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Defaulting on the Dream States Respond to America’s Foreclosure Crisis

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Page 1: States Respond to America’s Foreclosure Crisis · 2009-02-05 · deceptive foreclosure rescue transactions. Massachusetts soon will provide borrowers in default on their mortgage

Defaulting on the DreamStates Respond to America’s Foreclosure Crisis

Page 2: States Respond to America’s Foreclosure Crisis · 2009-02-05 · deceptive foreclosure rescue transactions. Massachusetts soon will provide borrowers in default on their mortgage

The Pew Charitable Trusts applies the power of knowledge to solve today’s most challenging problems. Thisreport is a joint effort between Pew’s Center on the States (PCS) and Pew’s Health and Human Services (HHS)program. PCS identifies and encourages effective policy approaches to critical issues facing states. HHS’ FamilyFinancial Security portfolio seeks to advance common-sense solutions to help Americans save for tomorrow andmanage debt today.

Center on the States Health and Human ServicesSusan Urahn, managing director Shelley Hearne, managing director

Project Team Kil Huh Ann ClokeLori GrangeTobi WalkerMichele Mariani VaughnDavid DraineCarla UrionaJessica RiordanJeremy Ratner

ACKNOWLEDGMENTSThis report is partially based on analysis by the Center for Responsible Lending (CRL), a nonprofit, nonpartisanresearch and policy organization dedicated to protecting homeownership and family wealth by working toeliminate abusive financial practices. CRL is a partner in Pew’s Family Financial Security portfolio, and we thankDebbie Goldstein, Ellen Schloemer, Evan Fuguet and Mary Moore for their research and guidance. It also ispartially based on the research of Michael Collins and Rochelle Nawrocki Gorey of PolicyLab Consulting, whichdoes not necessarily endorse its findings or conclusions. We would like to thank Kathy Litzenberg and David L.Martin for their editorial assistance, and Mike Heffner, Lucy Pope and Denise Kooper of 202design for theirdesign assistance. Additional staff from PCS reviewed drafts of the report and offered excellent comments andinsights that were instrumental to its completion. We would like to thank Katherine Barrett and Richard Greene,Tim Lynch, Jill Antonishak, Jeannette Lam and Grace Oh.

The report has also benefited from the insights and expertise of two external reviewers. These experts providedfeedback and guidance at a critical stage in the project. While these experts have screened the report formethodology and accuracy, neither they nor their organizations necessarily endorse its findings or conclusions.

William C. Apgar, Jr., Harvard University Joint Center for Housing Studies and the John F. Kennedy School ofGovernment

Kristopher M. Rengert, Department of Community Affairs, Office of the Comptroller of the Currency

For additional information on the Pew Center on the States, please visit

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April 2008

Dear reader:

Is the American Dream slipping away? One in 33 current U.S. homeowners may be headed toward foreclosure in the comingyears because of subprime loans, according to our new report, Defaulting on the Dream. In some states, the crisis is particularlyacute—in Arizona, for instance, one in every 18 homeowners could lose their home; in Nevada, the ratio is one in 11.

The problem hardly stops there. Because of foreclosures in their communities, an additional 40 million homeowners may seetheir property values and their municipalities’ tax bases drop by as much as $356 billion in the next two years. Nearly everystate is affected: in 47 states and Washington, D.C. the number of mortgage loans entering foreclosure as of December2007 had increased by at least 20 percent since December 2006. Ten states alone could lose a total of $6.6 billion in taxrevenue in 2008, according to a recent analysis by the firm Global Insight.

The stakes are incredibly high. Homeownership is the primary vehicle through which American families build financialsecurity. It also is an essential building block of state and local economies.

Defaulting on the Dream: States Respond to America’s Foreclosure Crisis is the first-ever comprehensive look at what stateshave been doing to tackle this critical issue. It showcases approaches in two principal areas: (1) helping borrowers avoidforeclosure and keep their homes; and (2) preventing problematic loans from being made in the first place. This reportrecognizes that while some states moved quickly to respond, their approaches are not yet proven.

At this writing, federal lawmakers are deliberating important proposals to try to address the crisis. Among other measures,Congress is considering federal funds to expand counseling programs for homeowners at risk of foreclosure, tax-exemptbonds for localities to refinance subprime loans and a hefty increase in federally insured mortgages. It also is debating theneed to strengthen underwriting standards.

While policy makers and the media have focused on the immediate foreclosure crisis, Pew, together with our partners,continues to call for more action to strengthen standards to prevent more troubling loans from being made in the future.While the causes of the current crisis are multifaceted, had these basic consumer protection safeguards been in place, wemay have curtailed this current calamity. The need is particularly acute as Congress considers ways to rewrite loans for thoseborrowers currently facing foreclosure. In this arena, many states have taken the lead, requiring lenders to verify a borrower’sincome and ability to repay at the fully indexed interest rate and not just at the low initial “teaser” rate, requiring the escrowof taxes and insurance payments and documenting the value of the property being financed.

Most experts agree this is a national crisis that warrants a national response, with the federal government providing bothleadership and funding. But Congress should take into account what some states already have put in motion to try to stemthe foreclosure tide and prevent the crisis from happening again. In the absence of federal leadership, states have beenexperimenting with homeowner counseling, refinance programs, stronger regulation of lending practices and other actions.As it deliberates, Congress should be aware of how its decisions will impact states’ efforts already underway—building on,rather than pre-empting, the strongest state statutes, and ensuring that states retain the flexibility to respond to localconditions and needs.

Defaulting on the Dream was researched and written by The Pew Charitable Trusts’ Center on the States (PCS), incollaboration with Pew’s Health and Human Services (HHS) program. PCS identifies and encourages effective policyapproaches to critical issues facing states. HHS’ Family Financial Security portfolio seeks to advance common-sensesolutions to help Americans save for tomorrow and manage debt today. The Center for Responsible Lending, one of theportfolio’s partners and a key source of data and analysis for this publication, focuses on expanding homeownership bycurbing abusive lending practices.

We hope this report informs Congress’ important deliberations and helps ensure that federal and state policy makers workclosely together to address America’s foreclosure crisis.


Sue Urahn Shelley HearneManaging Director Managing DirectorPew Center on the States Health and Human Services

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OverviewFew imaginable economic events send the samemessage of fear and foreboding in America as ahousing crisis. For most Americans, their homes aretheir greatest asset. And for the states, industriesdependent on housing are cornerstones for economicgrowth and fiscal stability.

Almost every state in the country has seen a significantincrease in mortgage foreclosures, largely triggered bydefaults on subprime mortgages. Yet greaterchallenges lay ahead. Based on new foreclosureprojections by the Center for Responsible Lending, Pewestimates that one in 33 current U.S. homeowners willbe in foreclosure, primarily in the next two years—thedirect result of subprime loans made in 2005 and 2006.Among the states hardest hit are Nevada, where one in11 homeowners could soon be in foreclosure;California, with one in 20; Florida, with one in 26, andGeorgia, with one in 27.

In other states where the numbers are less severe, thesituation is still troubling. If the economy tightens andhome prices continue to fall, as many economistsbelieve will be the case, more states and their residentswill feel increasingly acute pain. The nation’s foreclosurecrisis does not discriminate by region or size. In statessuch as Colorado, Indiana, Maryland, Michigan, Ohio,Oregon, Rhode Island, Tennessee and Texas, at least one in 37 homeowners is projected to experienceforeclosure as a result of a subprime loan.

Nationally, about 3.3 million home mortgages maydefault in 2007 and 2008, and more than two millionhomeowners could lose their homes, according to MarkZandi, Moody’s’s chief economist, whotestified before the U.S. House Housing FinancialServices Committee in February 2008.1

The effects reach far beyond a single house on a singleblock. Homeowners are estimated to lose $356 billionin home value because of nearby foreclosures, affectingnearly 40 million homes. The foreclosure problem alsohas spread to homeowners with prime loans—borrowers with solid credit histories. With home prices

falling and credit tightening, prime borrowers are facingthe same financial stress as those with subprime credit.

While this is a national crisis, states and localmunicipalities arguably will be asked to carry a largershare of the foreclosure burden as tax revenues declineand they experience increased demands for police andother services to deal with vacant and abandonedproperties.

A growing number of states have taken action, seekingat least to mitigate the damage to homeowners,lenders, municipalities and their own budgets. Theseverity and speed of the crisis have meant that, inmany cases, states are experimenting with innovativebut as yet unproven approaches. The jury is still outabout whether and to what extent they will beeffective. Still, several states among those hardest hitby foreclosures also have been among the mostassertive in trying to address the problem.

These states are using a range of approaches to helpresidents at imminent risk of foreclosure from losingtheir homes. They are beefing up lending enforcementto prevent problematic loans from being made in thefirst place. And recognizing that the crisis demands acollaborative approach, they are bringing together allthe major stakeholders, including lenders andrepresentatives of the financial services market, to try totackle the challenges comprehensively.

Ohio, for instance, launched a statewide campaign,including a 24-hour hotline, to encourage borrowers atrisk of foreclosure to seek counseling. Ohio also soughtinvolvement across the state to improve assistance forborrowers facing foreclosure, calling on lenders in thestate to modify high-cost loans for homeowners. Inearly April, Governor Ted Strickland reached agreementwith nine mortgage servicers on a significant effort tomodify the terms of adjustable-rate subprimemortgages in Ohio. These and other actions sprangfrom a task force, created in March 2007 by thegovernor, that convened representatives from industry,government and the nonprofit sector to collaborate onpolicy recommendations.

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Michigan now has two loan funds that helphomeowners facing foreclosure, a statewide consumereducation campaign and a task force; the state alsorequires greater disclosure of terms and conditionsbefore a high-risk loan is made. California, whichlaunched a task force last year, regulates mortgagebrokers and high-risk loans and has issued a notice toloan servicers calling on them to agree to wholesaleloan adjustments.

Although they had fewer loans in the foreclosure processas of December 2007, states such as Maryland andMassachusetts are taking similar steps, recognizing thatthey will face bigger problems if they do not act.Maryland recently passed sweeping emergency reforms,providing immediate help to distressed homeownerswhile strengthening the state’s oversight of the mortgageindustry. It extended the foreclosure process from 15 to150 days, criminalized mortgage fraud, bannedprepayment penalties and is seeking to preventdeceptive foreclosure rescue transactions. Massachusettssoon will provide borrowers in default on their mortgagepayments 90 days to work with their mortgage servicersto try to avoid foreclosure. In addition, the state recentlymade $2 million in grants available for foreclosureeducation, prevention and counseling initiatives.

Some states are contemplating more aggressive actionsto delay foreclosure and its ripple effects onneighboring homes. In New York, legislators proposeda moratorium on foreclosures for one full year.Massachusetts, Minnesota and New Jersey haveproposed six-month deferments of foreclosures, withMinnesota and New Jersey’s proposals including someform of rent-back or partial payment from thedelinquent borrower. These proposals to place long-term moratoria on foreclosures face steep industryopposition, but they highlight the pressure states areunder to try to address the current crisis.

But given the scale of the crisis and the complexity oftoday’s mortgage markets, states cannot go it alone,and it makes little sense to have 50 separate andspecific responses. There is broad agreement that the

federal government should take a strong leadershiprole. As it considers a range of proposals, both to helpmore homeowners stave off foreclosure and tostrengthen underwriting standards, Congress shouldunderstand what states already are doing and how itspolicy choices will affect those efforts. It also shouldensure that states have flexibility to pursue measuresthat respond to their particular circumstances and needsand build on, rather than pre-empt, those actions thatgo the furthest in protecting homeowners from practicesthat undermine wise and responsible borrowing choices.

We have based our findings in this report on data andanalysis that are comparable to information from well-respected industry analysts such as First American,Lehman Brothers, Merrill Lynch, Credit Suisse andMoody’s We rely on the MortgageBankers Association’s National Delinquency Survey tohighlight foreclosure challenges at the end ofDecember 2007. In addition, we use the Center forResponsible Lending’s projections to draw attention tothe estimated number of foreclosures and ripple effectsfrom subprime loans made in 2005 and 2006. However,as any researcher will note, these data have limitations;for a more detailed description of our methodology,see page 6.2

We have used the best available data to describe thechallenges that our nation and states may face. But thecurrent policy debate has been limited by the lack ofdata on the actual number of loans that have ended inforeclosure. Policy makers need accurate, comprehensiveand up-to-date information to fully understand theirforeclosure problems and identify potential solutions.States have an important role to play here, and many arealready building systems that link property descriptions,mortgage information and foreclosure actions. However,having 50 idiosyncratic foreclosure databases is not asolution. Instead, Congress and the states shouldconsider ways to collect, maintain and share reliable anduniform information across all 50 states to moreaccurately describe current conditions and better assessthe effectiveness of policy interventions.


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Pew’s analysis estimates that one in 33 currentU.S. homeowners nationwide is projected to faceforeclosure, primarily in the next two years, as aresult of a subprime loan made in 2005 and2006.3

Pew’s analysis of recent mortgage delinquencydata found that subprime loans—high-risk loansto people who do not qualify for a prime orconventional loan because of low income orpoor credit—make up just 14 percent of allmortgage loans being serviced, but more thanhalf of all loans in foreclosure.4

Nearly every state is affected: in 47 states andWashington, D.C. the number of mortgage loansentering foreclosure as of December 2007 hadincreased by at least 20 percent since December2006.5

Pew's analysis found that projected subprimeforeclosure challenges are spread across statesmore evenly, indicating that the foreclosure crisisis nationwide and not merely concentrated in afew states.6

10 states alone will lose a total of $6.6 billion intax revenue in 2008 as a result of the foreclosurecrisis, according to a 2007 projection.7

1.6 million loans were in foreclosure or 90 dayspast due as of December 2007—up 55 percentfrom a year earlier.8

More than 40.6 million homes across Americaare projected to lose value because of subprimeforeclosures in their communities. Foreclosuresmay cost neighboring properties up to $356billion in home value over the next couple ofyears.9

U.S. foreclosure starts, as of December 2007,involving prime adjustable-rate mortgagesincreased 158 percent in one year.10

Homes in foreclosure usually sell far belowmarket value, especially in today’s depressedreal estate market, and unsold properties can beexpensive to maintain. Lenders experienceforeclosure losses ranging from 20 cents to 60cents on the dollar, with one estimate of atypical lender’s foreclosure cost averaging$58,800 in the early 2000s.11

The media have dubbed the current situation a “subprime mortgage crisis.” But the current foreclosure dataand forthcoming trends show a more complex story, one in which a growing number of homeowners and primeloans are threatened. In short, nearly every homeowner and prospective homeowner is somehow affected bythis crisis.

Summary: Key Facts about

the Foreclosure Crisis


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Nine states have publicly supported mortgagerefinance funds and have committed at least$450 million in loan funds to help borrowersavoid foreclosure.12

California, Massachusetts and Ohio areencouraging lenders to modify defaulted loansto help homeowners keep their homes.

Nine states have implemented regulations thatprevent foreclosure rescue scams.

20 states have partnered with theHomeownership Preservation Foundation toprovide around-the clock consumer counselinghotlines.

States such as Indiana, Maryland, Massachusettsand Ohio have led media campaigns to educateat-risk borrowers about how to seek help.

California, Indiana and Minnesota mandate thatlenders give borrowers in danger of defaultingearly notice about available assistance.


31 states regulate high-cost loan products.

24 states require or recommend consumereducation and counseling.

