak or blemished credit histories. Higher interest rates make sense for higher-risk loans to a point, but the subprime market has been rife with problems that are rare in the mainstream prime market: excessive fees, high penalties for refinancing, refinances that provide no real benefit to homeowners, and steering families into more expensive loans when they qualify for a better rate.

In recent years, subprime lenders and brokers flooded the growing subprime market with dangerous mortgages that come with “exploding” adjustable interest rates. The result is a massive epidemic of foreclosures that is harming families, entire residential communities, not to mention the availability of credit at home and abroad.”

While some on the extreme right may argue that every loan should remain a “buyer beware” transaction that is left completely to the “free market,” the overwhelming majority of Americans have long recognized and accepted that consumer protection regulations are absolutely essential when it comes to important financial transaction like mortgage loans. This is especially true today, a time in which the average borrower must choose from a dizzying array of loan products (that he or she will seldom really understand) and lenders (with whom he or she will never be able to bargain as an equal).

What’s on the agenda?

Notwithstanding its foreclosure numbers, North Carolina actually has a proud tradition of saying “no” to predatory lenders. Components of the state’s groundbreaking 1999 mortgage law have been copied in several states and North Carolina was one of the first to affirmatively ban the pernicious practice of “payday” lending. Last week, speakers lauded North Carolina’s previous efforts for having played an important role in assuring that the current crisis is not as bad as it is in other states. Each also voiced support for further state action.

Here are some of the main ideas identified by the speakers:

1) Improved foreclosure processes. The specifics of the foreclosure process differ from state to state. Some states require a judge to carefully review each proceeding. In North Carolina, however, homes can be foreclosed upon with only the most minimal of findings by a Clerk of Court. To get a judge to review an individual borrower’s case in order to see if he or she has been subjected to unlawful or unconscionable loan terms or abusive loan servicing is a herculean task.

Last week, the Deputy Commissioner of Banks noted that one partial solution for North Carolina would involve requiring judicial supervision of foreclosures on certain types of subprime and/or non-traditional loans. The idea, of course, is that by requiring a judge to carefully examine such foreclosures, many borrowers could be protected from predatory practices. This, in turn, would encourage more loan holders seeking to foreclose to renegotiate with borrowers and, in the long run, help discourage predatory lending to begin with.  

Another, even simpler tactic under consideration in some states (and amongst some members of Congress) is a straightforward foreclosure moratorium that would put a hold on things for a set period until the market can stabilize.

2) New crackdowns on so-called "mortgage rescue" scams. One of the most pernicious practices in the mortgage lending area occurs when con artists promise strapped borrowers that they will, for an upfront fee, negotiate with loan holders. While many such transactions only cost the consumer a fee of $1,000 or $1,200 and some lost time, in other instances, the con artist actually convinces the homeowner to sign over the title of the home as part of the “rescue.” Needless to say, most such consumers never see that title again. New, tougher regulations combined with beefed up enforcement funding are an obvious first step in combating this practice.

3) A dramatic increase in the quantity and availability of unbiased, nonprofit housing counselors. At the heart of the foreclosure mess is the simple fact that far too many borrowers have been duped (and still get duped) into signing mortgages that they have no real prospect of keeping up with over time. Given the fact that a mortgage is the single most important financial transaction into which most individuals will ever enter, it's absurd that most people don't really know what they're signing.

One consistently successful practice for inoculating consumers against this phenomenon is the availability of high-quality, nonprofit financial counseling. North Carolina’s 1999 law actually rid the state of certain types of predatory high cost loans by making counseling a requirement for loans with such terms.

Given this success, lawmakers may wish to consider expanding the types of loans that trigger such a counseling requirement and significantly increasing state appropriations to hire more counselors and legal aid lawyers to aid consumers. Members of the committee also expressed support last week for new educational outreach efforts – particularly in minority communities – to convince consumers to seek unbiased advice and counseling before entering into transactions of such importance.

Looking ahead

While there are no short term magic bullets for confronting the current foreclosure crisis, there are reasons for cautious optimism. In fact, one silver lining to the current policy environment is the utter disrepute into which anti-government, market fundamentalists have fallen in the eyes of the public and policymakers of both parties. As has been the case in the past, it sometimes takes a greed-induced economic crisis to remind Americans of the importance of a vibrant regulatory scheme in building and keeping a healthy market economy. Given the high cost of the current lesson, let’s hope it’s not forgotten for a long time.   

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This entry was posted on Monday, January 28th, 2008 at 1:17 pm and is filed under Weekly Briefing. You can follow any responses to this entry through the RSS 2.0 feed.