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Banks sue to overturn local foreclosure laws

Lynn, Worcester sued over foreclosure laws

Seven Massachusetts banks are suing Lynn and Worcester over foreclosure regulations adopted in the aftermath of the housing bust, saying that cities are exceeding the authority allowed to local governments.

The lawsuit, filed on Monday in US District Court in Worcester, argues that only the state can set the rules governing foreclosure proceedings. If communities are allowed such powers, the banks say, it could open the door to a burdensome patchwork of rules conceivably spread across the state’s 351 cities and towns.

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“The ordinances are invalid as they are preempted in whole or in part by Massachusetts foreclosure statutes,” the banks said in the civil complaint. The suit was first reported by the Boston Business Journal.

The lawsuit is potentially a blow to Massachusetts cities that have sought to take on big banks, take control of the ongoing foreclosures in their communities, and protect homeowners and neighborhoods. In recent years, many cities were hard hit by foreclosures, which led to evictions of tenants, vacant buildings, blight, and crime.

The Lynn and Worcester ordinances require banks to negotiate alternatives with delinquent homeowners through a formal mediation process before they begin the property-seizure process, which is not a requirement of state regulations, according to a complaint. The regulations also make lenders responsible for the upkeep of vacant properties and homes in foreclosure — even before they legally have possession of the real estate, according to the Massachusetts Bankers Association, a trade group.

Lenders would be required to provide cash bonds to local governments to ensure they maintain vacant properties. Those that don’t comply would be penalized under the local laws.

The institutions suing are Eastern Bank, the largest locally owned Massachusetts bank, and six other community banks: Hometown Bank of Oxford, Country Bank for Savings of Ware, Avidia Bank of Hudson, Rollstone Bank of Fitchburg, North Brookfield Savings Bank, and Southbridge Savings Bank.

Bank representatives and local officials clashed about the regulations for months before the suit was filed.

“The banks that ultimately filed felt they had no other choice,” said Jon Skarin, senior vice president of the Massachusetts Bankers Association. “These are local banks who all feel strongly that there needs to be some resolution to these questions.”

A 2012 state law already requires lenders to offer loan modifications before pursuing foreclosures on certain high-risk loans, but officials in Lynn and Worcester say the law doesn’t go far enough and hasn’t been effective in pushing banks to negotiate with struggling homeowners.

“Foreclosures are so destabilizing to communities,” said Worcester City Manager Edward Augustus Jr. “The City Council felt very strongly that given the huge impact foreclosures have had on the city of Worcester, it was important to try to bring some pressure to bear on banks that weren’t responsive to homeowners who found themselves in an upside down position.”

Augustus said Worcester will not enforce its new ordinance until the court cases are resolved.

But in Lynn, city officials are moving aggressively to enforce new rules.

Lynn has hired a Salem-based mediation company to force dialogue between homeowners and lenders, and the company is already involved with 176 cases, said James Lamanna, city attorney.

“It’s consistent with state law,” Lamanna said in defense of Lynn’s ordinance. “State law requires banks to work out loan modifications. As a practical matter, it’s not working, particularly with big banks.”

Another group of banks has challenged a law governing foreclosures in Springfield, passed three years ago. The ordinance is on hold as the case awaits a ruling from the First Circuit Court of Appeals. The federal court has also asked the state Supreme Judicial Court to weigh in on the decision. A ruling is expected later this year.

A spokeswoman for the attorney general’s office declined to comment on the local regulations.

Foreclosure levels today are well below the worst of the crisis, which peaked in 2007 and 2008. In May, lenders initiated 573 petitions more than double the number from a year earlier, but a fraction of the more than 2,100 started in May of 2007, the Warren Group, a real estate tracking firm, reported Tuesday.

Timothy Warren, chief executive of the Warren group, blamed the jump foreclosure starts on a backlog created while lenders waited for new federal regulations to go into effects. Many foreclosures that are started are never completed as lenders and borrowers negotiate new payment plans or properties are sold.

Lenders completed 151 foreclosures in May, down from 251 a year earlier and more than 1,400 in May 2008.

Priyanka Dayal McCluskey can be reached at priyanka.mccluskey@globe.com. Follow her on Twitter @priyanka_dayal.
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