Nine states require mortgage brokers toconsider or represent the interests of theborrower when recommending mortgages.


14 states have created foreclosure task forces totry to address the challenges of the crisiscomprehensively, including bringing governmentleaders, lenders, advocates and experts to thetable to work on solutions.

NOTE: See Appendix A for more detail on which states are doing what.

The foreclosure crisis facing America is a national challenge, and it requires a national response. The federalgovernment must provide leadership and funding to address it. Among other measures, Congress at thiswriting is considering proposals that would provide federal funds to expand counseling programs forhomeowners at risk of foreclosure, tax-exempt bonds for localities to refinance subprime loans and a heftyincrease in federally insured mortgages. Congress also is contemplating strengthening underwriting standards.

Pew’s research found that states also have a critical role to play—and today, a growing number of state policymakers are taking action in three major ways: trying to help borrowers facing imminent risk of foreclosure tostay in their homes; preventing high-risk, high-cost mortgage loans from being made in the first place; andtaking a comprehensive approach to the crisis by convening stakeholders to develop solutions.

Summary: How States Have

Responded to the Crisis


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Section 1.0 The research reviews and analyzes two principaldata sets, one from the Mortgage BankersAssociation’s (MBA) 4Q 2007 NationalDelinquency Survey and, second, from theCenter for Responsible Lending’s (CRL)foreclosure projections and subprime spilloverestimates. Both data sets are widely cited andused to understand the nature and magnitude ofthe nation’s foreclosure challenges, but both alsohave limitations.

The Mortgage Bankers Association DataThe MBA quarterly data are based on surveysampling techniques and offer a point in timepicture of loans in various stages of delinquencyor in the foreclosure process. While theyrepresent an estimate of the foreclosurechallenges, they do not reflect the number ofactual foreclosures that were finalized at the endof a given quarter. They also do not account forforeclosures that moved through the processand are no longer a part of the inventory. TheMBA foreclosure estimates refer to all loans inthe foreclosure process as well as loans that areseriously delinquent—90 days past due. Wetotal the foreclosure inventory with the seriouslydelinquent loans to provide a snapshot of theestimated number of foreclosures at the end of2007, because one can reasonably expect,looking at past trends, that loans 90 days pastdue likely will be referred to start foreclosureproceedings.

The Center for Responsible Lending DataCRL’s data are materially different than the MBAinformation and have different limitations. CRL'sprimary data, which was used to build themodels for the cumulative foreclosureprojections, came from a private source that

aggregated securitized loans from variouslenders who had identified them as subprime.CRL had access to the data through acontractual arrangement with the provider. TheCRL foreclosure projections were recentlyupdated to be more comparable to subprimeforeclosure estimates from Moody’ ( and Merrill Lynch (TheMarket Economist, December 14, 2007). CRLalso used data on outstanding subprime loansreported by the MBA in its 3Q 2007 NationalDelinquency Survey to calculate these updatedforeclosure estimates. The MBA data are alsothe source for the subprime foreclosure starts.Like CRL’s original projections from its LosingGround study (December 2006), the updateddata reflect only loans to owner-occupants in the50 states and Washington, D.C., secured by afirst-lien on a single-family home, condominium,townhouse or unit in a planned development.CRL estimates the likelihood that a given loanwill be foreclosed upon for the lifetime of thatloan. In other words, CRL’s estimates take thetotal number of subprime loans disbursed during2005 and 2006 and give the number of loansthey expect will be foreclosed upon. Thisestimate includes foreclosures that will occur in2008 as well as subsequent years, providing alarger window for foreclosures to occur than theMBA data. However, by restricting the sample tosubprime loans made in 2005 and 2006 toowner-occupants, CRL’s estimates miss a numberof loans that will go into foreclosure in that sametime period. More details on CRL’s methodologycan be found in the appendix of the LosingGround report at pdfs/foreclosure-paper-report-2-17.pdf.

CRL also provided subprime spillover data—thatis, projections of the ripple effects offoreclosures on neighboring properties, and

Our Data, Methodologyand Limitations


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municipalities and states' combined tax bases inthe coming years. CRL calculated the estimatedripple effects examining 56,777 census tracts inthe nation’s 387 metropolitan statistical areas,using data on local housing densities andmedian house prices for each census tract. CRL’sstudy assumed that the predicted foreclosureswere evenly distributed throughout the tract,and researchers calculated the number of housesexpected to be within an eighth of a mile ofeach foreclosure. The expected decline inproperty values were calculated using findingsfrom another widely cited research study thatfound that each conventional foreclosure withinan eighth of a mile of a single-family homeresults in a decline of 0.9 percent in value. Thisloss of equity was then aggregated to the statelevel. CRL’s results do not include areas outsidemetropolitan statistical areas. One of thelimitations, however, of this analysis is that itdoes not account for market variations and,while appropriate, the foreclosure projectionsfrom depreciating values and the average lossvalue may not reflect the potential differencesaround these values. CRL’s foreclosureprojections and subprime spillover data rely on a number of assumptions. For a full and detaileddescription of the assumptions and their caveats,please see

Other sources of foreclosure data may showdifferent estimates, although the relative order ofmagnitude should be consistent. In manycommunities, vendors have developed databasesof foreclosure filings with the intent of selling theinformation to real estate speculators interestedin purchasing discounted property. These datavendors frequently receive media attention, butthe quality of their data can be questionable.Policy makers should use a variety of datasources to monitor foreclosure trends in keymarkets and should also validate the datacarefully before using it to make critical decisions.

Section 2.0We conducted extensive interviews anddocument reviews to highlight state responsesto the mounting foreclosure challenges facing all50 states and the nation as a whole. In thesection highlighting state actions, researchersdescribe the legislative and regulatory actionsstates have taken to try to mitigate the damageto homeowners, localities and state budgets. Itis critical to note that we did not seek toevaluate the effectiveness of these responses,principally because most actions are relativelynew and the data do not yet exist. While manystate policy makers and researchers believe thatthese approaches are promising, the jury is stillout on whether and to what degree they willdeliver positive results.

Supplemental Fact Sheets andEstimated Number of ForeclosuresPer HomeownerFor the nation overall and for each state, weprojected the number of foreclosures pernumber of overall homeowners in the state thatare anticipated to take place, primarily over thenext two years, because of subprime loans. Wedeveloped individual fact sheets for the 50states and Washington, D.C. that profile eachstate's foreclosure challenges and responses tothose challenges to date. We calculated theratio of projected foreclosures per owner-occupied housing units (homeowner), whichallows us to account for the relative size of thestates in estimating the relative impact of thesubprime crisis. The U.S. Census Bureau’s 2006American Community Survey was used to obtainestimates for owner-occupied housing units. Weused a method similar to the one used byRealtyTrac, a real estate Web site that tracksforeclosure properties, to rank the states.However, we used owner-occupied housing unitsas the denominator because our foreclosureprojections are for loans to owner-occupants(homeowners).

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The Foreclosure Wave Is JustBeginningBased on projections by CRL, Pew estimates thatone in 33 current U.S. homeowners willexperience foreclosure, largely in the next twoyears, the direct result of subprime loans madein 2005 and 2006.

In 2007, predatory lending practices, aggressiveloan marketing and the proliferation of high-costsubprime loans all converged into a perfectstorm to push subprime mortgage foreclosuresto record levels. (See Appendix B for anexplanation of subprime lending and theforeclosure process.) As of December 2007, 2.9million mortgage loans were past due, and whilesubprime loans account for only 14 percent ofmortgage loans being serviced, they representmore than 50 percent of loans in foreclosure.13

Now, in early 2008, the pace of foreclosurescontinues to pick up. RealtyTrac, a real estateWeb site that tracks foreclosure properties,released its 2007 U.S. Foreclosure Market Report,finding that loans in some stage of foreclosurewere up 79 percent from the previous year.14 Infact, most experts predict more than one millionforeclosures will occur by 2009, particularly ifhome values continue to decline.15

As Exhibit 1 illustrates, nearly every state isfeeling the impact of the crisis. A report by theMBA in March 2008 showed that in 47 statesand Washington, D.C. mortgage loans enteringforeclosure as of December 2007 had increasedby at least 20 percent since December 2006.Only three states—Alaska, Montana and

Vermont—did not experience at least a 20percent increase in foreclosure starts; less than 1percent of the American population lives inthose states.

The pain of the credit crisis has spread to primeborrowers, those with solid credit histories. InDecember 2007, 4.51 percent of primeborrowers were in delinquency or default ontheir mortgages—the highest rate since theMBA began tracking prime borrowers separatelyin 1998. Like subprime mortgages, many recentprime loans were adjustable-rate mortgages(ARM) that allowed consumers to pay littleinitially and more as the interest rates reset. Withhome prices falling and credit tightening, primeborrowers are facing the same financial stress asthose with subprime credit.

In fact, U.S. foreclosure starts involving primeARMs increased by 158 percent during the 12months ending in the fourth quarter of 2007,according to the MBA. Arizona, Florida, Nevadaand California were among the states hit hardestby ARM foreclosure starts.






S E C T I O N 1 . 0

…most experts predict more than one million foreclosureswill occur by 2009,

particularly if home values continueto decline.

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Projected Foreclosures and Ripple Effects Projected Foreclosures Per Homeowner(Primarily 2008-2009) (Primarily 2008-2009)

Total Estimated Estimated No. of Decrease in House Owner-occupied Number of ProjectedNumber of Foreclosures From Neighboring Homes Value/Tax Base housing units, Foreclosures to

State Foreclosures, Subprime Loans Experiencing from Foreclosure 2006 HomeownersDecember 2007 2005-2006 Devaluation Effect (millions)

Alabama 23,013 21,330 209,052 $406 1,289,272 1 out of 60Alaska 1,135 3,831 47,404 $190 148,249 1 out of 39Arizona 38,048 85,726 1,201,327 $8,687 1,523,041 1 out of 18Arkansas 8,452 11,734 71,351 $131 753,412 1 out of 64California 228,133 355,682 7,505,584 $107,196 7,102,197 1 out of 20Colorado 32,040 49,923 748,652 $3,183 1,269,421 1 out of 25Connecticut 13,808 18,847 441,018 $2,039 921,382 1 out of 49Delaware 5,274 5,551 90,615 $390 238,194 1 out of 43District of Columbia 1,966 4,190 223,797 $4,287 114,586 1 out of 27Florida 186,093 194,796 3,667,230 $35,856 4,994,101 1 out of 26Georgia 67,126 83,686 630,218 $1,817 2,285,179 1 out of 27Hawaii 3,204 8,832 167,942 $4,160 257,599 1 out of 29Idaho 4,288 10,035 97,029 $304 390,982 1 out of 39Illinois 69,251 87,918 2,536,938 $27,297 3,301,367 1 out of 38Indiana 49,069 48,034 544,991 $959 1,756,328 1 out of 37Iowa 10,800 11,190 178,166 $344 885,969 1 out of 79Kansas 9,682 14,347 200,403 $382 761,022 1 out of 53Kentucky 17,241 21,153 249,727 $498 1,167,081 1 out of 55Louisiana 19,621 26,306 400,306 $1,032 1,071,667 1 out of 41Maine 5,064 6,597 42,127 $134 399,076 1 out of 60Maryland 27,491 55,693 1,220,574 $12,133 1,450,411 1 out of 26Massachusetts 26,787 32,976 1,013,548 $7,992 1,588,359 1 out of 48Michigan 91,081 79,893 1,414,411 $3,798 2,908,273 1 out of 36Minnesota 31,359 38,991 545,773 $2,254 1,558,206 1 out of 40Mississippi 13,502 15,439 77,449 $144 760,318 1 out of 49Missouri 27,366 42,727 705,446 $1,792 1,628,838 1 out of 38Montana 2,117 3,225 16,790 $42 260,137 1 out of 81Nebraska 5,504 7,390 132,896 $250 475,899 1 out of 64Nevada 28,783 51,881 557,286 $6,537 580,705 1 out of 11New Hampshire 6,599 7,422 57,628 $203 363,652 1 out of 49New Jersey 40,074 57,083 1,781,424 $19,573 2,110,308 1 out of 37New Mexico 4,959 9,093 151,430 $513 505,915 1 out of 56New York 61,978 124,601 3,552,642 $65,136 3,940,942 1 out of 32North Carolina 37,062 53,254 332,375 $861 2,350,798 1 out of 44North Dakota 891 1,103 23,761 $51 181,666 1 out of 165Ohio 91,188 85,618 1,392,990 $2,850 3,150,239 1 out of 37Oklahoma 14,727 20,157 256,261 $427 950,407 1 out of 47Oregon 8,578 27,827 466,877 $2,549 939,123 1 out of 34Pennsylvania 52,069 76,055 1,684,475 $6,582 3,475,105 1 out of 46Rhode Island 5,530 8,170 244,424 $1,713 255,495 1 out of 31South Carolina 21,797 27,996 179,309 $477 1,165,464 1 out of 42South Dakota 1,564 1,860 18,982 $38 216,212 1 out of 116Tennessee 31,020 46,218 441,703 $967 1,660,152 1 out of 36Texas 99,495 149,661 2,283,390 $4,923 5,291,045 1 out of 35Utah 7,025 23,286 310,442 $1,317 585,929 1 out of 25Vermont 1,344 2,122 6,460 $22 182,389 1 out of 86Virginia 30,372 62,174 1,035,979 $6,953 2,030,284 1 out of 33Washington 16,847 42,036 846,526 $4,893 1,620,052 1 out of 39West Virginia 4,002 6,218 40,886 $80 554,791 1 out of 89Wisconsin 21,049 26,334 557,251 $1,900 1,571,129 1 out of 60Wyoming 964 2,246 18,630 $46 144,117 1 out of 64US Total/average 1,606,430 2,258,457 40,621,895 $356,310 75,086,485 1 out of 33

SOURCES: Foreclosure estimates from Pew Center on the States 2008, based on Mortgage Bankers Association, National Delinquency Survey (March 2008), Center for ResponsibleLending, Subprime Spillover (Revised January 31, 2008), (accessed February 14, 2007). Projectionsrevised February 28, 2008. Number of owner-occupied housing units from U.S. Census Bureau, 2006 American Community Survey, U.S. Department of Commerce: Washington, D.C.NOTES: Estimated foreclosures in 2007 include the foreclosure inventory and seriously delinquent loans (90 days or more). MBA estimates how many loans in a particular quarter aredelinquent or are concluding the foreclosure process; it takes into account all loans originated, including loans that were originated in the prior quarter that are likely to have started theforeclosure process. CRL’s numbers reflect all loans originated in 2005-2006 and estimate the total number of loans in that vintage that will end up in foreclosure. CRL’s projections ofsubprime foreclosures and spillover impact were updated to reflect newer estimates of subprime defaults as reported by Merrill Lynch (The Market Economist, December 14, 2007) andMoody’s ( Additionally, foreclosure estimates were calculated using outstanding subprime loans reported by theMBA in its 3Q 2007 National Delinquency Survey; the latter was also the source for the subprime foreclosure starts. Spillover results do not include areas outside of metropolitanstatistical areas. For additional information about the Center for Responsible Lending’s methodology and its caveats, see link to Subprime Spillover report above. The number ofprojected foreclosures to current homeowners was calculated by dividing CRL’s number of projected foreclosures to owner-occupant subprime loans by the number of owner-occupanthouseholds reported by the U.S. Census.

