Legislation and regulations that delay foreclosures in various states came in for sharp criticism from a Federal Housing Finance Agency (FHFA) official on Monday.  Alfred M. Pollard, General Counsel to FHFA, told the House Committee on Oversight and Government Reform that "It would be very valuable for states and localities to pause in their passage of rules that may crease impediments to smooth foreclosures and to review the balance between homeowner protections and the movement to efficient and professionally undertaken foreclosures."

Pollard said that states and localities clearly face significant challenges from the housing crisis.  In addition to homeowners losing their homes they see erosion of the tax base and a resulting curtailment of local services and in many areas blighted neighborhoods.  The response has been a rash of local regulations that, while intended to help homeowners, have had a lot of unintended consequences while, in many cases, not even achieving the original goal.

Since 2009 state legislatures have introduced over 550 laws related to foreclosure by one estimate and other estimates place the number even higher.  These bills have variously sought to create new or higher foreclosure filing fees, extend foreclosure timelines, require registration of mortgage assignments, and mandate foreclosure mediation and have caused delays and problems including:

  • Adding to the considerable differences between judicial and non-judicial states, differences among those using each process and even differences within a state, there are new procedures such as mediation programs that lack safeguards to insure good faith participation.
  • States have additional types of priority liens that must be paid out of foreclosure sale proceeds, affecting the return to lender and investor. Furthermore, these liens are made retroactively, thereby altering the contract returns relied upon by the lender when they extended the credit.
  • Vacant property ordinances have been altered with new requirements and fees that encumber and delay foreclosures as well as increase costs to lenders.
  • States have added bonding and other requirements and charges to undertake foreclosures that are far in excess of any benefits provided to lenders and investors.

 "Many state laws that stretch out the period of legitimate foreclosures - after every effort is made to avoid foreclosure and keep homeowners in their homes - result in no added benefit for the homeowner and produce harm to the housing finance system and to neighborhoods," Pollard said.  "State directed delays in such circumstances harm the very groups that are intended as beneficiaries.  Again, once a bona fide and robust effort is made to avoid foreclosure, then foreclosure must be undertaken and undertaken as provided by law."

Prior to his remarks on state level regulations Pollard told the legislators about some of the initiatives that had been undertaken by the government sponsored enterprises (GSEs) with the support of FHFA.  These include aggressive attempts to market foreclosed properties, the Home Affordable Modification Program (HAMP), the Home Affordable Refinancing Program (HARP) and the Servicing Alignment Initiative (SAI).  Under SAI the GSEs made clear that servicers are expected to evaluate borrowers for the full range of loss mitigation options simultaneously so that both borrower and servicer can pursue and lock in an alternative to foreclosures as quickly as possible.  To encourage loan modifications the GSEs have offered substantial incentive payments to servicers to cover the costs of aggressive outreach.

Pollard suggested that the processes now in place with the GSEs and FHFA render many of the state laws unnecessary.  Most servicers do not act on foreclosure until after a homeowner is 120 days in default.  Under the SAI, servicers of GSE loans must demonstrate efforts to assist troubled borrowers within that time frame and, after that point, must have those efforts independently reviewed internally before referring it for foreclosure.  One the process begins the GSEs require the servicer to continue to provide an opportunity to cure. 

Pollard referred to study from the National Bureau of Economic Research, and MIT that reviewed various foreclosures regimes and the outcomes for homeowners and found that many of the laws intended to protect borrowers only delayed but did not prevent foreclosures.  The delays contributed to an overhang in the market without borrowers finding relief.  A key finding was that most parties who are able to benefit from loss mitigation do so in the first 60 to 90 days of delinquency and that has been the focus of FHFA and the GSEs.  "Laws and ordinances that add to the overhang of properties simply depress values for other homeowners and increases losses for creditors and investors."

Every effort should be made to help homeowners stay in their homes but state actions that increase costs, create new liabilities for mortgagees and delay inevitable do not benefit the majority of homeowners. At the same time if a borrower is treated improperly, the law has always provided protection for them for fraud or deceptive practices. "Adding new charges before and during foreclosures, new procedures that fuel delays and otherwise encumber foreclosures in the long run will only increase costs for everyone."

Pollard said that the states should consider their actions in light of new federal programs and in light of unintended consequences of some of these actions and FHFA stands ready to work with them on positive steps that maintain homeowner protections while not adversely affecting housing finance.