New research says it pays to help struggling homeowners.
Thousands of Californians have lost their homes during the housing crisis, wreaking havoc on families, as well as state and local government property tax revenue. But there is an inexpensive solution, according to a report released last week by the National Consumer Law Center.
The study focuses on programs in 19 states that require mortgage companies to have supervised meetings with troubled homeowners and neutral third parties, such as housing counselors, before foreclosing on a property.
“Evidence shows that effective foreclosure mediation can keep paying borrowers in their homes for the long term while also saving billions of dollars for taxpayers and investors,” said Geoff Walsh, an attorney at the National Consumer Law Center and author of the report.
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California doesn’t mandate many of the protections that the report says are crucial for preventing fraud and abuse. State law requires a mortgage servicer to file a statement that says it tried to contact the homeowner 30 days before it files a notice of default. Unlike some other states, California does not require a third party to supervise discussions between a servicer and homeowner.
In addition to supervised meetings, Walsh notes that requiring mortgage companies to provide documentation proving they have assessed whether investors will get more money from a modification than foreclosure also helps ensure that investors’ interests are best served.
A 2011 study [PDF] from the California Reinvestment Coalition, a group that advocates for increased access to credit on behalf of low-income communities, estimated that foreclosures in California have resulted in more than $500 billion in direct and indirect costs. Foreclosures have caused a $424 billion loss in real estate values, resulting in an estimated $3.8 billion lost in property tax revenue, the study notes. Local government agencies have spent an additional $17 billion to absorb the cost of increased services to care for these properties.
Federal oversight of mortgage companies’ efforts to provide loan modifications has failed, Walsh said, leaving states with a greater responsibility to oversee the process. He hopes more states will implement effective programs and found that other states have been able to recoup the costs of the programs through fees that lenders pay to file foreclosure documents.
In addition to the 13 million families that already have lost their homes, Amherst Securities Group LP predicts 8 to 10 million mortgages are likely to default and enter foreclosure before the crisis is over.
California Watch reached out to homeowners in the state using the Public Insight Network, an engagement platform that connects journalists with people who want to share their knowledge and insights. Homeowners spoke of the challenges with trying to navigate the loan modification world.
Kevin Mims of Sacramento said he stopped making payments to Bank of America in October 2008. He assumed it was just a matter of time before the bank foreclosed on his home and he started looking for a place to rent. In July, the company told him that it would modify his loan if he made three monthly payments at a new rate. Despite making the payments, the deal never materialized, he said. With the help of an attorney, he finally was able to get a permanent modification 15 months later.
“It was kind of a turbulent period because they would call me every now and then and say, 'Well, you’ve never made a payment, so we’re going to foreclose on you.' And I said, 'I’ve made tons of payments, I’ve made every payment.' It was like one branch of the bank didn’t know what the other branch was doing,” Mims said.
Bank of America did not respond to a request for comment in time for publication.
A settlement agreement reached last week between major mortgage companies and state attorneys general is expected to provide some relief for current homeowners by reducing the amount of principal they owe on their mortgages. Mims, who now owes more on his two mortgages than his house is worth, hopes that he is eligible.