Two-part cure for unnecessary foreclosures
Five years is long enough. It’s time to end the foreclosure crisis that has stifled the housing market and dragged down our economy. With some critical help from the Legislature and direct assistance from the national mortgage settlement, the Commonwealth is well-positioned to close this chapter and take an essential step toward growing our economy again.
More than five million people across the country have lost their homes to foreclosure during this economic crisis, including more than 45,000 in Massachusetts. Thousands more in the state are on the brink of foreclosure. According to the Warren Group, there were 1,394 foreclosure starts in Massachusetts during February, more than double the number than in February 2011.
Despite these numbers, a blueprint for ending the foreclosure crisis is within reach. The Legislature is poised to enact legislation that mandates loan modifications when commercially reasonable. Even the banks have long acknowledged that it often makes more financial sense to create an affordable payment plan rather than foreclosing and selling a home at a substantial loss. This legislation never asks the bank to lose money on a loan modification. We can save thousands of homeowners while still improving the creditors’ bottom lines. And that, in turn, saves families and communities.
Despite agreement on these principles, loan modifications currently do not occur on the scale necessary. Our office met one homeowner in East Boston who purchased his condominium using a $147,000 loan. He lost his job and contacted the bank to request a modification that would require him to make monthly payments equivalent to a loan of $90,000. The bank refused, foreclosed on his property, and later resold that property at just $40,000, well below the value of an affordable revised loan. It made no economic sense for the bank to put this borrower out on the street. Unfortunately, his story is one of many.
Predictable and enforceable loan modifications will save those homes that can be saved. And when a foreclosure is unavoidable, it will make the process more predictable and efficient. For five years we have relied on ad hoc and unenforceable loan modification programs. The results have been stunningly poor. Inaction will prolong the foreclosure crisis. The Loan Modification Bill will bring it to an end.
The Comptroller of the Currency recently reported that loan modifications proved much more sustainable when they included principle reductions, and made more economic sense than foreclosure. Even the Federal Housing Finance Agency, which has been a stubborn holdout, recently acknowledged that principle reductions work for the creditor as well as the homeowner. In addition, loan modifications were a critical component of the recent settlement with the five large banks. Those mega-creditors, which include Bank of America, Chase, and Wells Fargo, all agreed to offer a net present value loan modification before proceeding to foreclosure.
With that standard in place, the HomeCorps, recently established by our office with the funds from the national mortgage settlement, will help Massachusetts borrowers navigate the loan modification process. This groundbreaking new initiative will increase the number of loan modification specialists available to help distressed borrowers and provide a wide range of grant opportunities aimed at easing the foreclosure crisis in Massachusetts. This initiative ensures that homeowners won’t be alone as they navigate the loan modification process. HomeCorps will provide a specialist to advocate for homeowners with their lender and ensure that a full evaluation is done before foreclosure. This can help all Massachusetts borrowers regardless of who holds their loan.
The combination of the Loan Modification Bill and HomeCorps is a one-two punch that will avoid unnecessary foreclosures, while accepting that unavoidable foreclosures should occur efficiently. This will hasten the transformation of vacant properties to new owners and renters, promoting the recovery of our communities and the housing market.
For five years our office has focused on investigations and enforcement actions against predatory lenders and subprime securitizers. Through first-of their-kind actions, we’ve provided relief to many distressed borrowers in the Commonwealth. That focus on accountability will continue, but we must focus equally on leading our Commonwealth out of the foreclosure crisis once and for all. The Loan Modification Bill and HomeCorps are the surest strategy to accomplish that. Five years is long enough.
Martha Coakley is the attorney general of Massachusetts.