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Although dire, the MBA’s “point in time”foreclosure statistics do not show the full extent ofthe foreclosure problem, because they do notinclude the high number of subprime loans maderecently that have yet to enter their peakforeclosure years. In a December 2006 study,CRL, which receives funding from Pew, estimatedthat one in every five subprime mortgages madein 2005 and 2006 ultimately will end inforeclosure.16 These projections have beenupdated for this report and refer to projectedactual homes lost, not to late payments orforeclosures started but not completed. Based onhistoric patterns of default, states with highernumbers of subprime loans made in 2005 will bethe most likely to have higher default (past due)and foreclosure rates in 2007 (see Exhibit 1 forthe number of projected foreclosures).17

Based on an analysis of CRL’s foreclosureprojections, more challenges are looming. In thecoming years, 2.26 million homeowners are likelyto lose their homes as a result of their subprimeloans made in 2005 and 2006. This translates toone in 33 homeowners nationally. In addition,unlike the MBA data (see Exhibit 2) that showthat loans in the foreclosure process and over 90days delinquent (estimated foreclosures) areconcentrated in a few states, CRL’s projectionsindicate the challenges are spread across statesmore evenly. Because CRL’s projections focusexclusively on subprime loans made to owner-occupants in 2005 and 2006, they provide aconservative estimate of foreclosures in thecoming years. The CRL data do not account forprime borrowers, investors or other loan types.(See Pew’s supplemental state fact sheets for astate-by-state analysis of foreclosure estimatesand their projected ripple effects on neighboringproperties.)

A recent study estimates that correcting thecurrent crisis could take up to five years.18 Thecurrent wave of foreclosures originated largelyfrom loans with adjustable “teaser” rates that

reset to higher payments that borrowers cannotafford. The bulk of these loans will reset in 2008and 2009, continuing until late 2011. Anotherstudy suggests that more than eight millionloans will reset and nearly 1.9 million willforeclose, assuming house prices continue todrop.19

Some States and CommunitiesHave Been Hit Especially HardMore than half of all the nation’s loans inforeclosure and seriously delinquent loans—90days past due—are concentrated in seven states.As Exhibit 2 shows, while California has thelargest share of all foreclosures in the U.S., it alsohas the largest share of U.S. loans. Ohio,Michigan, Illinois and Indiana, on the other hand,have a significantly larger share of allforeclosures and seriously delinquent loans thanthey do mortgage loans.

Within each state, foreclosures tend to beconcentrated in neighborhoods that havedisproportionately high shares of subprimelending. These areas typically are made up ofnon-white families with modest incomes. Thisgeographic concentration of foreclosures furtherreduces the value of properties owned by lower-income residents in already weakened housingmarkets.

Everyone Suffers the Consequences Foreclosure can have a devastating impact onhomeowners and their families. It can ruin theircredit for years, adversely affect their jobs andchildren’s schooling, and take away what formany Americans is their principal investmentopportunity and chance to get ahead. But theconsequences stretch far beyond the exteriorwalls of their home.

Homes in foreclosure usually sell far below marketvalue, especially in today’s real estate market, and





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unsold properties can be expensive to maintain.Lenders experience foreclosure losses rangingfrom 20 cents to 60 cents on the dollar, with oneestimate of a typical lender’s foreclosure costaveraging $58,800 in the early 2000s.20

And neighbors and communities feel significantripple effects. Close to 41 million homes acrossthe nation are projected to decline in value byan average of $8,800 because of subprimeforeclosures that take place nearby, according toCRL’s estimate of the impact of foreclosures fromsubprime mortgages made in 2005 and 2006. Inaddition, communities will likely experience a$356 billion cumulative decrease in their housevalues and tax base from nearby foreclosures asa result of loans made in this two-year timeperiod.21 (See Exhibit 1 for a state-by-statebreakdown of projected reduced propertyvalues/tax base.) Moreover, homes in theforeclosure process may become vacant, leadingto increased crime and other problems in theneighborhood.22

State and local governments—and taxpayers—likely will experience significant fiscal pain. Onestudy, focused on the City of Chicago, estimatesthat an abandoned, foreclosed property onaverage costs a municipality approximately$7,000, although it can rack up more than$30,000 in police, fire and code enforcementcosts.23 A 2007 analysis by Global Insight, aglobal economic and financial analysis firm,projects that property values will decline by$519 billion in 2008 due to the number ofhomes in foreclosure from all loans, whichdepresses resale values over and above thedecline expected from cyclical decreases inhome values. For state and local governmentsthat rely heavily on property taxes, real estatefees and sales taxes, this could mean a seriousdrop in revenue. The same study estimates that10 states alone will lose a total of $6.6 billion intax revenue in 2008.24

State governments and municipalities also arefacing losses on subprime investments. Severalstate- and county-run investment pools—usedby thousands of school, fire, water and otherlocal districts—hold interests in structuredinvestment vehicles that include subprime loans.“Nobody knows how much more pain is coming.State funds could lose hundreds of millions ofdollars,” said Lynn Turner, chief accountant ofthe U.S. Securities and Exchange Commissionfrom 1998 to 2001.25

Finally, as recent news headlines suggest, theforeclosure crisis is wreaking havoc on thenation’s economy at large. One study suggestsforeclosures will reduce U.S. economic activityby $166 billion in 2008 because of declines inthe real estate and construction industries and inconsumer spending.26

The widespread impact of the crisis underscoresa critical point: Everyone—borrowers, lenders,regulators, advocates, researchers and policymakers—must work together to find solutions.

The 10 states where estimated foreclosures are the most prevalent.


SOURCE: Pew Center on the States 2008, based on data from Mortgage Bankers Association National Delinquency Survey, (March 2008)NOTE: Foreclosure numbers above reflect loans in the foreclosure process and 90 days delinquent at the end of 2007.


Percentage of all U.S. mortgagesPercentage of all U.S. foreclosures

THE HARDEST HIT: Where Foreclosures Are The Most Prevalent, December 2007Exhibit


























New York






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For state and local policy makers, identifying theright set of reforms depends in part onunderstanding the cause of the problem.

Loans Become More Accessible—and Bring Higher RiskIn recent years, mortgage lending hasfundamentally changed. More than 10,000lending institutions were in business 20 yearsago; today, just a few dozen lenders dominate.The source of capital for loans used to bedeposits made by consumers and businesses;now the source is primarily bonds issued infinancial markets. Loans today are often madeby independent brokers who work on behalf ofmultiple lenders and who are compensatedbased on the size and terms of the loan ratherthan on how the loan performs.

Historically, borrowers who received loans had tomeet rigid qualification requirements. But theadvent of credit scoring and morecomprehensive consumer data has allowedmortgage loans to be priced according to thecalculated risk of mortgage applicants. Thesenew mechanisms have enabled millions ofborrowers to access credit they would have beendenied in the past—but this access putsborrowers and lenders at risk of making seriousfinancial mistakes and puts borrowers at risk ofbeing preyed upon by unscrupulous lenders.

The Housing Market Booms, 2002-2006From 2002 to 2006, home prices in many areasexceeded sustainable levels. Record numbers ofloans were pushed through the mortgagelending system, with real estate marketspromoting homes as an investment with rapiddouble-digit returns. Liberal lending practicesallowed for growing numbers of prime and

subprime loans requiring no minimumdownpayment; loans with adjustable or “teaser”rates that, after a short time, required paymentsoften well beyond what the borrower couldafford; loans that did not pay down principal(and in some cases even allowed it to grow);loan applications without documentation provingthat the borrower could actually afford the loan;and overly aggressive real estate appraisers andloan brokers.

The Housing Bubble Bursts, 2006During the housing boom, borrowers were toldroutinely that if all else failed, they could simplyrefinance their loans. However, when homeprices stopped rising at record rates, thehousing bubble burst and many borrowers foundthey owed more than their homes were worth.Investors providing mortgage capital lostconfidence that loans were valuable assets. Andas lenders began to tighten their loanrequirements, many borrowers no longer hadthe option to refinance.

Foreclosures Increase Significantly,2007In the past, foreclosures often resulted from achange in the borrower’s situation: illness, job loss,divorce and the like. These problems still causehomeowners to default, but many of today’sforeclosures result from the structure of the loansthemselves. A growing number of borrowers aremissing payments because, as interest rates andmonthly payment amounts reset, they can nolonger afford the loan. In general, lenders do notbenefit from foreclosure—so before initiating thatprocess, many seek to offer borrowers otheroptions. In fact, housing industry estimatessuggest that of all the homes that entered theforeclosure process between 2001 and 2005, atleast half of the borrowers were projected to have





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avoided foreclosure because they were able tocatch up on their loan payments or work out anew payment plan.27 The potential “workoutplans” include:

• Forbearance, in which borrowers reduce orsuspend their payments for a period of time

• Repayment plans that enable a borrower toadd past due amounts to future monthlypayments

• Loan modifications that allow borrowers toadd past due amounts to the principalbalance, extend the term of the loan orreduce the interest rate

• Sales assistance, in which lenders help bymaking referrals to real estate agents andputting the home on the market with theunderstanding that the borrower will payoff the mortgage when the home sells

• Deed-in-lieu of foreclosure, in which theborrower returns the property to theinvestor, then walks away without aforeclosure mark on his or her credit history

• Pre-foreclosure sale (or “short” sale), inwhich the property is sold for less than isowed on the mortgage

But too many borrowers do not take advantageof these options. In fact, some researchers haveestimated that as many as half of all borrowerswho go into foreclosure never even contactedtheir lenders beforehand.28 Why? Experts cite anumber of reasons: borrowers are unaware ofthe alternatives; they are distracted by otherfamily crises, such as illness or job loss; they areashamed of the stigma of foreclosure; or theydo not trust lenders. In addition, loans may besold multiple times, making it unclear whoactually controls them—so borrowers often donot know who to contact for help.


As described above, America’s foreclosure crisisis likely to get worse before it gets better—andthe impact will be felt not just by residents wholose their homes, but also by their neighbors,communities, municipalities, states and U.S.taxpayers as a whole. Homeownership is afundamental aspect of families’ financial security,but—as this report makes clear—it also is criticalto state and local governments’ fiscal health.

Federal policy makers must work to curb abusivesubprime home loans and to strengthenunderwriting standards, including, for example,such common-sense practices as requiring

lenders to verify a borrower’s income to helpassure they can pay a loan’s teaser rate and therate after the loan adjusts. But states also havean important—and immediate—role to play.Across the country, a growing number of policyleaders are recognizing the need to continue toencourage buyers to invest in homes—but to doso fully informed, with accurate information fromscrupulous sources. Policy makers alsounderstand the importance of helping buyersstay in their homes so that they can build equityand contribute to the stability and fiscal healthof their communities, towns, states and nation.

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State Policy ResponsesS E C T I O N 2 . 0

What can states do to stem the tide offoreclosures? While some may argue thattightening underwriting standards is no longernecessary, history has shown these problems willrecur if action is not taken. Thus, states canregulate future subprime lending and createresources to help their residents avoidforeclosure. State housing finance agencies canbe active in the mortgage market and they canuse their access to capital through bonds.Governors can use their bully pulpits to promoteconsumer education and awareness. Stateattorneys general can help develop

comprehensive plans to manage defaults andforeclosures and play an important role inconvening industry leaders who want to—andneed to—be part of the solution. And state andlocal leaders can help encourage the federalgovernment to take aggressive action to curbforeclosures and prevent more problems in thefuture through tighter regulation of lenderpractices. A growing number of states arepursuing a full range of policies to helphomeowners and taxpayers mitigate the harm ofthe foreclosure crisis.






















































SOURCE: Pew Center on the States 2008,based on research by PolicyLab Consulting

NOTE: Nevada has a proposed hotline as of 2007.

States thathave foreclosureinterventionregulations or laws

States that have a hotline

States thathave statewidecounseling efforts


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Federal Action to Curb High-Cost LendingHome Ownership and Equity Protection Act (HOEPA) covers

loans with high interest rates and fees, requiring added

disclosures and banning certain product features. HOEPA is

focused on refinance and home equity loans (also called

“Section 32” loans); first lien mortgages with an annual

percentage rate (APR) higher than 8 percentage points above

the rate on Treasury securities of comparable maturity (usually

a 30-year Treasury bond) and second mortgages with an APR

more than 10 percentage points greater are also covered.

HOEPA also applies when total fees and points are higher

than 8 percent of the total loan amount (or more than $547

in 2007 if the loan is under $6,800). HOEPA includes the

following provisions:

• HOEPA loans may not contain balloon payments due

in fewer than five years and may not allow negative

amortization, where monthly payments are too small

to pay off the loan and inevitably cause an increase in

the amount owed.

• HOEPA loans cannot contain prepayment penalties

lasting more than five years.

• Lenders are required to underwrite loans based on

the borrower’s ability to repay the loan and may not

‘flip’ or refinance a HOEPA loan into another HOEPA

loan within the first 12 months, unless the new loan is

in the borrower's best interest.

Because of the high interest rate and fee thresholds that

trigger federal restrictions under HOEPA, it is widely

considered to affect few high-cost mortgages. More than a

dozen states have followed the HOEPA model while taking

a more comprehensive approach to high-cost lending.



States are exploring reforms in at least three keyareas: (1) helping borrowers avoid foreclosureand stay in their homes; (2) preventingproblematic loans from being made in the firstplace; and (3) forming state task forces that canconvene all the major stakeholders to developcomprehensive solutions.

To help borrowers avoid foreclosure and keeptheir homes, 20 states have launched formalforeclosure intervention or prevention initiatives.And 16 states have enacted both high-costlending and foreclosure intervention laws (seeAppendix A). In addition, 13 states have createdcounseling hotlines to help those at risk offoreclosure, and several states are encouraginglenders to work with borrowers to findalternatives to foreclosure.29

Nine states have established loan funds that canbe used to refinance borrowers who have loansthey cannot afford or to provide short-term loansto help borrowers overcome financial difficulties(see Exhibit 4 on page 21). To date, a total of atleast $450 million in loan funds has beencommitted by states as a means of helpingborrowers avoid foreclosure through short-term oremergency loans30. To protect vulnerableborrowers from unscrupulous real estate investors,nine states have created laws regulating firms thatclaim to “rescue” borrowers from default.

In an effort to prevent problematic loans frombeing made, 31 states (see Exhibit 5 on page24) have implemented laws that addresspredatory lending. The strongest of these lawsextend and expand the provisions of the federalHome Ownership and Equity Protection Act(HOEPA), which regulates very high-costsubprime loans that carry high rates or fees (see“Federal Action to Curb High-Cost Lending”).However, most of those state laws, passedbetween 2002 and 2004, cover only a smallportion of the total subprime loans made in thestate—those with the highest rates or fees. Morerecently, a few states have addressed recklessunderwriting through broader statutes that applyto subprime loans generally (see Appendix A).All 50 states have laws designed to regulatemortgage brokers or originators. However, onlynine states require that mortgage brokers

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consider or represent the interests of theborrower when recommending mortgages (seeExhibit 5 and Appendix A).

Finally, 14 states have created foreclosure taskforces to try to address the crisis comprehensively.These task forces not only assess the specific

challenges faced by their states, but also bringtogether relevant stakeholders to developinformed recommendations for lawmakers (seeAppendix A).

Nearly all of the actions described above werelaunched in the past two years.

Expand Counseling and LegalAssistance for At-Risk Borrowers Foreclosures can be avoided: In the currentmarket, loan workouts may not be as effective asthey were a short time ago.31 Nonetheless, thefirst step is for the homeowner to seek help.

