Two states and several Democratic U.S. senators are actively pursuing solutions to the projected onslaught of foreclosures resulting from loose subprime lending standards last year. Some of the proposed legislation would hold lenders accountable for policing mortgage brokers and real estate appraisers.
New Jersey's Assembly Deputy Speaker Neil M. Cohen requested that the Department of Banking and Insurance establish a state-run, toll-free telephone hotline for borrowers facing foreclosure, according to an announcement by the Assembly Democrats. The hotline would provide information about mortgage foreclosures, the department's counseling programs, contact numbers for credible organizations that provide counseling and aid in refinancing.
Cohen has reportedly also asked the state attorney general and the governor to pursue a moratorium on new subprime foreclosures, pending a government investigation into how the subprime market collapse is affecting New Jersey.
"With the condition of the subprime market expected to worsen in the coming months, we must take proactive steps to protect New Jersey homeowners," Cohen said in the statement. "Scrambling to offer aid after thousands have lost their homes will be too little, too late."
In Massachusetts, Governor Deval Patrick directed the commissioner of banks to seek delays from mortgage lenders, on a case-by-case basis, for any borrower in the state who has filed a complaint about their mortgage with the Division of Banks.
"We asked the commissioner to intervene because [some borrowers] can't wait for legislation," governor spokesman Jose Martinez told MortgageDaily.com.
"Cases, or complaints, will be evaluated to see what assistance we can provide," Martinez continued. For "borrowers who are about to be foreclosed on, we will intervene and ask lenders for a 60-day forbearance period. Others who are not at that time sensitive stage, we'll refer to organizations that can assist."
The Massachusetts governor is asking that mortgage lenders consider modifying the terms of their loans to assist borrowers to move from adjustable-rate mortgages into fixed-rate loans. These measures and other initiatives will be featured in forthcoming legislation, according to the governor's announcement.
Another recent action was the reintroduction of the STOP FRAUD Act by U.S. Democratic senators from Illinois, Barack Obama and Dick Durbin. The move was made to combat mortgage fraud and abuse and is intended to lessen foreclosure risk, according to an announcement.
"As the number of foreclosures skyrocket and the housing market becomes more vulnerable, we must establish stiff penalties to deter fraud and protect consumers against abusive lending practices," Obama said in the statement.
In addition to providing the "first federal definition of mortgage fraud" and authorizing stiff criminal penalties against fraudsters, the legislation provides $25 million for housing counseling and technical assistance for borrowers and other consumers with respect to mortgage fraud and other activities likely to increase the risk of foreclosure.
The act would also protect the rights of borrowers to challenge lending practices in foreclosure proceedings, if the borrower receives a subprime loans with any of several high-risk characteristics targeted by the act, including loans in which the borrower does not have the ability to repay at maximum rate of interest, those in which true long-term costs are not clearly disclosed to the borrower, stated-income and no-documentation loans, and loans with unreasonable prepayment penalties, Obama's announcement stated.
In Washington, D.C., U.S. Senator Charles E. Schumer introduced legislation that would give $300 million in federal funds to nonprofit organizations certified by the Department of Housing and Urban Development that specialize in foreclosure prevention, according to an announcement Thursday. The legislation is said to be the "first major" one to deal with the subprime foreclosure crisis.
Schumer, D-N.Y., and other senators additionally sent out letters to financial institutions' representatives, including the Mortgage Bankers Association and the American Bankers Association, requesting that private sector banks and mortgage lenders that stand to lose the most from foreclosures create a similar home retention fund by matching the aforementioned appropriation at a minimum of $2 to $1.
MBA Chairman, John M. Robbins, issued a written statement in which he applauded Schumer's commitment to provide support for community-based non-profit groups.
"The real estate finance industry remains devoted to helping borrowers who are having trouble making their mortgage payments on time," Robbins said in the statement. "The lending industry has been working with non-profit community groups for years supporting programs to help consumers who are facing foreclosure because nobody wins when a home is foreclosed upon."
Schumer, who said the federal and private funds will help "hundreds of thousands" of families from foreclosure and save "billions in spillover foreclosure costs," also introduced a separate bill to upgrade standards for mortgage originators that would require them to assess a borrower's ability to repay a mortgage and would hold lenders accountable for policing their associated brokers and appraisers. This, "to ensure that we don't get into this mess again, we need to seal the cracks in our regulatory system to prevent future widespread lending abuses."
The bill, the Borrower's Protection Act of 2007, would reportedly require originators to underwrite loans at the fully indexed rate, create escrow accounts to pay taxes and hazard insurance on subprime loans, and prohibit steering.
MBA, however, does not support these remedies because "they will have the unfortunate effect of limiting choice and restricting mortgage credit to the neediest borrowers, thereby hurting those people it is ostensibly designed to help," Robbins said.