FORECLOSURES ARE climbing rapidly, across the United States and in Massachusetts. They should be slowing, given that the country’s biggest banks just spent more than a year hammering out a far-reaching settlement that committed $25 billion toward anti-foreclosure efforts. Instead, the perverse logic of the foreclosure crisis dictates that banks ring in the national foreclosure settlement by accelerating the pace at which they seize people’s homes.
An anti-foreclosure bill pending on Beacon Hill embodies the unsettled, upside-down nature of the housing market it seeks to regulate. The legislation pushes foreclosure prevention efforts further than any other state. But it also leaves a tremendous amount of leverage in the hands of the same banks that are racing to ramp up their foreclosure efforts.
The last time Massachusetts passed a law regulating foreclosures, the state took a soft-touch approach with banks. The two-year-old law tried to foster dialogue between banks and troubled borrowers by extending the 90-day window troubled Massachusetts homeowners have to make good on defaulted mortgages to 150 days; however, banks could stick to the 90-day window if they made good-faith efforts to modify borrowers’ loans, but failed to come to an agreement.
The thinking was that the costs of a two-month delay would goad banks into at least talking to borrowers facing foreclosure. It assumed that once banks opened dialogue with homeowners, loan modifications would inevitably follow. In practice, many large banks and mortgage servicers opened dead-end talks with borrowers that allowed for speedy foreclosures, while appearing to show the good faith the state law required. When Attorney General Martha Coakley sued the country’s five biggest mortgage banks last year, she alleged this cat-and-mouse game amounted to an unfair and deceptive business practice.
The foreclosure bill attempts to squash dead-end negotiations by taking the definition of good faith out of banks’ hands. Bank-borrower negotiations would become mandatory, not optional. Instead of asking banks to have a conversation with homeowners, it would require them to run numbers through a pair of math formulas. Banks would have to calculate the cost of modifying a troubled mortgage, and weigh that against the cost of evicting a homeowner and auctioning off the repossessed property; banks would only be allowed to foreclose if they could prove, mathematically, that it would be cheaper to foreclose than to keep borrowers in their homes.
Nearly 54,000 Massachusetts homeowners have lost their homes to foreclosure since the beginning of 2007. Often, home seizures spread neighborhood blight, since banks have been slow to resell properties they take back. Foreclosure sales, when they do happen, depress housing prices for everyone. And they often come at a steep cost for the banks, which are selling properties at significant discounts to the soured mortgages, after collecting no income at all during the long stretches homes are in the foreclosure pipeline.
In many cases, banks recoup more money by modifying mortgages than they do by foreclosing. The Legislature isn’t asking banks to lose money by keeping residents in their homes. It’s just demanding that they justify foreclosures from a fiscal standpoint, and not just because foreclosing is what banks have always done when mortgages go bad. There’s a new urgency behind these calculations, since Massachusetts foreclosures are up 77 percent this year.
If it passes, the Massachusetts foreclosure bill would be the nation’s toughest, since it would use mathematical tests to force banks’ hands on mortgage modification. Its relative toughness really speaks to other states’ inability to confront foreclosures, more than six years after the housing market peaked. The bill is targeted specifically at the worst mortgages from the housing boom — subprime mortgages, no-documentation liar loans, loans with exploding adjustable rates, and credit card-like payment options that bury homeowners in debt. These mortgages are far more likely to go bad than conventional fixed-rate loans.
The focus on unconventional loans follows a solid history of state litigation on foreclosures, which held that the act of writing a loan designed to explode is an unfair business practice. But for the past four years, conventional mortgages, not the exotic ones, have made up the bulk of foreclosures in the United States. Beacon Hill is only putting teeth into regulations on exotic mortgages, while hoping that banks will apply loan modification formulas to all troubled loans. The past two years of soft-touch regulations on foreclosures show that hope is likely misplaced.