Approximately 20 states have partnered with theHomeownership Preservation Foundation (HPF),which provides education and 24-hourcounseling services through the “Homeowner’sHOPE Hotline.” Currently, HPF coordinates sixU.S. Department of Housing and UrbanDevelopment (HUD)-certified housing counselingagencies to provide phone counseling. Inaddition, HPF has developed relationships withkey servicing institutions to connect borrowersdirectly with their loan servicers if appropriate.This program plans to expand its capacity in2008 to become the primary contact point fortroubled borrowers.

In Colorado, a state initiative illustrates the valueborrowers place on one-on-one, face-to-facetime with a counselor. The Colorado ForeclosurePrevention Hotline, launched in February 2006 inresponse to a large number of requests forforeclosure prevention counseling, provides atoll-free number for Colorado residents to callfor help. Callers are routed to a local service thatcan provide face-to-face counseling. Colorado’shotline reports that 85 percent of callers

preferred appointments with local counselingagencies over telephone counseling.

Marketing activities and a strong leadership roleby Colorado’s governor have successfully raisedawareness of the hotline. The average monthlyvolume for the hotline is 1,769 calls, and year-to-date figures as of November 2007 showed thatmore than 18,000 calls had been placed to thehotline.32 A recent survey suggests that thisapproach is working: Four out of five callers whoreceived counseling avoided foreclosure.33 Thesuccess of the program stems from pairinghomeowners at risk of foreclosure with localhousing counselors in their community who canprovide information about options in lieu offoreclosure. Counselors also help borrowersnegotiate and communicate with their lenders.

To date, a total of at least $450 million in loan funds has

been committed by states as ameans of helping borrowers avoidforeclosure through short-term oremergency loans.







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Similarly, Michigan’s Save the Dream hotline,operated by the Michigan State HousingDevelopment Authority, was launched in 2007 todirect homeowners to a housing counselor intheir county. The hotline was launched alongwith two new statewide loan refinance initiativesfor borrowers facing default.

Many borrowers require legal assistance inaddition to counseling. In Ohio, a statewide taskforce recommended improving homeowneraccess to legal information and counsel as partof the foreclosure process, as well as providingincentives for private attorneys to volunteer torepresent borrowers in foreclosure cases. Thetask force also encouraged the governor and the court system to single out and publicly“recognize and honor attorneys who willinglyrecognize their essential role in mitigating theserious effect of the foreclosure crisis on Ohio’scitizens and its economy.”34

Notify Borrowers About HelpEarlier in the Process In general, borrowers often do not know where to turn when they face a financial problem that prevents them from making amortgage payment. Many borrowers arereluctant to call their lenders and most lackinformation about the alternatives that lenderscan offer. In addition, borrowers may be unawareof the services that counselors or legal servicescan provide to help them reach an agreementwith lenders.

Several states have explored ways to ensure thatborrowers receive information about possibleworkout options that may help them avoidforeclosure early in the foreclosure process andto encourage borrowers at risk to work withlenders to obtain a loan modification or workoutplan as soon as possible. California, Indiana andMinnesota, for instance, are working to haveservicers and lenders provide borrowers with

information about their options earlier in theforeclosure process.

• California regulators have sought voluntaryagreements with servicers to reach out toborrowers with high-risk, adjustable-rateloans so they can prepare for upcomingpayment changes.

• Indiana requires that information aboutstate-provided resources be included inforeclosure notices.

• Minnesota has required lenders to notifyborrowers about state foreclosurecounseling and assistance as well as aboutthe availability of a referral service thatprovides access to HUD-approved housing counseling.

As long as resources are in place and lenders arewilling to work with borrowers, these approachescould help borrowers proactively cure a defaultbefore the foreclosure progresses.

In addition, state leaders in Indiana, Maryland,Massachusetts and Ohio have developed media campaigns to convey the message thatborrowers at risk of default can and should seekhelp. The campaigns include statements issuedby the governor, press releases, Web site linksand brochures providing service referrals. Private lenders have been supportive of theseapproaches and, in some cases, have providedfunding for public awareness campaigns.

Encourage Lenders to ModifyLoans in DefaultOne of the most important state efforts so farhas been to encourage lenders to voluntarilymodify loans that are likely to go into default orare already in default. While most lenders andservicers have shown a preference for modifyingloans on a case-by-case basis, state leaders—from governors to directors of bank supervisoryagencies—have pushed financial institutions to

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modify adjustable-rate loans thatmeet certain criteria in order to affectmore at-risk loans and have a greaterimpact on the problem. Examples include efforts bygovernors in Arizona, California andOhio, each of whom has worked withmajor lenders to obtain someagreement to modify loans on abroader scale. In addition, theConference of State BankingSupervisors and a select group ofstate attorneys general have beenexploring regulatory, statutory andlegal actions to facilitate loanmodifications for mortgages withsignificant short-term paymentshocks.

These state-level efforts face afederally created obstacle. In fall2007, the U.S. Department of Treasury and theU.S. Department of Housing and UrbanDevelopment (HUD) launched the “HOPENOW” alliance to encourage housingcounselors, loan servicers, investors and othermortgage market participants to form an allianceto “maximize outreach efforts to homeowners indistress to help them stay in their homes andcreate a unified, coordinated plan to reach andsupport as many homeowners as possible.”35

HOPE NOW (discussed in greater detail inSection 3.0) represents 11 lenders servicingmore than four out of five subprime loans, or 80percent of the subprime market. Last December,the HOPE NOW alliance proposed a plan tofreeze the interest rates for five years on loansthat had been expected to go up. While theproposal intends to help borrowers by freezinginterest rates, the problem is that this approachcreates a template for wholesale loanmodifications and could limit states’ abilities tonegotiate an across-the-board extension of theterms of the loan, such as converting a 30-yearloan to a 40-year loan, which would result in

lower monthly payments, or a reduction in theamounts owed. Indeed, the State ForeclosurePrevention Working Group—comprisingattorneys general and banking regulators from11 states, including California, Iowa, New Yorkand North Carolina—has noted that resets arenot the key issue for many homeowners who arefalling behind on their monthly payments.

Chicago’s HOPI City ModelIn 2002, the city of Chicago and NHS Chicago, a leading

nonprofit community development agency, began an initiative

to address a near doubling of foreclosures in the city, most of

which were concentrated in low-income neighborhoods where

increasing numbers of vacant buildings began appearing on

once stable blocks. Working with the Federal Reserve Bank of

Chicago, NHS launched the Home Ownership Preservation

Initiative (HOPI) with key lending, investment and servicing

institutions. Seeking to preserve sustainable homeownership

and to reclaim foreclosed homes as neighborhood assets,

HOPI has met at least twice, annually releasing research on

foreclosure trends and developing innovative new

strategies, many of which have been replicated nationally.







Governors in California,Massachusetts and Ohiohave encouraged lenders

to modify loan terms on a larger scale.The Conference of State BankingSupervisors and a select group of state attorneys general have been exploring regulatory, statutory and legalactions to facilitate loan modifications for mortgages with significant paymentshocks in the short term.

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According to the working group’s analysis fromFebruary 2008, more than 30 percent ofborrowers with subprime loans and/or ARMs—representing about 365,000 of the 1.1 milliondelinquent loans—are already at least 30 dayspast due on their mortgage payments eventhough they have not yet seen their first ratereset.36 The interest rate freeze negotiatedthrough HOPE NOW would not help theseconsumers. Still, states are encouraged by HOPE NOW to work with lenders and servicersto identify ways to ensure that objectivestandards are used to modify loans for a broadgroup of borrowers and to encourage lenders toreach the most borrowers possible through awholesale approach.

Provide Publicly Supported, Short-Term Loans and MortgageRefinance Funds for BorrowersCollectively, nine states have committed at least$450 million to homeowners facing foreclosure—to provide short-term or emergency loans to helpborrowers overcome their financial difficulties (seeExhibit 4). These loan funds typically are fundedby public and private sources, including proceedsfrom taxable bond issues. In other situations,pools are guaranteed or insured by state agenciesto encourage private lenders to participate.

States have provided funding for short-terminterventions designed to help borrowers whenforeclosure proceedings are imminent. While theseprograms have proved effective in responding tosignificant job losses or other economicdisruptions (for example, family or healthemergencies), the changing nature of foreclosuresbrings new challenges. These emergency loanfunds may be less effective in the current crisisbecause today’s foreclosures are often the result ofthe loans themselves: the terms may have alreadydamaged the financial stability of the borrower,and the loan may be based on a housing valuethat has already diminished. Nonetheless, state

loan funds have an important role to play inkeeping communities stable by helping ensurethat credit remains available for consumers whenthey need it—especially with housing valuesweakening and credit tightening up.

Pennsylvania’s Homeowners’ EmergencyMortgage Assistance Program (HEMAP) was oneof the first state-led foreclosure assistance funds.Launched in the 1980s, when the stateexperienced record unemployment due to amassive transition away from manufacturing jobs,the program provides a limited number of short-term loans (up to two years and a maximum of$60,000) to help borrowers bridge a period ofunemployment. Loans are restricted to borrowerswho are in default but have made good-faithefforts to make payments. All borrowers mustwork with local nonprofit housing counselors.HEMAP provides funds to nonprofit agencies tocounsel delinquent homeowners and to helpthem apply for aid. The program makesmortgage payments directly to lenders on behalfof the borrowers during the emergencyassistance period. These payments make up thedifference between the applicant’s monthlycontribution and the lender’s required payment.Pennsylvania requires that all lenders must send anotice about HEMAP to homeowners who are atleast 60 days delinquent. Since its inception,Pennsylvania’s program has helped more than40,000 families maintain their homes.37

HEMAP is considered an exemplary model, andother states have implemented similar programs.Delaware, Michigan, Massachusetts and NorthCarolina have recently created similar funds toprovide small emergency assistance loans.

The Minnesota Housing Finance Agency, inconjunction with 18 nonprofit counselingagencies, offers counseling and loan funds toprevent mortgage foreclosure as part of thestate’s Foreclosure Prevention AssistanceProgram (FPAP). The program provides

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delinquent mortgage borrowers with financialand debt-management counseling, helpnegotiating with lenders and assistanceaccessing emergency loans up to $5,500. Nearly100 loans equaling approximately $427,000were made in FY2007 (October 1, 2006 toSeptember 30, 2007). As in Pennsylvania,lenders are required to notify delinquentborrowers about the availability of FPAPassistance.

In addition, half a dozen states offer troubledhomeowners the option to refinance loans.Ohio, for example, launched the OpportunityLoan Refinance Program in April 2007 to help

borrowers refinance high-cost loans. Theprogram offers 30-year, fixed-rate loans alongwith a 20-year, fixed-rate second mortgage tohelp with closing costs for eligible borrowers.

As of June 2007, the Ohio Housing FinanceAgency (OHFA) planned to make more than 80loans for approximately $11 million. The newloans would then be purchased by OHFA usingtaxable bonds (at no cost to Ohio taxpayers). Todate, $100 million in taxable bonds have beenallocated to fund the program. And the state’sForeclosure Prevention Task Force has askedOHFA to expand its underwriting criteria so thatmore homeowners can qualify for the program.38








Amount State Fund Use (Committed/Pledged)

Connecticut CT Families Refinance to 30-year, fixed-rate, fully amortizing loans at 0.25 percent $50 millionabove Connecticut Housing Finance Agency’s regular rate

Delaware Emergency Mortgage Up to $15,000 emergency loan for borrowers in foreclosure to pay $2 millionAssistance Program past due balance and/or up to 12 future mortgage payments

Maryland Lifeline Refinance Borrowers with ARM or interest-only loans with upcoming reset can $100 million, including Mortgage Program receive a 40-year fixed-rate loan, within income limits $10 million loan loss

reserve and $25 million in housing agency bonds

Massachusetts Home Saver Foreclosure Borrowers up to 60 days behind and victims of predatory lending $250 million (pledged), Prevention Program including $60 million in taxable

bonds as guaranteeMichigan Adjustable-Rate Refinance ARMs into below-market rate fixed-rate loans before Funded by taxable bonds

Mortgage Refinance delinquentRescue Refinance Refinance ARMs into below-market rate fixed-rate loans after Funded by taxable bondsProgram delinquent at risk of losing their home

New Jersey Homeownership Refinance for borrowers who cannot afford the rate reset or other loan $30 millionPreservation terms, or have been denied a loan modification for a 30- and 40-year,Refinance Program fixed-rate loan. Must meet income and maximum mortgage limits

New York Keep the Dream Alive Borrowers with ARM or interest-only loan with upcoming reset can $100 millionMortgage Refinance Program receive 40-year, fixed-rate loan, within income limits

Ohio Opportunity Loan Refinance ARMs into fixed-rate loans before delinquent, within $100-500 million in taxableRefinance Program income limits bond proceeds

($100 million committed)Pennsylvania Refinance to an Pennsylvania Housing Finance Agency buys current loan for borrowers $25 million bond issue

Affordable Loan unable to afford their loan or who owe more than the home is worthHomeowner Equity Refinance ARMs into below-market rate fixed-rate loans for $25 million bond issueRecovery Opportunity borrowers less than 60 days delinquentEmergency Mortgage Short-term loans to bring payments up to date; also ongoing Approximately $20 million Assistance Program assistance with up to 24 payments annually from loan

repayments andannual appropriation

SOURCE: Pew Center on the States 2008, based on research by PolicyLab Consulting

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In July 2007, New York State launched the“Keep the Dream Alive” program. With $100million available, New York’s Housing FinanceAgency aims to help 500 to 700 familiesrefinance out of high-risk loans into affordable,low-interest loans. The program targetshomeowners with interest-only, adjustable-rateor other unconventional loan terms. Borrowersmust receive homeownership counseling fromapproved housing counseling agencies beforeloan approval. Critics say the program’s loancriteria are not broad enough to meet the needsof most New York City homeowners, but effortsare underway to expand the program.

Connecticut, Delaware, Massachusetts, Michiganand Pennsylvania also have announced refinanceprograms.

Prevent “Foreclosure Rescue”ScamsAs foreclosure rates increase, many vulnerableborrowers may fall victim to scam artists whopromise to rescue them from foreclosure throughvarious lease-buyback or loan repaymentschemes. These scams typically involve“foreclosure consultants” who charge clients a feeto help them avoid foreclosure. The consultantspromise to work with the homeowner’s lender orservicer, but often do nothing more than what theborrower could do on his or her own. Equityproperty purchasers also make false promises tohelp homeowners stay in their homes. Theyencourage homeowners to sign their deeds overto them, and then rent or lease the property backto the homeowner, often with higher paymentsthan the original mortgage amount. In manycases, homeowners do not realize they havegiven up ownership of the property.

At least nine states have enacted legislationaimed at preventing foreclosure rescue scams(see Appendix A). While most laws are very new,with the effects yet to be seen, many consumer

advocates believe they have made it moredifficult for dishonest foreclosure consultants tooperate. Such laws typically include thefollowing provisions:

• A clear and conspicuous notice stating thatconsumers have the right to cancel anagreement with foreclosure consultants

• Required disclosure of terms andconditions, as well as a “right to rescind”period during which a consumer can cancelthe transaction before the closing

• Terms that cap or limit fees that theforeclosure consultant can chargeconsumers, and terms that prohibitpayment until all services are completed

• Terms that rescind or prevent the transferof property to a foreclosure consultant

• Provisions that establish criminal and civilpenalties for violating the regulations

In May 2005, Maryland became one of the firststates to pass emergency legislation to addressforeclosure rescue scams. The MarylandProtection of Homeowners in Foreclosure Actseeks to protect homeowners from unscrupulousorganizations portraying themselves as rescueoutfits. The law criminalizes predatory activitiesand permits the victim to receive damages if theconsultant knowingly violates its provisions.Minnesota, Colorado, Illinois, Indiana,Massachusetts, New Hampshire and New Yorkall enacted similar legislation between 2004 and

In May 2005,Maryland becameone of the first

states to pass emergency legislation to address foreclosure rescue scams.


