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
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.
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.
property ordinances have been altered with new requirements and fees that
encumber and delay foreclosures as well as increase costs to lenders.
have added bonding and other requirements and charges to undertake foreclosures
that are far in excess of any benefits provided to lenders and investors.
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."
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.