Progress Illinois

On January 7, President-elect Barack Obama declared his intention to address the foreclosure crisis soon after being sworn in. The challenge now for advocates is to ensure that the details of the plan match Obama’s rhetoric and truly assist homeowners and renters.

Strong federal mandates are needed because the foreclosure crisis is expected to worsen. At the end of last year, credit agency TransUnion estimated that 4.7 percent of all mortgages were delinquent by 60 days or more. And they've projected that this figure may surpass 7 percent by the end of 2009.

Meanwhile, the voluntary actions on the part of the lending industry to assist homeowners have so far been largely ineffective. Housing counselors across Illinois recently reported that 75 percent of loan servicers rarely agree to workout plans that allow homeowners to maintain their homes. The worst offenders were: America's Servicing Company (a subsidiary of Wells Fargo), First Franklin Loan Services/Home Loan Services, Bank of America, Saxon Mortgage, American Home Mortgage Servicing, and Aurora Loan Services (a subsidiary of Lehman Brothers).

These survey findings -- reported by Housing Action Illinois in "Who's Serving Whom? Analyzing The Frequency Of Loan Servicer Modifications" (PDF) -- provide evidence to support a federal moratorium on home foreclosures, as well as legislation to systematically and automatically modify loan terms and other measures.

A truly comprehensive plan to address homeowners and renters impacted by the foreclosure crisis should include the following six components:

A temporary federal moratorium on home foreclosures

President-elect Obama has called for financial institutions that participate in the federal government’s $700 billion financial rescue plan to adhere to a homeowner's code of conduct, including a 90-day foreclosure moratorium for any homeowner who is making a  good-faith effort to pay their mortgages.

To be truly effective, however, a foreclosure moratorium needs to cover all servicers. A better moratorium would allow struggling homeowners to delay a foreclosure sale by up to nine months, so long as they make reasonable monthly mortgage payments to their lender and maintain the property responsibly.

Federal legislation to systematically and automatically modify loan terms

A plan developed by Federal Deposit Insurance Corporation (FDIC) Chairman Sheila Bair would pay servicers $1,000 for each modification and have the government share up to 50 percent of any loss if a modified loan goes on to default.

The cornerstone of the plan is the requirement that participating servicers must systematically review all loans in their portfolios. Each loan will be subjected to a test to determine whether it is more beneficial to modify or to foreclose. Loans passing the test must be modified. In contrast to claims from some critics, the legislation will not allow homeowners without adequate income to maintain their home.

Strengthen requirements on servicers to modify loans

Legislation should make it the legal duty of mortgage servicers to engage in reasonable loss mitigation activities before foreclosing, such as reducing a loan’s interest rate and/or principal and lengthening the term of the loan.

On December 1, 2008, a hedge fund, Greenwich Financial Services, sued Countrywide Financial Corporation demanding that they compensate holders of some mortgage-backed securities if the lender changes the terms of the loans. The case may be dismissed on its merits, as this is a largely untested area of law. Nonetheless, securing loan modifications will be difficult as long as threat of more lawsuits against servicers exist. Legislation mandating that servicers attempt to modify loans will significantly lessen the chance of future lawsuits.

Allow bankruptcy judges to modify loan terms on primary residences

The bankruptcy code currently contains a loophole that allows bankruptcy judges to modify the terms of mortgages on investment properties and vacation homes but not on primary residences. In October 2007, our own Sen. Dick Durbin introduced legislation to close this loophole, but the opposition from the lending industry has kept it from passing.

Durbin’s legislation, however, has built-in protections for lenders: only families who fail a means test and therefore face foreclosure would be eligible; interest rates would be set at commercially reasonable, market-based rates; the loan term would not be able to exceed 40 years; and the principal balance would not be able to be reduced below the fair market value of the property.

Provide adequate resources for HUD-certified housing counseling agencies

The $360-million National Foreclosure Mitigation Counseling (NFMC) Program was launched in December 2007 with funds appropriated by Congress to increase the availability of foreclosure counseling services across the country. Illinois has received nearly $9.9 million and it is estimated that this funding will assist 34,938 households.

The federal government must continue to provide adequate resources to HUD-certified counseling agencies to insure that homeowners at risk of foreclosure have access to quality housing counseling.

Provide additional resources for renters impacted by foreclosures

A promising recent policy development is Fannie Mae’s December 15, 2008 announcement that it would sign new leases with renters living in foreclosed properties owned by the company.

Almost all financial institutions have policies to evict renters after foreclosure. State and federal law support these policies. A positive step to change this situation would be passage of federal legislation to require entities that take ownership of rental properties in foreclosure to honor the current lease, to provide at least 90 days notice prior to terminating the tenancy (similar legislation became law in Illinois earlier this year but needs to be strengthened) and to provide for transfer of Section 8 contracts to new owners.

It has been widely reported that many of the banks that have so far received funds from the $700 billion federal bailout have not used the money to make access to credit easier or to invest in communities. Instead, banks have often used the funds to pay back their own debt. It’s far past time that the federal government require more from the financial services industry to assist homeowners and make amends for the part they played in causing the foreclosure crisis to begin with.

Bob Palmer is Policy Director for Housing Action Illinois, whose mission is to increase and preserve the supply of decent, affordable and accessible housing in Illinois, particularly for households with the lowest incomes.