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Foreclosure Prevention and Protections

Overview

As of October 2010, 2.5 million homeowners have been foreclosed upon, and another 5.7 million are at imminent risk of foreclosure.¹ Foreclosure threatens financial security and is a devastating experience for a household’s finances, as homeownership is still the single largest source of equity for American households. Though the country is emerging from this crisis, foreclosures continue to occur with little scrutiny, and homeowners and entire communities are left with few tools to recover. To address these issues, states can adopt policies and programs that prevent unnecessary foreclosures from occurring and protect homeowners during the foreclosure process. They can also help those who have lost their homes recover after a foreclosure and can stabilize communities after properties have been vacated.

Policy Ratings

To see state-by-state policy data, click here.

Elements of a Strong Policy

Based on the expertise of the Center for Responsible Lending, Center for American Progress, National Consumer Law Center, and Center for Community Progress, CFED considers a state’s foreclosure policy strong if it meets the following criteria:

1. Preventing foreclosures: Does the state require review in the presence of a neutral third party? An effective strategy for preventing unnecessary foreclosures is to ensure that the process takes place with the presence of a neutral third party educated in the state’s foreclosure laws. This review happens automatically in ‘judicial foreclosure’ states, where the foreclosure process is overseen by a judge in court. However, in ‘non-judicial foreclosure’ states, where foreclosure takes place without automatic court involvement, states can establish programs that require a mediator to oversee the process.² Strong mediation programs automatically schedule homeowners for mediation instead of requiring homeowners to request it and do not require homeowners to bear the full cost of mediation.³
2. Protecting homeowners during the foreclosure process: Does the state regulate mortgage servicers? To protect homeowners during the foreclosure process, states should regulate general mortgage servicing conduct and practices related to borrowers at risk of foreclosure. These regulations can take a number of forms and address a wide range of practices, including establishing a duty of good faith and fair dealing, restrictions on fees and charges, protections regarding the allocation of payments, or a requirement to disclose the financial analysis used to decide whether to let the borrower go into foreclosure (commonly known as an NPV test).⁴
3. Helping borrowers recover after a foreclosure: Does the state ensure foreclosed upon homeowners are not burdened with insurmountable debt? A deficiency judgment is a court order that makes a homeowner personally liable for unpaid debt. In the case of a foreclosure, if a property does not sell for a price that covers the value of the mortgage loan, a homeowner may be issued a deficiency judgment. Homeowners face foreclosure because of financial distress; allowing mortgage holders to pursue deficiency judgments can create an overwhelming debt obligation from which a homeowner can never recover. States should abolish deficiency judgments or limit the amount or circumstances for which a mortgage holder can pursue them.
4. Stabilizing communities after properties have been vacated: Does the state enable strong management and redevelopment of foreclosed properties? When a property is vacant for a prolonged period of time, the surrounding community can be negatively affected; the vacant property can create fire and safety hazards, or invite vandalism and crime. This neighborhood blight can lead to declining adjacent property values and the loss of property tax revenue. States can minimize blight through strong management of foreclosed properties. One management strategy is to create a land bank – a governmental or quasi-governmental entity that can acquire, hold and manage foreclosed properties and return them to productive use. Although land banks are established at the local level, states must enact legislation that enables their creation via local government.

Footnotes

1. Sara Weed and Sonia Garrison, Foreclosure as a Last Resort: States Can Stabilize the Housing Market by Preventing Unnecessary Foreclosures, (Durham, NC: Center for Responsible Lending, 2010), http://www.responsiblelending.org/mortgage-lending/policy-legislation/states/20101021-State-Loss-Mit-Brief-Final.pdf.
2. It would be difficult for a state to change from a non-judicial to a judicial foreclosure process, as it requires an often expensive overhaul of the judicial system to accommodate a more time- and cost-intensive process.
3. According to a June 2010 report from the Center for American Progress, mediation programs with automatic scheduling have significantly higher participation rates than opt-in programs; consistently, 70-75% of homeowners participating in automatically-scheduled mediation reach settlement. Opt-in mediation programs see a wider range of results, with a settlement rate as low as 3% for participating homeowners in New York.
4. A net present value (NPV) analysis is a test that servicers perform to decide whether it is more profitable to modify a loan and accept lower payments over time or to let the borrower go into foreclosure. Requiring these analyses to be made public means a homeowner has evidence to present in a court appeal if a mortgage servicer is not acting in good faith.