HB 71 Stopping foreclosure

HB 71 Foreclosure as the Last Resort

What would this bill do?

Require foreclosing parties to provide homeowners with foreclosure alternative applications prior to foreclosure and create a mechanism for providing borrowers with a standardized and meaningful explanation for the reasons they may be denied a loan modification.

Require that that every mortgage servicer provide homeowners with foreclosure alternative packets and explore all available foreclosure alternatives options with them before beginning any foreclosure activities.

Require that all foreclosure activities cease until the borrower has been reviewed for all available programs.

Require that the foreclosure party submit an affidavit disclosing the specific basis for the denial of a loan modification, including the inputs and outputs of any loss mitigation calculations and all programs for which the borrower was considered.

Provide a mechanism for a homeowner to dispute a modification denial based on failure of the foreclosing party to engage in a good faith review of foreclosure alternatives.

Provide a public enforcement mechanisms to safeguard against systemic abuses Center for Responsible Lending, Lost Ground, 2011: Disparities in Mortgage Lending and Foreclosures, (2011).

Center for Responsible Lending, Fix or Evict? Loan Modification Return More Value than Foreclosures, (2011).

History

More than 2.7 million households have lost their homes to foreclosure and the nation is not even halfway through the foreclosure crisis. "The policy choices we make now regarding loan servicing and loan modifications have the potential to influence both the duration and the severity of the crisis."

Underwater mortgage debt and foreclosures are the primary drag on our economy. It is projected that by the end of 2014, our economy will experience $1 trillion in losses to borrowers, local governments, and financial institutions as a result of the housing crisis. Even though monthly payment reducing modifications would return more value to the investor, help stabilize the economy, and keep more families in their homes; the number of borrowers facing foreclosure continues to outpace loan modifications at a rate of twelve to one.

The system is currently biased toward foreclosure sales rather than sustainable loan modifications. Few mortgages are restricted from modification; however servicers are not required to provide foreclosure alternative options to homeowners. Unless servicers are required to provide loss mitigation and loan modification options to borrowers in need, millions of homeowners will lose their homes and the negative results will continue to spill-over into our communities, our state and our economy. Loan modifications are much less costly than foreclosures and contribute to our economy as a whole. With tens of thousands of foreclosures still on the horizon and 20 percent of all homes in Colorado underwater, there is an urgent need for policymakers to respond with measures to keep families in their homes and stabilize the housing market and the economy.

Why is this bill needed?

Colorado's rate of mortgage foreclosure has risen to unprecedented levels, both for prime and subprime mortgages.

Foreclosures are expected to continue because homeowners will not be able to afford payments due to rising adjustable rate mortgage payments, continued unemployment and continued underemployment.

Foreclosures create spillover costs for the entire community. The Center for Responsible Lending estimates that by
2012, the foreclosure crisis will strip neighboring homeowners of $1.9 trillion as foreclosures drain value from
homes located nearby.

As a result of depressed home values, 1 out of 5 homeowners in Colorado is "underwater;" owing more on their mortgage than their home is worth. This equates to more than $9 billion in negative equity for Colorado homeowners.

It is estimated that homes in foreclosure experience a 22% decline in value. Home values are based on sales surrounding homes - so the foreclosure sales prices are directly impacting surrounding home values and thus transferring to decreased property tax revenues while creating increased demand for more local services in the form of maintenance, inspections, trash removal and increased public safety calls.

Loss Mitigation, a Win-Win for the Investor and the Borrower

An investor can lose between 49% and 75% of the total unpaid principle on a foreclosed mortgage through legal and servicing fees, property maintenance, sales costs, and depressed values. In almost all cases, payment reducing- modifications would return more value to the investor than a foreclosure, even at high modification re-default rates. Although lower payments reduce monthly cash flows to investors, they also reduce re-default risk and make the mortgage payments more sustainable in the long term.
By utilizing a Net Present Value Test (NPV), a comparison of financial outcomes can be calculated to determine whether foreclosure or modification will best serve the financial interest of the investor. NVP positive case - the expected return to investors from a modified loan is greater than the expected return from foreclosure. The system is currently biased toward foreclosures. Servicers generate their profits through default-related fees. They do not earn much through successful foreclosure avoidance. The industry compensates foreclosure lawyers based on the number of foreclosures they complete. Investors themselves often claim "that they are not preventing modifications from proceeding and have voiced
concern that servicers are not acting in their best interest."

For more information contact:
Corrine Fowler. | Campaign Director
Economic Justice | corrine@progressivecoaltion.org
Direct Line: 303 867 0302 | Cell: 720 296 8389