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2007. Massachusetts’ regulations allow transfersof properties in the foreclosure process onlybetween family members or through nonprofitorganizations to protect consumers from rescuescams.

Colorado’s Foreclosure Protection Act prohibitsforeclosure consultants from charging up-frontfees. The law also requires that all agreementsmade with a foreclosure consultant be in writing,in English, and translated into the borrower’s

native language. Under this law, homeownershave a three-day right of rescission for anyagreement signed with a foreclosure consultant.

Illinois’ Mortgage Fraud Rescue Act of 2007requires that any person who seeks to help ahomeowner at risk of foreclosure must fullydisclose in writing the terms of the services, allassociated costs and a right of rescission. Any salemust be close to the home’s appraised value, andviolators are subject to criminal liability.

Curb High-Cost LendingConsumer protection is an important state issueand several states have been at the forefront ofcrafting strong regulations that can safeguardborrowers—and, ultimately, the lending industryand the economy as a whole-—from taking onmore expensive loans than they can safelymanage. At least 31 states have passed lawssimilar to the federal Home Ownership andEquity Protection Act (HOEPA), which regulatesvery high-cost subprime loans that carry highrates or fees. After HOEPA was enacted, itbecame clear that many abusive lenderscircumvented the law by taking advantage ofloopholes in the definition of which loans itcovered. For this reason, several states enactednew subprime lending laws to supplementHOEPA by covering a broader range of fees.These new provisions result in more loans beingregulated, but they still account for only thoseloans in the highest cost portion of the market.However, some state efforts successfully curbedthe first wave of predatory mortgage lending(largely centered on equity stripping)39 withcarefully crafted laws designed to weed outabusive practices.

North Carolina’s predatory lending law is oftencited as model legislation regulating high-costloans; in fact, about a dozen states haveadopted statutes that closely mimic it. The stateuses the same APR triggers as HOEPA but has alower fee trigger, requires counseling and bansprepayment penalties for loans under $150,000.North Carolina’s law also extends to other typesof mortgages, including purchase loans;however, it excludes reverse mortgages andhigh-cost loans of more than $300,000.

Reform Underwriting StandardsUnderwriting standards in the subprime markethave become extremely loose in recent years,which has been the key driver in today’sforeclosure crisis. Building on laws passed earlierthis decade, however, states are once again atthe forefront of consumer protection. Congress,in its deliberations, should carefully examine andcapitalize on what states have learned fromthese initiatives. In an effort to re-establish astable marketplace for both borrowers andlenders, several states—including Colorado,Maine, Minnesota, North Carolina, Ohio andMassachusetts (by regulation)—have enactedbold legislation to curtail abusive lending







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practices. The specific provisions vary by state,but some of the strongest and most effectivepractices are discussed here.

Require Lenders to Assess a Borrower’s Ability to Repay Several states—such as Colorado, Maine,Massachusetts, Minnesota, North Carolina, Ohioand Rhode Island—now require that lendersassess a borrower’s ability to repay the loan afterintroductory interest rates expire.

• Maine, Massachusetts, Minnesota, NorthCarolina, Ohio and Rhode Island all requirelenders to underwrite mortgages at thefully indexed interest rate to ensureaffordability after adjustment for ARMloans. The fully indexed rate equals theindex rate prevailing at origination plus themargin specified in the contract.

• Colorado, Massachusetts, Minnesota andOhio require the “ability to repay” analysison all home loans while other states requireit only for subprime or other specified loans.

• Maine, Massachusetts, Minnesota, NorthCarolina and Ohio all require the “ability torepay” analysis to include related costs,such as property taxes and insurance.

Require Lenders to Verify Borrower Income To effectively implement an “ability to pay”standard, lenders must verify that a borrower’sincome is adequate to repay the loan. Borrowersoften do not realize when their income isoverstated on an application, and they may notunderstand that they will be charged a higherinterest rate if they fail to document their income(even if their W-2s are readily available). Stated-income loans—when borrowers’ incomes are notverified—have been proven to increase the


High-cost lending regulations or laws

State task force

States that alignbrokers’ interestswith borrowers’















































SOURCE: Pew Center on the States 2008, based on research by PolicyLab Consulting


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chance of foreclosure. For example, a review ofa sample of stated-income loans found that 90percent had inflated incomes, and “moredisturbingly, almost 60 percent of the statedamounts were exaggerated by more than 50percent.”40 An increase in loans with few or noexisting documents to verify a borrower’sincome—“low doc” and “no doc” loans—hascompounded the problems of underwriting andactual affordability. Recent laws in Colorado,Maine, Massachusetts, Minnesota, NorthCarolina and Ohio all require that incomesources be verified.

Limit or Ban Predatory Prepayment Penalties Prepayment penalties—the steep fee (often sixmonths of interest) for paying off or refinancing aloan early—are included in about 70 percent ofall subprime loans, compared with about 2percent of prime loans. Subprime prepaymentpenalties trap borrowers in high-cost loans bysubjecting them to the loss of significant homeequity if they refinance.

• More than 35 states now regulateprepayment penalties.

• At least 10 states ban most prepaymentpenalties outright, including Maine,Minnesota and North Carolina.

Regulate Mortgage Brokers More Effectively Because two thirds of all subprime loanapplications are originated by mortgage brokers,many states are examining their role and lookingfor ways to create greater accountability forbrokers who use unfair and deceptive tactics topush subprime financing on borrowers. Whilemany consumers believe mortgage brokers mayhave a fiduciary duty to the borrowers theyrepresent, only Illinois, Massachusetts, Minnesotaand South Carolina have clear statutes thatoutline this legal relationship. Even where legalduties are undefined, many brokers do actresponsibly and ethically on behalf of borrowers.Still, the current system provides incentives to

brokers that can be contrary to borrowers’ bestinterests. For instance, broker compensation isdriven by yield-spread premiums—the fees paidto them for originating loans at higher rates thanthose for which the borrower would qualify.

New legislation or regulation also extends totightened broker duties. Colorado, Maine,Massachusetts, Minnesota, North Carolina andOhio are all recent examples. These states haveestablished an obligation of good faith and fairdealing. And they require brokers to act in theborrower’s best interests, sell only mortgagesthat are appropriate for the particular borrowerand disclose any compensation clearly andcompletely.

Prohibit Lenders from Steering Consumers toHigher-Cost LoansSteering is the predatory lending practice ofoffering borrowers a higher-cost loan when theborrower could actually qualify for a better rateor better terms. Pricing disparities can be theresult of a variety of factors, includinginconsistent application of objective pricingcriteria, targeting of families of color by higher-rate lenders or brokers and a lack of investmentby lower-cost lenders in these communities. For example, recent data illustrate thatcommunities of color continue to pay more forhomeownership than white borrowers.41 In 2006,CRL found that for most types of subprimeloans, black and Latino households are 30percent more likely to be given a subprime loaneven after controlling for legitimate risk factors.42

Lenders and policy makers can take amultifaceted approach to ensuring that allborrowers, regardless of race, receive loans thatare fair and sustainable. For instance,Massachusetts recently instituted regulationsthat ban steering, and several other states—including Minnesota, North Carolina and Ohio—have addressed steering through anti-predatorylending laws and broker regulations.






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Enforce Regulations More Strictly Most lenders do not keep the loans they make,but instead sell or “assign” the loan to otherentities that bundle mortgages into securities forinvestment purposes. To address this marketdynamic, some states have begun to providegreater enforcement authority to their mortgageregulators while also providing a private right ofaction for borrowers and establishing assigneeliability, which means that lenders who makerisky loans will be held liable even after sellingthe bad loan.

• Ohio has brought many mortgageprotections under its Unfair and DeceptiveActs or Practices laws, thereby subjectinglenders to punitive measures for abusiveloans.

• Maine has banned pre-dispute, mandatoryarbitration; the ban ensures that borrowerscan pursue legal claims through the courts.

• Maine and Rhode Island are the mostrecent of the dozen or so states to instituteassignee liability for high-cost home loans.

Encourage Consumer Education andCounseling Before Loans Are Made Homeowner counseling programs can helpprevent foreclosures by making consumersaware of the intricacies of their mortgagedecisions and by educating consumers aboutthe pitfalls that accompany taking out anunaffordable mortgage or committing to arefinance that is not in their best interest. In fact,successful counseling requirements have beennarrowly focused and have targeted a specificset of loans.43 However, requiring counseling fora specific demographic or class of homeownerscan be problematic.

Illinois provides a useful example. The IllinoisPredatory Lending Database Law went intoeffect in January 2006. The law requiredmandatory counseling for any mortgageapplicant living within 10 ZIP codes in CookCounty and who had a credit score below aparticular threshold or who had applied for aloan that had certain characteristics associatedwith risky loans. But the law was suspended lessthan 10 months later under immense scrutinyfrom consumer advocates and lenders, becauseit targeted individuals with particular creditscores who tended to be minorities or low-income consumers. As a result, the law wasrevised to expand its reach to all of Cook Countyand to re-focus counseling requirements by thetype of loan, rather than by the credit history ofthe borrower.

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Convene State Task Forces toAssess Challenges, BringStakeholders Together and Identify Needed ReformsToday, 14 states have created task forces onforeclosure intervention to marshal resources,bring stakeholders together and implement arange of strategies (see Appendix A). Task forcestypically include representatives from nonprofitagencies, state and local government and, inmany cases, the financial industry. Thesealliances help identify state priorities and keepthe issue of foreclosure in the public spotlight.States’ task forces have focused on all of thepolicy reforms discussed in this report: fromseeking to protect homeowners before theysecure mortgage loans to offering short-termloans and mortgage refinancing to helphomeowners stave off foreclosure.

The Massachusetts Mortgage Summit WorkingGroups, a state task force, works to implementstrategies to address the foreclosure crisis.Convened by the state Division of Banks, asummit consisting of representatives fromnonprofits, government and the mortgagelending industry was held in November 2006and produced two working groups that focusedon rules and enforcement and consumereducation and foreclosure assistance. In April2007, the groups issued a report titled,Recommended Solutions to PreventForeclosures and Ensure MassachusettsConsumers Maintain the Dream ofHomeownership. (Exhibit 6 illustrates this group’sprimary findings.) In June 2007, Governor DevalPatrick submitted a legislative proposal (H.B.4085) that drew upon the Mortgage SummitGroups’ recommendations. His proposalcriminalized mortgage fraud; created aninformation system to monitor and analyzeforeclosures; required consumers applying for anonconforming variable rate mortgage to get

counseling before obtaining the loan; andmandated that mortgage servicers file a 90-daynotice of intent to foreclose with the homeownerand the Division of Banks. As of December2007, the bill was still under consideration;however, the state’s banking commissioner hasalready secured temporary stays for hundreds ofhomeowners in the foreclosure process, and hasprovided financing and counseling assistance tothese families. In addition, the governorannounced a $250 million loan refinanceprogram in July 2007; the attorney general hasbanned foreclosure rescue schemes; and thestate senate passed an omnibus foreclosurerelief measure.

Convened in March 2007 by Ohio’s GovernorTed Strickland and chaired by the director of thestate’s Department of Commerce, the OhioForeclosure Prevention Task Force is made up of25 members from government, industry and thenonprofit sector. The task force has approved 27recommendations in the following areas:

• Development of public awarenesscampaigns

• Funding goals for counseling, including atleast $2 million in new state funds

• More flexibility within pooling and servicingagreements

• Improvements to Ohio’s foreclosureprocesses, including expanding consumeraccess to counseling and legal assistance,encouraging mediation and alternativedispute resolution in foreclosureproceedings and expediting propertytransfers to the court or sheriff to minimizeimpact on surrounding neighborhoods

• Stronger protections for homeowners,requiring mortgage servicers to contact thestate with details on the loan terms andhistory of the consumer before filing aforeclosure complaint






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• Lender requirements that offer consumersthe option of escrowing taxes andinsurance

• Strategies for dealing with the aftermath ofincreased numbers of foreclosed homes,including reallocating resources to facilitatereinvestment in affected neighborhoodsand to fund additional public foreclosurerescue measures for consumers

As a result of the recommendations outlined bythe Ohio Foreclosure Prevention Task Force lastSeptember, Governor Strickland has sought thecooperation of mortgage lenders to address theincreasing number of foreclosures in Ohio. Thegovernor proposed a compact, which called forservicers to increase outreach and education toborrowers, especially in the areas of loanmodifications and rate changes. Under thecompact, the servicers were asked to take allmeasures to increase loan workouts, includingadjusting their staff and resources toaccommodate major improvements inpreventative efforts and loss mitigation. If theseefforts to modify loans should fail, lenders wererequired to provide adequate advancenotification of the intent to proceed withforeclosure.

In early April 2008, Governor Strickland reachedagreement with nine of 11 of Ohio's largestmortgage servicers on a significant effort tomodify the terms of adjustable-rate mortgagesacross the state.

In addition to attempting to work with the state’smajor lenders to provide distressed homeownersrelief, Governor Strickland directed the OhioDepartment of Development (ODOD) tocoordinate the distribution of $2 million from theOhio Housing Trust Fund for housing counselingservices. The Trust Fund will be asked to providean additional $1 million to ODOD for a vacanthousing demonstration program. Ohio also hasan active loan fund (the Opportunity Loan

Refinance Fund) to help households in danger offoreclosure to refinance problematic loans.

Similarly, the New York State BankingDepartment launched the Halt Abusive LendingTransactions and Mortgage Fraud Campaign(HALT) in reaction to the state’s growing numberof foreclosures resulting from predatory lending.This interagency task force aims to counteractthe harm caused by predatory lending throughincreased collaboration between lenders,communities and other stakeholders whileworking to strengthen community and localorganizations’ ability to combat predatorylending. HALT provides outreach and consumercounseling through public serviceannouncements, a consumer helpline and grantsthat support consumer services, and partnerswith the State of New York Mortgage Agency tooffer a 40-year fixed rate loan and to developthe “Keep the Dream” program that helpseligible subprime borrowers refinance theirloans. The program also raises mortgage lendingstandards through better documentation of aborrower’s capacity to pay loans, a unifiedsystematic approach to loan modifications andthe creation of a mortgage fraud unit and anational licensing system for mortgage loanoriginators.44

Advocates in Colorado successfully pulledtogether various stakeholders in the public andprivate sectors, including representatives fromthe Colorado Division of Housing, JP MorganChase and the Colorado Association of Realtors,to form the Colorado Foreclosure PreventionTask Force.45 This group’s central achievement todate has been establishing a Coloradoforeclosure hotline, which fields calls from stateresidents having trouble making their mortgagepayments.

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1. Criminalize Mortgage FraudGoal: Mortgage fraud becomes a criminal offensewith a penalty of up to 10 years imprisonment and/ora $50,000 fine. Multiple cases of fraud could receiveup to 20 years imprisonment and fines up to$500,000.Status: Requires legislation or emergency regulationby the Office of the Attorney General.

