Foreclosure workouts not working, AGs tell banks

Legal News Line Oct. 10, 2008, 11:16am

Tom Miller (D-Iowa)

Lisa Madigan (D-Illinois)

Jerry Brown (D-California)

Greg Abbott (R-Texas)

(Legal Newsline)--Attorneys general from 10 states are coordinating efforts to shore up the country's mortgage crisis following news that the rate of foreclosures continue to rise.

On Wednesday, a task force - The State Foreclosure Prevention Working Group -- that includes attorneys general from Illinois, California, Arizona, Ohio, Texas, Iowa, North Carolina, Colorado, Massachusetts, Michigan issued a letter to 16 mortgage lending companies urging them to follow the loan modification model put forth in the multi-state settlement with Countrywide Mortgage Corp., announced on Monday.

"It has become clear that the scope and scale of this foreclosure crisis," the letter written by Iowa Attorney General Tom Miller stated, "demands a more efficient response than handling individual borrower cases one at a time."

Illinois Attorney General Lisa Madigan and California Attorney General Jerry Brown negotiated a deal with Bank of America to settle predatory lending lawsuits from 11 states against Countrywide Financial Corp., which Bank of America acquired July 1.

The Countrywide loan modification program includes the suspension of some foreclosures for eligible borrowers with subprime and adjustable rate loans, waiver of late feels, and increased counseling to ensure loan modifications efforts are taken place before foreclosures occur.

A study commissioned by the task force and released last week discovered that despite the rapid increase in foreclosures, mitigation efforts have actually decreased in the last year. It found that eight out of 10 homeowners facing foreclosures are not "on track for any loss mitigation outcome," Miller wrote.

Illinois Attorney General Lisa Madigan said the report makes clear the need for action.

"Unfortunately, this report shows that while the foreclosure crisis continues to intensify, lenders have not effectively sustained their efforts to help borrowers avoid foreclosure," Madigan said. "Now, nearly eighty percent of borrowers who are seriously delinquent are still not getting the help they need to try and save their homes."

The letter states that the time for comprehensive action has come and that all lenders must develop loan workout program that will curb the trend of foreclosures, which according to the report, has grown to the point that 38 percent of all homeowners with a subprime loan were facing foreclosure as of May 2008.

"The message," Madigan said, "from this report is clear: lenders must develop a broad and systematic approach to putting homeowners into affordable loans that will stave off the devastating effects of foreclosures in our communities."

Facts in the report showed a grim picture of the success of loan counseling efforts to date. Loan modification efforts for at-risk homeowners dropped by 28 percent from January to May, the lowest since 2007.

"We urge you in the strongest possible terms," Miller wrote in the letter, "to adopt a comprehensive, effective and streamlined loan-modification program as soon as possible."

Lending institutions that were sent the letter included Citi, Chase, Wells Fargo and HSBC, among others.

Though not a member of the task force, Texas Attorney General Greg Abbott proposed a series of foreclosure prevention measures to his state's three largest lenders in a meeting Thursday.

"Mortgage lenders, loan servicers and public officials must work cooperatively on behalf of Texas homeowners who are affected by the looming housing crisis," Abbott said. "Because of the housing industry's tremendous economic impact, resolving this issue is important to the Texas economy's continued growth and expansion. We believe that the proposals laid out in today's meeting offer real solutions that will help keep Texans in their homes."

Abbott met with representatives from Countrywide Mortgage, Houston-based Litton Loan Servicing and Dallas-based EMC Mortgage.

Abbott's plan involves five measures, according to a press release issued by the Texas Attorney General's office on Thursday. Lenders should provide long-term solutions to customers with adjustable rate mortgages. Lenders must also work to mitigate loans first, collect second.

Brown urged companies to engage customers in a non-threatening manner before sending delinquent homeowners to collections.

Next, Brown wants the lenders to create an in-house committee to address consumer complaints and to improve communication with customers.

Finally, Brown's plan calls for lenders to waive penalties and fees in working out a long-term solution to enable homeowners to save their homes.

Brown said his office would follow up in 30 days seeking specific signs of action on his plan.

Meanwhile in Southern California, San Diego City Attorney Mike Aguirre is expected to announce todau that he will sue other lenders - the exact lenders he has not yet released - who used subprime loans and predatory lending practices to contribute to the housing crisis.

Aguirre was the first city attorney to sue Countrywide Mortgage Corp. and an active proponent of the need for a foreclosure moratorium to force banks to do more to modify loans.

Illinois took action last week to bolster loan modification efforts when it passed the Homeowners' Rights Act. The act, which takes effect on Jan. 1, 2009, will require lenders to provide borrowers with a statement of their legal rights and options when they are served with a foreclosure suit. This statement must advise homeowners that they can sell their home, refinance or pay off the loan during the redemption period, according to the attorney general's office.

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