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Foreclosure Prevention Policy Options

Paul LeonardDecember 9, 2008

EARN ConferenceLas Vegas, NV

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About CRL

Nonprofit, nonpartisan research and policy organization dedicated to protecting homeownership and family wealth by working to eliminate abusive financial practices.

Affiliated with Self-Help, one of the nation’s largest community development financial institutions.

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Overview

Key drivers to crisis Voluntary efforts falling short Feds and States can pursue a

variety of strategies

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Key drivers of foreclosure crisis

Wall Street demanded volume

Originators developed risky products, reckless underwriting, and incentives to push borrowers into unaffordable loans

Policymakers didn’t do enough to curb abuses

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What’s Needed Now

Bailout proposals ignore fundamental cause of crisis, i.e. foreclosures and falling housing prices

Need for bankruptcy reform and systematic loan modifications

Need to improve borrower protections going forward

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Voluntary Loan Mods Dwarfed By Foreclosures & Delinquencies

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Existing Obstacles to Voluntary Modifications

Insufficient Servicer Staffing/Technology

Misaligned Financial Incentives for Servicers

Risk of Investor Lawsuits Limits of Pooling and Servicing

Agreements Piggyback Seconds

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Federal Solutions

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Increase Mods through TARP

Require mandatory formulaic mods for loans owned by any bank that gets cash infusion

FDIC proposal: Systematic Modifications, Pay Servicers, Guarantee Modifications $25b to pay servicers and guarantee up to 2 million modified loans conditioned on sustainability standard.

Democratize Data Reporting: HMDA for Loss Mitigation

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Lift the Ban on Judicial Modifications

Bankruptcy judges can modify all loans (incl. for yachts, vacation homes, and for subprime lenders in bankruptcy) but not for primary residences

Zero cost to taxpayers Could help 600,000 families keep their homes Narrowly targeted; limited judicial discretion Incentive to servicers to modify outside

bankruptcy

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State and Local Solutions

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What Can States Do?

States control foreclosure process States regulate servicers Bring legal actions: State Attorneys

General have track record of aggressive mortgage enforcement NY: Spitzer and Cuomo Countrywide settlement

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Mediation/Intervention

What: Require or encourage mediation to explore options for modifying loans

Why Greater foreclosure-prevention success by (1) ensuring communication and negotiation between the parties;

(2) leveling the playing field and formalizing the process by involving a judge, attorney, or other experienced third party;

(3) providing increased transparency

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Mediation/InterventionExamples

City of Philadelphia: Court-ordered mandatory mediation supervised by judges.

NY: Required 90-day pre-fc notice and mandatory settlement conference for certain proceedings

NC: 45-day pre-fc notice and creates subprime database to determine candidates for modifications

Others: NJ, MI(proposed), MN (AG prop), CT

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Deferment/Moratoria

Provides additional time to adopt new procedures, use new tools/market products, catch up to workload.

Requires minimum payments to continue

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Deferment/Moratoria Examples

Voluntary initiatives Servicers: Fannie Mae, Freddie Mac,

Countrywide, Citi States: Florida

Mandatory CA (prop): Safe harbor for servicers that

adopt systematic FDIC-like proposal MN: 1-year deferment, vetoed by Gov. Federal: HR 6076 (Matsui): 9 month

deferment, min. payment required

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Foreclosure Process Reforms

Proof of Ownership: NY, OH courts, Extend Timelines Require Loss Mitigation or Meetings State Examples

MD: extend timeline from 15 to 150 days PA: notice required 30 days before default for

face-to-face meeting with servicer or counselor

CA: servicer due diligence protocol to contact/offer meeting

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Foreclosure Tax

NJ proposed $2,000 fee Could fund counseling, mediation

efforts

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For more details

State and Local Foreclosure Prevention Policy Options:

October 16, 2008 Testimony of Eric Stein on the Causes of the Foreclosure Crisis http://responsiblelending.org/policy/testimony/turmoil-in-the-u-s-credit-markets-the-genesis-of-the-current-economic-crisis.html

November 13, 2008 Testimony of Martin Eakes on Solutions to the Crisis

http://responsiblelending.org/policy/testimony/oversight-of-the-emergency-economic-stabilization-act-examining-financial-institution-use-of-funding-under-the-capital-purchase-program.html

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Contact

Paul Leonard

California Director

Center for Responsible Lending

Paul.Leonard@responsiblelending.org

510-379-5500

www.responsiblelending.org

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Bonus Slides

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As Suprime Wave of Resets Concludes, Alt-A Wave Builds

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Background: Race, Ethnicity and the Subprime Market

African-American and Latinos disproportionately receive high-cost loans

Subprime as a Proportion of All Mortgages by Race/Ethnicity, 2005-2007

49%

37%

20%

0%

10%

20%

30%

40%

50%

60%

African-American Latino non-Latino, white

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Cleveland Foreclosures Concentrated in African-American Neighborhoods