2. Increase Mortgage Licensing RequirementsGoal: Support National Mortgage Licensing System(NMLS) and expand licensing requirements to includeall mortgage originators, increase capitalization andnet worth requirements for brokers and lenders andrequire minimum licensing requirements of five yearsfor lenders and three years for brokers.Status: Division of Banks proposed regulations forminimum experience requirements for brokers andlenders as well as increased net worth requirementsand a surety bond for lenders and brokers.

3. Increase Funding for the Division of BanksGoal: Increase funding for Division of Banksenforcement activities by increasing mortgage lenderand broker fees. Status: Governor proposed legislation to provide theDivision of Banks funding for enforcement, which isunder consideration.

4. Adopt Federal Guidance on Nontraditional MortgagesGoal: Adopt parallel guidance that can be applied tolenders that are not federally regulated. Status: Division of Banks adopted parallel guidance inJanuary 2007 for nontraditional mortgages such asthose with interest-only and payment option ARMs.

5. Change Foreclosure LawsGoal: Improve rights of consumers in the foreclosureprocess. Status: Governor supported legislation to require pre-foreclosure notification to homeowners and theDivision of Banks and post-foreclosure reporting ofcosts and proceeds of the home sale.

6. Create Foreclosure DatabaseGoal: Division of Banks to develop a database totrack information on pre-foreclosure notificationand foreclosure petitions. Status: Legislation introduced to require that thename and license number of lender and broker berecorded on all mortgages when filed with theregistry of deeds.

7. Prevent Foreclosure Rescue ScamsGoal: Require that transactions with foreclosureconsultants be in writing with no payment due untilall services rendered. Provide a five-day graceperiod that enables consumers to cancel thecontract. Status: The attorney general introduced emergencyregulations prohibiting unfair and deceptiveforeclosure rescue scams to prevent the transfer ofdistressed property to for-profit entities charging afee. Transfers between family members or involvednonprofit organizations are exempt.

8. Increase Consumer Awareness aboutForeclosure and Increase ResourcesGoal: Support of statewide and grassrootsawareness campaign in multiple languages;increase availability of homeownership counselingand borrower workshops by nonprofit agencies. Status: The state is developing a partnership withthe Homeownership Preservation Foundation tooffer counseling.

9. Create Foreclosure Intervention ProductsGoal: Create a mortgage product to helpconsumers refinance unsustainable loans andprovide credit enhancements for high-riskmortgages. Seek participation of private lenders. Status: MassHousing, the state’s housing financeagency, established a $250 million Loan RefinanceProgram offering fixed-rate refinance loans.

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Address Foreclosure Vacancies,Turnover and BlightEven if a state adopts a wide range of reformsand approaches the crisis comprehensively, thereality is that many homes with unsustainablesubprime mortgages will fall victim toforeclosure. While there is still a window ofopportunity for state policy makers to mitigatethe effects of foreclosure by carrying out someof the measures highlighted in this report, stateand local officials need to consider strategies todirectly manage the consequences of foreclosurein modest-income homeowner neighborhoods.

Foreclosed homes are frequently abandoned andleft to vandals, disrepair and mismanagement forup to two years while banks work through theforeclosure process. While many localities haveprograms in place to manage troubledproperties, these efforts were designed to dealwith existing vacant properties, not to handle arapidly rising tide of new, vacant homes inotherwise stable neighborhoods. With a largevolume of properties entering foreclosure, effortsto manage vacant properties will become evenmore challenging. And these efforts will becomeincreasingly important for neighborhoodpreservation and revitalization. According to ouranalysis of CRL’s subprime spillover data,surrounding homeowners could lose $356 billioncumulatively, simply by being in close proximityto foreclosed properties.46 As a result, citiesacross the country could lose many billions intaxes and revenue from lost fees for services(for example, permits, water, garbage pick-up) provided by the public sector.

Both Massachusetts and Minnesota recentlyannounced programs to address vacancies inthe wake of the foreclosure crisis. The OhioForeclosure Prevention Task Force hasrecommended strategies to manage theaftermath of foreclosures. These statestrategies and efforts emerging in otherstates generally include:

• Expediting property transfers once aforeclosure judgment is completed, whichentails getting the property into the handsof the new owner as quickly as possible.Ohio uses a system in which speciallyappointed master commissionersadminister the post-judgment process fromentry of judgment to transfer of title. Ohioalso is considering a two-track system thatwould move investor properties throughforeclosure more quickly than owner-occupied properties, giving homeownersgreater opportunity to remedy theirsituation.

• Providing grants for property rehabilitation.The cost of deferred maintenance andmajor repairs for homes in foreclosure canbe significant. In some cases homes simplyneed to be demolished. Illinois andMinnesota have developed modestprograms to recover properties that arelender real estate owned (REO)—homesthat lenders have taken possession of andneed to sell off—and turn them over tolocal community developmentorganizations to renovate for first-timehome buyers. While the number ofrecovered properties remains low, therenovated homes can have a significantimpact by stabilizing neighborhoods thathave experienced a wave of foreclosures.

Foreclosed homesare frequentlyabandoned and

left to vandals, disrepair andmismanagement for up to twoyears while banks work throughthe foreclosure process.


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• Providing support for municipal codeenforcement to ensure abandonedproperties are maintained and to makesure they do not create blight forneighboring properties; engaging in landbanking to publically purchase, hold andmaintain abandoned property for laterpublic use; and supporting neighborhoodplanning and redevelopment efforts. Ohiohas explored using tax foreclosures tosecure properties or propel rehabilitation.State housing finance agencies can alsouse Low Income Housing Tax Credits toredevelop vacant properties.

Because REO properties are a depreciatingasset, lenders are increasingly willing to sellthem in bulk at a significant discount or evendonate some properties to a public entity ornonprofit development agency. Thisarrangement can require significant capitalresources, extensive negotiation and carefullymanaged housing construction activities.Combined with the scattered-site nature ofsingle-family homes in foreclosure and the poorquality and location of the most depreciatedREOs, taking on a portfolio of properties shouldbe approached with great caution.

A related issue for homes in foreclosure affectsthose properties that contain one or more rentalunits. What happens to existing tenants? Payingrenters provide some cash flow for maintenance,taxes and other expenses. But many potentialnew owners prefer an empty property in whichthey can invest and then lease to new tenants.There are few protections for renters living in aproperty in foreclosure, and many are evicted onshort notice. Although few states haveprotections for renters, some have started toexplore additional safeguards to provideextended availability of housing for renters inthese situations—although many of theseproposed fixes are temporary in nature. Lease-holding tenants in New Jersey, New Hampshire,Washington, D.C. and Massachusetts cannot beevicted by new owners unless the tenants havefailed to pay the rent or have violated any otherimportant lease term or law. In August 2007,North Carolina enacted a law increasing to 30days the court notice given to tenants inproperties containing 15 or more rental units.Illinois recently passed a law extending thenotice period for tenants in foreclosed buildingsto 120 days or the remainder of the lease,whichever is shorter.47






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Congress has taken some steps and is activelyconsidering others to address the currentforeclosure crisis. The following federal initiativesare meant to complement states’ actions and, ifsuccessful, they could significantly reduce theimpact of subprime foreclosures nationwide.

FHASecureLaunched in August 2007, this program is aimedat helping homeowners refinance certain ARMs.Unlike traditional FHA-insured mortgages, theprogram allows even delinquent borrowers torefinance if their delinquency results from anARM resetting to a higher rate. This programapplies only to owner-occupied homes (noinvestors) with existing non-FHA ARM loans thathave or will reset between June 2005 andDecember 2009. The program is available tohomeowners with mortgages under a certaindollar amount, which varies by geographicregion (for instance, the temporary limit is729,750 for high cost areas.)48

HOPE NOW Alliance As described earlier, the federal HOPE NOWalliance represents 11 lenders servicing morethan four out of five subprime loans.49

A significant part of the HOPE NOW effort isaimed at modifying loans by freezing the interestrate at the current level. The plan was announcedin December 2007, and is a voluntary effort bythe private sector to address the nationalforeclosure challenge. However, this programonly targets a limited number of homeownersfacing foreclosure. To be eligible, homeownersmust have had good payment histories, taken

their loans out between January 2005 and July2006, face loan resets that result in a paymentincrease of 10 percent or more, and had a loanto value ratio of over 97 percent. The programuses a direct mail campaign to contact at-riskhomeowners and encourage them to call theHomeownership Preservation Foundation’snational hotline (888-995-HOPE). In November2007, the alliance sent more than 200,000 lettersto at-risk homeowners.50

Because HOPE NOW is entirely voluntary, it willhave an impact only to the extent that lendersand servicers agree to modify loans. This plandoes not address or alleviate any of the problemsthat have prevented lenders and servicers frommodifying loans to date (for example, theinterplay between first and second lien holdersand the mismatched incentives between servicersand investors). The plan excludes borrowers whohave already defaulted on their loans and arealready on track to lose their homes inforeclosure. The plan also excludes all borrowerswhose rates reset before January 1, 2008, whichaccounts for most borrowers with loans thatoriginated prior to 2006. An even more recentTreasury plan, “Project Lifeline,” provides a“pause” that would temporarily halt foreclosureproceedings for some borrowers, but only for 30days.

In mid-January 2008, the MBA released statisticson the number of loan modifications itsmembers accomplished in the third quarter of2007. The data reveal that the number ofinitiated foreclosures outstripped loanmodifications by a seven-to-one margin (384,388to 53,573). For subprime ARMs—the root of thecurrent foreclosure crisis—servicers modified

National Initiatives




S E C T I O N 3 . 0

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almost 13,000 loansnationwide, initiatingforeclosures 13 times moreoften (166,415 to 12,741). Aday after the MBA’snumbers were released,HOPE NOW reported,based on separate data,that there were 120,000loan modifications in thesecond half of 2007. Theabsence of detailedinformation leads toquestions of whether themodifications implementedare sustainable. In any case,the available evidencesuggests that the rate ofvoluntary loan modificationsis well outpaced by thewave of foreclosures. In fact,the number of foreclosurestarts reported by the MBAin the third quarteroutnumbered the numberof loan modificationsreported by HOPE NOW forthe third and fourth quarterscombined, by a margin ofthree to one.51

National MortgageLicensing System All states have implementedlicensing requirements andstandards for individual loanoriginators that includeeducation requirements,testing and criminalbackground checks.Beginning in early 2008,state-licensed lenders,brokers and loan officers inseven states will be able to

Court-Supervised Loan Modifications: CurrentLaw Excludes Bankrupt Homeowners from ReliefThe risk of foreclosure is highest for several million families who hold subprime

loans with “exploding” adjustable interest rates that are set to rise sharply,

resulting in massive and often unaffordable payment increases. If these

homeowners are unable to make their payments, refinance the mortgage or sell

their home, current law gives them only limited options: loan modification by

lenders or foreclosure.

Given that lenders currently are not voluntarily modifying loans in significant

numbers, one of the potential options for homeowners who would otherwise

lose their homes would be a loan modification through the bankruptcy process.

But that avenue is legally closed to them, because current federal law specifies

that the mortgage on the primary residence is the only debt that bankruptcy

courts cannot modify. However, such bankruptcy relief is available on other types

of debts, including loans on commercial real estate, investment properties and

even yachts. Congress provided a similar type of bankruptcy relief to family

farmers during the farm crisis of the 1980s, and this remains part of the

bankruptcy code today.

CRL estimates that changing the federal bankruptcy law to allow court-ordered

loan modifications for homeowners in bankruptcy could prevent 600,000

foreclosures. (For more information, see


loan-modifications-would-save-600-000-homes.html.) Both the U.S. House of

Representatives and a key U.S. Senate committee are considering bankruptcy

reform to help homeowners. Current proposals include the following provisions:

• Modifications that incur no cost to the U.S. Treasury

• Relief efforts that narrowly target families who would otherwise lose

their homes, excluding families who do not need assistance

• Programs that help maintain property values for families who live near

homes at risk of foreclosure

• Efforts that save American families not facing foreclosure $72.5 billion

by averting neighboring foreclosures

• Guarantees for lenders that they will obtain at least the value they

would through foreclosure (given that a foreclosure sale can recover

only the market value of the home)

• Expedited processes that save lenders the high cost and significant

delays of foreclosures

While homeowners generally turn to the drastic solution of bankruptcy only as a

last resort, the proposed bankruptcy reform would potentially cover a significant

number of homeowners, especially those who will not qualify for FHASecure and

HOPE NOW programs.


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use the Web-based National Mortgage LicensingSystem (NMLS), administered by the Conferenceof State Bank Supervisors (CSBS) and theAmerican Association of Residential MortgageRegulators, to apply for, update and renew theirlicenses online.

While NMLS does not cover banks that arechartered by federal or state governments, CSBSestimates that the online database will helpensure accountability because it will coverapproximately 70 percent of all loan originators.


All of the programs and proposed plansdiscussed in this report will amount to very littlewithout follow through on all levels, someasuring the results of these efforts is essential.Without such information, it is impossible tomeasure lenders’ results against their proposedplans.

Foreclosure filings are public records, typicallymaintained by county governments. Gainingaccess to these data can be difficult, however,unless the filings are recorded in an electronicformat and released for analysis. In many

communities, vendors have developedforeclosure filing databases with the intent to sellthe information to real estate speculators. Thesedata vendors frequently receive media attention,but the quality of their data can bequestionable. State policy makers could certainlyuse these and other data sources, afterverification, to monitor foreclosure trends in keymarkets.

The lack of regularly reported data has been asignificant concern to critics of the HOPE NOWloan modification plan. The plan encourages



For hotline and counseling efforts:

• How borrowers heard about service• Main reason for delinquency• Loan amount• Income• Number of payments behind• Type of loan (ARM, interest only)• Lender/servicer name• Date of foreclosure filing• Cumulative length of counseling• Property address

For loan programs:

• Number of loans• Amount of loans• Type of loans and type of previous loans

refinanced• Loan repayment rates

For prosecution of fraud:

• Type of fraud• Dollar value lost or at risk• Referrals to other services

For vacant property reclamation:

• Number of properties• Appraised values• Repair and/or rehabilitation investment• Resale value• Demographics of new occupants





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loan servicers to report extensive data on thenumber and types of loan modifications, butthese reports are required to go to investors inmortgage-backed securities only—not toregulators, policy makers or the general public.52

Two national efforts are underway to collectconsistent data on loan servicing activity,although both of these rely on voluntarycompliance by servicers. First, a working groupof the Conference of State Banking Supervisorsand State Attorneys General (CSBS/AG) hasdeveloped a framework for collecting state-leveldata on loan servicing activities and outcomes.In addition, the national HOPE NOW alliance

has been developing metrics for measuring theactivities of servicers. However, both theCSBS/AG and HOPE NOW data collectionefforts are likely to release data in an aggregateform, rather than providing lender- andgeography-specific information.

At least two states have introduced bills to makedata reporting mandatory. California isconsidering legislation that would require allservicers to report data on a monthly basis for allsubprime and nontraditional mortgages. Thislender-specific data would then be posted ongovernment agency Web sites. Maryland hasintroduced a similar proposal.

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For more information and help in designingstate responses to the foreclosure crisis, policymakers can refer to the following resources. (Thislist is not comprehensive.)

Board of Governors of the Federal ReserveThe Board of Governors of the Federal Reserveoversees state-chartered banks and trustcompanies that belong to the Federal ReserveSystem. The Board provides educationalinformation and offers a list of resources andreferral agencies to help consumers avoidforeclosure and to assist borrowers who havealready entered the foreclosure

Center for Responsible LendingThe Center for Responsible Lending (CRL) is aunit of the Center for Community Self-Help (Self-Help), based in Durham, N.C. Recognizing thatlack of legal representation is an obstacle forfamilies facing foreclosure, CRL created theInstitute for Foreclosure Legal Assistance (IFLA),a project managed by the National Associationof Consumer Advocates, which fundsorganizations that provide legal representationto families facing foreclosure due to subprimelending.53

Federal Housing AdministrationThe Federal Housing Administration, a subsectionof the U.S. Department of Housing and UrbanDevelopment that monitors lenders and providesmortgage insurance, offers consumer educationand resources on its Web site for individuals andfamilies in danger of losing their homes.,717348&_dad=portal&_schema=PORTAL

Homeowners’ Emergency MortgageAssistance Program (HEMAP)One of the first of its kind, HEMAP provideseligible Pennsylvania residents who are facingforeclosure with assistance through its loan

Homeownership Preservation FoundationThe Homeownership Preservation Foundation(HPF) creates partnerships with localgovernments, nonprofit organizations, borrowersand lenders to help families overcome obstaclesthat could result in the loss of their homes. HPFoffers 1-888-995-HOPE, a national homeownerassistance hotline to help individuals andfamilies who are struggling financially to avoidforeclosure.

Minnesota: Foreclosure Prevention AssistanceProgramMinnesota’s Housing Finance Agency, partneringwith 18 nonprofit counseling agencies, hascreated the Foreclosure Prevention AssistanceProgram to provide counseling and somefinancial assistance to homeowners in danger offoreclosure.

National Consumer Law CenterThe National Consumer Law Center (NCLC)helps consumers, their advocates and policymakers to use powerful consumer laws to buildfinancial security and promote marketplacejustice for vulnerable individuals and families.NCLC presents information about mortgageservicing and foreclosure prevention, offering abook and CD-ROM about foreclosureprevention.





S E C T I O N 4 . 0

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NeighborWorks® AmericaNeighborWorks America, a national nonprofitorganization that works to revitalize communitiesthrough affordable housing opportunities, trainingand technical assistance, has created the Centerfor Foreclosure Solutions, which works to reducethe rate of foreclosures as well as the negativeimpact of foreclosures on borrowers andcommunities. The Center convenes stakeholdersand supports a coordinated foreclosureprevention and intervention strategy incommunities nationwide. The Center providestips for avoiding foreclosure, backgroundinformation, counseling training courses and adatabase of other resources. In FY2008, Congresscharged NeighborWorks America withadministering a $180 million national foreclosuremitigation counseling program.

New York: “Keep the Dream Alive” ProgramThe State of New York Mortgage Agency’s “Keepthe Dream Alive” program works to refinancehigh-risk loans into 30- or 40-year, fixed-rate loans.The program has $100 million available and aimsto help between 500 and 700 families refinancetheir loans in danger of

Office of the Comptroller of the CurrencyThe Office of the Comptroller of the Currency(OCC), a bureau of the U.S. Department of theTreasury, regulates all national banks. In June2007, OCC released Insights: ForeclosurePrevention; Improving Contact with Borrowers, adocument that introduces how banks, inconjunction with state and local governments,nonprofits and other key players, areapproaching the issue of foreclosure andworking to safeguard homeowners and

Ohio: Opportunity Loan Refinance ProgramOhio’s Opportunity Loan Refinance Program,launched by the Ohio Housing Finance Agency(OHFA), aims to help borrowers refinance high-cost loans, offering a 30-year, fixed-rate loan anda 20-year, fixed-rate second mortgage. A uniqueaspect of this program is that the loanspurchased by OHFA are bought through taxablebonds at no cost to the state’s

The Reinvestment FundThe Reinvestment Fund (TRF) is a national leaderin the financing of neighborhood revitalization,with efforts focused across the Mid-Atlanticregion. TRF’s recent work includes studies onforeclosure filings in Delaware and

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Broker MustConsider/Represent

Interest of Borrowers Statewide Statewidewhen Recommending Consumer Consumer StatewideMortgages (all states Education Education Foreclosure

State High-Cost Loan Law/Regulation Foreclosure Intervention Law/Regulation license mortgage brokers) Campaign Hotline Task Force


Alaska 2005

Arizona 2002 l 2007

Arkansas 2002 Arkansas Home Loan Protection lAct 1340 (high-cost loan regulations)

California 2002 California Covered Loan Law 4970 2007 Department of Corporations 2007(high-cost loans, disclosure, counseling Release No. 61-FS (notice to loan recommended, lower threshold than servicers)HOEPA, referral to counseling hotline)

Colorado 2002 Colorado Consumer Equity 2007 HB 1322 l 2006 2006Protection Act (high-cost loans, disclosure) (Mortgage Fraud Prevention Act)

Connecticut 2001 HB 6131; 2002 HB 5073 CT Families – Refinancing Assistance 2005 l 2007Connecticut Abusive Home Loan Lending Practices Act (high-cost loans)

Delaware 2006 Emergency Mortgage Assistance 2001 lProgram (DEMAP)

District of 2002 Home Loan Protection Act TitleColumbia 26A Ch 20 (high-cost loans, disclosures,

counseling recommended)

Florida 2002 Florida Fair Lending Act SB 2262 2007 l(high-cost loans, disclosure, counseling recommended)

Georgia 2002 Georgia Fair Lending Act HB 1361 (high-cost loans, counseling required, lower trigger than HOEPA)

Hawaii 2007 HB 1306 HB 1336 (mortgage fraudagainst seniors)


Illinois 2003 815 ILCS 137 High Risk Home Loan 2007 Mortgage Rescue Fraud Act 2004 l 2006Act (high-cost loans, disclosure, counseling recommended, lower threshold than HOEPA)

Indiana 2005 Home Loan Practices ("Article 9") 2007 SB 0390 Mortgage Rescue Fraud 2006 l 2006(high-cost loans, disclosure, counseling Law 2007 HB 1753 (counseling) recommended)

Iowa 2007 l

Kansas 2000 Regulation of Agreements and Practices (16a-3-207) (high LTV loans, mentions counseling is available)

Kentucky 2003 High-Cost Home Loan Law (high- 2005cost loans, counseling recommended, disclosure) 2006 Predatory Lending Law


Maine 2003 PL49 (high-cost loans, disclosure); l2007 Predatory Lending Law (counseling required)

Maryland 2002 Maryland Covered Loan Law 2005 Foreclosure Counseling Services Law 2005 l 2007(high-cost loans, disclosure, counseling (mandates borrowers in foreclosure be recommended at application, lower referred to counseling); 2006 Lifeline threshold than HOEPA) Refinance Mortgage Program; 2007

Homeowners Preserving Equity (HOPE)

Massachusetts 2004 Predatory Home Loan Practices Act 2007 Home Saver Foreclosure Prevention l 2005 l 2006(high-cost loans, counseling required; Program (foreclosure prevention loan lower triggers than HOEPA) fund)

Michigan 2002 Consumer Mortgage Protection Act 2007 Adjustable-Rate Mortgage Program 2006 2006(disclosure, counseling recommended at and Rescue Refinance Programapplication, referred to counseling hotline)

Minnesota 2002 Residential Mortgage Originator 2007 Foreclosure Prevention Loan Fund l 2003 l 2007and Servicer Licensing Act (disclosure); (funding for expanding counseling)2007 Predatory Mortgage Practices (high-cost loan regulations)



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Broker MustConsider/Represent

Interest of Borrowers Statewide Statewidewhen Recommending Consumer Consumer StatewideMortgages (all states Education Education Foreclosure

State High-Cost Loan Law/Regulation Foreclosure Intervention Law/Regulation license mortgage brokers) Campaign Hotline Task Force

Mississippi 2006

Missouri 2007 Foreclosure Rescue Fraud

Montana 2007 l


Nevada 2007 Predatory Lending Law (high-cost 2007 Predatory Lending Law (rescue fraud proposedloan regulations) prevention) 2007

New 2007 Foreclosure Consultant Practices Act Hampshire (rescue fraud prevention)

New Jersey 2002 New Jersey Home Ownership 2007 New Jersey Home Ownership Security Act (high-cost loans, disclosure, Preservation Refinance Programcounseling required)

New Mexico 2003 Home Loan Protection Act (high-cost 2004 l 2007loans, lower threshold than HOEPA,disclosure, counseling recommended)

New York 2000 High-Cost Home Loan Law (lower 2007 Home Equity Theft Prevention Act 2007 2007threshold than HOEPA, disclosure, (rescue fraud); 2007 Keep the Dream counseling recommended) (revised 2007) refinance fund; 2007 HALT

North Carolina 1999 High-Cost Home Loan Law (high-cost 2007 HB 1374 (consumer protections in l 2001loan regulations, counseling required) loan servicing)

North Dakota

Ohio 2002 HB 386 Sec. 1349.26 (high-cost loan 2007 Opportunity Loan Refinance l 2005 l 2007regulations, disclosure); 2006 Homebuyer ProgramProtection Act

Oklahoma 2003 Home Ownership and Equity 2006Protection Act (high-cost loan regulations, counseling recommended)


Pennsylvania 2001 Consumer Equity Protection Act 2007 Refinance to an Affordable Loan(high-cost loans, counseling (REAL); Homeowner Equity Recovery recommended, disclosures) Opportunity (HERO)

Rhode Island 2006 Home Loan Protection Act (high-cost 2006 Madeline Walker Act (rescue fraud 2002loan regulations, disclosure, counseling prevention)required, lower threshold than HOEPA)

South Carolina 2003 High-Cost and Consumer Home l 2002Loans Act (high-cost loan regulations, counseling required)

South Dakota

Tennessee 2006 Home Loan Protection Act (high-cost loan regulations, counseling recommended, disclosure)

Texas 2002 High-Cost Home Loan Law (high-cost loan regulations, counseling recom-mended, referral to counseling hotline)

Utah 2004 High-Cost Home Loan Act (high-costloan regulations, disclosure, counseling recommended)

Vermont l

Virginia 2007


West Virginia 2004 West Virginia Residential Mortgage Lender, Broker and Servicer Act (limits fees, requires counseling, strong provisions cover all loan types, protection against excessive fees and points, prepayment penalties, yield-spread premiums, includes remedies for violations)

Wisconsin 2004 Responsible High-Cost Mortgage 2007Lending Law (high-cost loan regulations, counseling recommended)


SOURCE: Pew Center on the States, 2008, based on research by PolicyLab Consulting

NOTE: As of January 31, 2008

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Subprime Lending: Sowing theSeeds of a Foreclosure CrisisThe subprime market was intended to providehome loans for people with impaired or limitedcredit histories. In addition to lower incomes andblemished credit, borrowers who receivedsubprime loans may have had unstable income,savings or employment and a high level of debtrelative to their income. However, there isevidence that many families who receivedsubprime mortgages could have qualified forless expensive mainstream loans but wereinstead “steered” into accepting higher-costsubprime loans. In fact, one study of FreddieMac that securitized loans found that one in fivesubprime loan holders could have received aprime mortgage.54

In a short time, subprime mortgages grew froma small niche market to a major component ofhome financing. From 1994 through 2006, thesubprime home loan market grew from $35billion to more than $600 billion and reached a23 percent share of the mortgage market.55 Themajority of subprime lending has been in theform of refinance loans rather than purchasemortgages to buy homes. Subprime loans alsotypically have higher interest rates and fees thanfound in prime loans, and subprime loans aremore likely to include prepayment penalties andbroker fees (known as “yield-spread premiums”).

During the late 1990s, widespread abusivelending practices emerged in the subprimemarket. The primary abusive practices involvedequity stripping—that is, charging homeownersexorbitant fees or selling borrowers suchunnecessary products as single-premium creditinsurance on refinanced mortgages. By financingthese additional charges as part of the new loan,unscrupulous lenders were able to disguisethese excessive costs. Further, these loans

typically came with costly prepayment penalties,which mean that homeowners have to paythousands of dollars to close the abusive loan.

During the past several years, a number of statesmoved to pass laws that address equity-strippingpractices. Research assessing these laws hasshown them to be highly successful in cuttingexcessive costs for consumers without hinderingborrowers’ access to credit. In addition, theleadership shown by states helped encouragethe adoption of some best practices byresponsible lenders and leaders in the mortgageindustry. For example, single-premium creditinsurance virtually disappeared from the market,upfront fees declined and prepayment penaltiesbecame less costly, on average, and lasted for ashorter period of time.

In spite of these successes, problems in subprimelending were not completely eliminated.Prepayment penalties continued to be imposedon 70 percent of all subprime loans, and manyother predatory practices stayed in place and stilloccur in the market. These practices includesteering (which occurs when lenders push marketborrowers into a subprime mortgage even whenthey could qualify for a prime loan), yield-spreadpremiums (fees to brokers for selling loans withhigher interest rates than the borrowers qualifiedfor), and loan “flipping” (which occurs when alender refinances a loan without providing anynet tangible benefit to the homeowner).

In addition, a second generation of subprimelending abuses emerged in 2004 and dominatedthe market in 2005 and 2006. These predatorypractices included high-risk loan products thattypically began with a low introductory “teaser”interest rate that increased sharply after twoyears and failed to account for escrows forrequired taxes and insurance. The very design of

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these loans, which were marketed to borrowerswho could not afford these mortgages, hasforced struggling homeowners to refinance toavoid unmanageable payments, in effectdefeating the prohibition against flipping thatmany states instituted previously.

Add to this mix a historically strong housingmarket from 2002 to 2006, where prices in manyareas exceeded sustainable levels. Recordvolumes of loans were pushed through themortgage lending system, with real estatemarkets promoting homes as an investment withrapid double-digit returns. Exacerbating theseconditions were subprime loans combined withadjustable-rate mortgages (ARMs), loans withteaser rates and even negative repayment ofprincipal, loan applications with nodocumentation of ability to repay, and overlyaggressive real estate appraisers and loanbrokers.

Borrowers were routinely told that if all elsefailed they could simply refinance their loans.But when home prices stopped rising at recordrates, many borrowers found they owed morethan their homes were worth.

Although media attention has focused oncurrent borrowers with adjustable-rate loans thatwill reset to higher rates after an introductoryperiod (creating so-called payment shocks andlikely more foreclosures), the bulk of these resetsare predicted to occur in 2008 and 2009. Theproblems of the mortgage market are justbeginning; it could take up to five years for theprocess to unwind and recover.

As Exhibit B-1 shows, a large share of thesesubprime rate resets will occur throughout 2008,peaking in October. Massive foreclosures arealso expected to arise from the large numbers ofanother product, the payment option ARMs,

which are also facingsignificant payment resets.Studies have shown that,particularly as originatorswho lacked experience inmaking these loansentered the fray in asignificant way, many ofthese payment optionARMs were originatedwith lax underwritingstandards—even thoughthe majority of them arenot subprime loans.56

Exhibit B-1 shows a spikein payment option ARMresets between 2009 and2011, just after the 2008spike in subprime hybridARM resets.


MONTHLY MORTGAGE RATE RESETS (first reset in billions of U.S. dollars)Exhibit


SOURCE: Credit Suisse Fixed Income U.S. Mortgage Strategy, January 2007

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Understanding the ForeclosureProcessWhen a consumer acquires a mortgage loan ona home, the lender receives a security interest inthe property. This allows the lender to startforeclosure proceedings if the borrower fails topay the loan according to its stated terms. Whilea borrower is technically in “default” on the loanafter missing even one payment, the reality isthat many lenders wait until the loan is seriouslypast due (three missed payments—also called a“90-day delinquency”—with a fourth paymentdue) before declaring the loan in default andbeginning the foreclosure process.

The foreclosure process varies according to statelaw, but typically lasts five to 18 months. Initially,borrowers have a period of time (called thereinstatement period) during which they havethe right to “cure” their default. Thereinstatement period typically lasts three to fourmonths, although it can be as short as 21 days,as in Texas, or as long as six to 12 months.

Borrowers may cure a default in several ways:

• They may bring their account current bypaying the past due balance on their loan,including late charges and other feesassessed by the lender.

• They may renegotiate the terms of theirloan with the lender.

• They may pay off their loan by refinancingthe loan with another lender.

• They may sell the property to pay off thecurrent loan (if the home is worth morethan the mortgage).

• Or they may voluntarily convey theproperty back to the lender through adeed–in-lieu of foreclosure.

If the default is not cured by the end of thereinstatement period, a lender typically willproceed with foreclosure as permitted understate law. Although the exact process may vary,the lender generally sells the property through apublic auction or private sale and uses theproceeds to cover the amount owed on themortgage. In most states, the lender also hasthe right to pursue a borrower’s other financialassets to mitigate any default-related losses.






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Endnotes1 Mark Zandi, Chief Economist and Co-Founder,

Moody’s, 2008, “Monetary Policyand the State of the Economy,” Testimony Beforethe U.S. House Financial Services Committee(February 26, 2008).

2 More details on their methodology can be found inthe appendix of the Losing Ground report at<>.

3 Based on Center for Responsible Lending,Subprime Spillover: Foreclosures Cost Neighbors$202 Billion; 40.6 Million Homes Lose $5,000 onAverage, CRL Issue Brief, (accessed January 25,2008). (Revised and updated February 28, 2008).See Exhibit 1.

4 Mortgage Bankers Association, NationalDelinquency Survey (March 2008).

5 Ibid.

6 Based on Center for Responsible Lending,Subprime Spillover: Foreclosures Cost Neighbors$202 Billion; 40.6 Million Homes Lose $5,000 onAverage, CRL Issue Brief, (accessedJanuary 25, 2008). (Revised and updated February28, 2008). See Exhibit 1.

7 Global Insight, The Mortgage Crisis: Economic andFiscal Implications for Metro Area (Lexington, MA:Global Insight, November 26, 2007).

8 Mortgage Bankers Association, NationalDelinquency Survey (March 2008).

9 Center for Responsible Lending, SubprimeSpillover: Foreclosures Cost Neighbors $202Billion; 40.6 Million Homes Lose $5,000 onAverage, CRL Issue Brief, (accessedJanuary 25, 2008). (Revised and updated February28, 2008). See Exhibit 1.

10 Mortgage Bankers Association, NationalDelinquency Survey (March 2008).

11 Craig Focardi, Servicing Default Management: AnOverview of the Process and UnderlyingTechnology, Research Note No. 033-13C(TowerGroup, November 15, 2002).

12 If Ohio expands its commitment, as it isconsidering doing, the total dollar amount ofpublicly supported mortgage refinance funds couldexceed $800 million.

13 Mortgage Bankers Association, NationalDelinquency Survey (March 2008).

14 RealtyTrac, 2007 U.S. Foreclosure Report (January29, 2008), (accessed January 29, 2008).

15 Charles E. Schumer, Sheltering Neighborhoodsfrom the Subprime Foreclosure Storm (SpecialReport by the Joint Economic Committee, 2007), (accessed November 29,2007).

16 Ellen Schloemer, Wei Li, Keith Ernst, and KathleenKeest, Losing Ground: Foreclosures in the SubprimeMarket and Their Cost to Homeowners (Center forResponsible Lending, December 2006), (accessedDecember 1, 2007).

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17 This pattern generally holds true with fewexceptions. First, states where foreclosures arerooted in weakened job markets rather than insubprime mortgages—such as Ohio, Michigan andIndiana—have higher default rates than theproportion of subprime loans in the marketsuggests. Second, some states with high rates ofsubprime lending, such as California, have lowerdefault rates than might be expected. Perhaps thelower default rates can be explained by stronghousing market values that have resulted in highlevels of resale and refinancing. Also, as seen inExhibit 1, the delinquency rates for subprime loansare many times larger than prime loans. SubprimeARMs have even higher rates of delinquency.

18 Christopher L. Cagan, Mortgage Payment Reset:The Issue and Impact (First American CoreLogic,March 19, 2007), December 1, 2007).

19 Ibid.

20 Craig Focardi, Servicing Default Management: AnOverview of the Process and UnderlyingTechnology, Research Note No. 033-13C(TowerGroup, November 15, 2002).

21 Center for Responsible Lending, SubprimeSpillover: Foreclosures Cost Neighbors $202Billion; 40.6 Million Homes Lose $5,000 onAverage, CRL Issue Brief, January 25, 2008). (Revised dataupdated February 28, 2008). See Exhibit 1.

22 William Apgar, Mark Duda, and Rochelle NawrockiGorey, The Municipal Cost of Foreclosures: AChicago Case Study, Housing Finance PolicyResearch Paper Number 2005-1 (Minneapolis, MN:Homeownership Preservation Foundation, February27, 2005).

23 Ibid.

24 Global Insight, The Mortgage Crisis: Economic andFiscal Implications for Metro Areas (Lexington, MA:Global Insight, November 26, 2007).

25 David Evans, Public School Funds Hit by SIV DebtsHidden in Investment Pools, Bloomberg News (Nov15, 2007), (accessed January 25, 2008).

26 Global Insight, The Mortgage Crisis: Economic andFiscal Implications for Metro Area (Lexington, MA:Global Insight, November 26, 2007).

27 William Apgar, Mark Duda, Bruce Gottschall,Rochelle Nawrocki Gorey, and Angie Marks,Preserving Homeownership: Community-Development Implications of the New MortgageMarket (Prepared by Neighborhood HousingServices of Chicago, March 25, 2004), See also Larry Cordell,Innovative Servicing Technology: Smart Enough toSustain Homeownership Gains? (Research Institutefor Housing America, Conference on HousingOpportunity: Will Technology Expand HousingOpportunity, 2001). See also Amy Cutts andRichard K. Green, Innovative Servicing Technology:Smart Enough to Keep People in their Homes,paper presented at Harvard University Joint Centerfor Housing Studies Symposium: Building AssetsBuilding Communities (Cambridge, MA: HarvardUniversity Joint Center for Housing Studies, 2003).See also J. Michael Collins “Exploring the Designof Financial Counseling for Mortgage Borrowers inDefault,” Journal of Family and Economic Issues28(2):207-226.

28 J. Michael Collins “Exploring the Design ofFinancial Counseling for Mortgage Borrowers inDefault,” Journal of Family and Economic Issues28(2):207-226. See also Larry Cordell, InnovativeServicing Technology: Smart Enough to SustainHomeownership Gains? (Research Institute forHousing America, Conference on HousingOpportunity: Will Technology Expand HousingOpportunity, 2001).

29 Nevada proposed a hotline in 2007; the state isconsidering the recommendation.



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30 See note 12.

31 Previous studies suggested that counselingprograms had greater efficacy. However, today'ssubprime loan terms and the decline of housingvalues have made post-purchase counseling morechallenging.

32 Brothers Redevelopment, Inc., The ColoradoForeclosure Prevention Hotline, 2007 StatusReport. Unpublished memo. (2007).

33 Ibid.

34 Ohio Foreclosure Prevention Task Force, OhioForeclosure Prevention Task Force Combined Listof Recommendations (September 11, 2007), (accessed December 1, 2007).

35 HOPE NOW Alliance, NOW: Support & Guidancefor Homeowners, Alliance Statement (October2007), (accessed January25, 2008).

36 State Foreclosure Prevention Working Group,Analysis of Subprime Mortgage ServicingPerformance, Data Report No. 1 (February 2008), (accessed February 25, 2008).

37 Pennsylvania Housing Finance Agency,Pennsylvania Foreclosure Prevention Act 91 of1983—Homeowners’ Emergency MortgageAssistance Program (HEMAP), (accessed December 1, 2007).

38 Ohio has two “funds” to assist delinquentborrowers. The first is the “Ohio Rescue Fund” forNeighborWorks organizations, which disbursegrants of up to $3,000 to help delinquentborrowers catch up on their mortgages. Thesecond fund, the Opportunity Loan Refinance fund,operated by the OFHA, has been less successfuldue to strict underwriting requirements. The taskforce advised OHFA to expand its guidelines.

39 Equity stripping, which is a predatory practiceemployed by unscrupulous individuals, is designedto identify vulnerable homeowners who havesubstantial equity in their property with the goal of“stripping” the equity in their property. Theseequity strippers attempt to obtain title to theproperty—at below market value, as part of theterms to the transaction—and quickly attempt torid themselves of any interest the homeowner hasso the property can be sold and the equitycaptured.

40 Paul Leonard, California Office Director, Center forResponsible Lending, 2007, “Preserving theAmerican Dream: Legislative Recommendations toProtect Future Borrowers in California,” Testimonybefore the California Senate Banking Committee(August 21, 2007); See also Mortgage AssetResearch Institute, Inc. 2006. Eighth PeriodicMortgage Fraud Case Report to Mortgage BankersAssociation, <URL: (accessed April2007); Global Structured Finance Outlook, 2007:Economic and Sector-by Sector Analysis, FitchRatings Credit Policy, (December 11, 2006), p. 21.

41 Robert B. Avery, Kenneth P. Brevoort, and Glenn B.Canner, The 2006 HMDA Data. Federal ReserveBulletin (December 21, 7007), 23, (accessed Dec. 1, 2007).

42 Debbie Gruenstein Bocian, Keith S. Ernst, and WeiLi, Unfair Lending: The Effect of Race and Ethnicityon the Price of Subprime Mortgages (Center forResponsible Lending, May 31, 2006), (accessed Dec. 1, 2007).

43 J. Michael Collins, “Exploring the Design ofFinancial Counseling for Mortgage Borrowers inDefault,” Journal of Family and Economic Issues28(2):207-226.

44 State of New York Banking Department, “HALT –Halt Abusive Lending Transactions & MortgageFraud: About HALT,” Consumer Help andInformation, (accessed January 25, 2008).

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45 Colorado Department of Local Affairs: Division ofHousing, “Colorado Foreclosure Hotline: 1-877-601-HOPE,” (accessed January 25, 2008).

46 Center for Responsible Lending, SubprimeSpillover: Foreclosures Cost Neighbors $202Billion; 40.6 Million Homes Lose $5,000 onAverage, CRL Issue Brief, January 25, 2008). (Revised and dataupdated February 28, 2008). See Exhibit 1.

47 “New Law Gives Foreclosure Notice to HelpRenters,” Chicago Daily Southtown (August 31,2007).

48 Edmund L. Andrews and Louis Uchitelle, “Rescuesfor Homeowners in Debt Weighed,” New YorkTimes (February 22, 2008), more information about FHASecure see,717446&_dad=portal&_schema=PORTAL.

See also Department of Housing and UrbanDevelopment, Federal Housing Commission,Mortgagee Letter 2007-11 (September 5, 2007),available at

49 HOPE NOW Alliance, NOW: Support & Guidancefor Homeowners, Alliance Statement (October2007), (accessed January25, 2008).

50 ”More Than 200,000 Letters Sent to At-RiskHomeowners: Alliance Urges Borrowers to GetHelp Now,” HOPE NOW Alliance press release(October 31, 2007).

51 Jay Brinkman. An Examination of MortgageForeclosures, Modifications, Repayment Plans andOther Loss Mitigation Activities in the ThirdQuarter of 2007. See also HOPE NOW: Number ofHomeowners Helped Rapidly Rising, press releaseby Hope Now Alliance (January 18, 2008).

52 American Securitization Forum, StreamlinedForeclosure and Loss Avoidance Framework forSecuritized Subprime Adjustable Rate MortgageLoans, Executive Summary (December 6, 2007), 33-34, (accessed December 1,2007).

53 IFLA was launched with a $15 million grant fromthe investment management firm Paulson & Co.Inc. IFLA provides funding and training toorganizations that help homeowners negotiatealternatives to foreclosure. The majority of IFLA’sfunds will be given in the form of grants in 10 ormore states to support direct legal assistance toborrowers, to fight foreclosure, predatory lendingand abusive loan practices. IFLA will do thisprimarily by providing money to top nonprofitlegal-aid groups and law school clinics.

54 Mike Hudson and E. Scott Reckard, “MoreHomeowners with Good Credit Getting Stuck inHigher-Rate Loans,” Los Angeles Times, p. A-1(October 24, 2005). For most types of subprimeloans, African-American and Latino borrowers aremore likely to be given a higher-cost loan evenafter controlling for legitimate risk factors. See alsoDebbie Gruenstein Bocian, Keith S. Ernst, and WeiLi, Unfair Lending: The Effect of Race and Ethnicityon the Price of Subprime Mortgages (Center forResponsible Lending, May 31, 2006), (accessed Dec. 1, 2007).See also Darryl E. Getter, “Consumer Credit Riskand Pricing,” Journal of Consumer Affairs (June 22,2006); Howard Lax, Michael Manti, Paul Raca, andPeter Zorn, “Subprime Lending: An Investigation ofEconomic Efficiency,” Housing Policy Debate15(3):533-571.



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55 Based on origination volume statistics publishedregularly by Inside Mortgage Finance.

56 See e.g. Office of the Comptroller of the Currency,National Credit Committee, Survey of CreditUnderwriting Practices 2005. By the industry’s ownadmission, underwriting standards in the subprimemarket have become extremely loose in recentyears, and analysts have cited this laxness as a keydriver in foreclosures. The Office of TheComptroller of Currency (OCC) survey of creditunderwriting practices found a “clear trend towardeasing of underwriting standards as banks stretchfor volume and yield,” and the agency commentedthat “ambitious growth goals in a highlycompetitive market can create an environment thatfosters imprudent credit decisions. See also FitchRatings, 2007 Global Structured Finance Outlook:Economic and Sector-by-Sector Analysis(December 11, 2006); See also Structured Finance:U.S. Subprime RMBS in Structured Finance CDOs,FITCH RATINGS CREDIT POLICY (New York, N.Y),August 21, 2006, at 4 (noting that “loansunderwritten using less than full documentationstandards comprise more than 50 percent of thesubprime sector…” “Low doc” and “no doc” loansoriginally were intended for use with the limitedcategory of borrowers who are self-employed orwhose incomes are otherwise legitimately notreported on a W-2 tax form, but lenders haveincreasingly used these loans to obscure violationsof sound underwriting practices); See also VikasBajaj and Louise Story, Mortgage Crisis SpreadsBeyond Subprime Loans, New York Times(February 12, 2008). See also Ruth Simon, OptionARMs: Next Weakling. Fall in Home Prices, Rise inLoan Values Force Foreclosures, Wall Street Journal(December 22, 2007) (citing recent study fromMerril Lynch that states 'Merrill Lynch economistscalled option ARMs "ticking time bombs" that willstart "ticking louder next year.")

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