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Out-Of-State Loan Servicers Undermining Mortgage Help

JEFF GENTES AND ERIN BOGGS

April 24, 2010

Foreclosure limbo: It's better than foreclosure for most homeowners, but still costly and stressful. About 8,500 Connecticut homeowners are stuck in foreclosure limbo, and the number grows daily. The Connecticut Fair Housing Center is on the front lines of the foreclosure crisis. Many of the homeowners we see could keep their homes through government programs but are in foreclosure limbo because out-of-state mortgage servicers fail to participate in good faith in Connecticut's Foreclosure Mediation Program. A bill before the General Assembly would fix this problem.

Since it began in July 2008, the mediation program has helped more than 3,800 residents keep their homes. Its specialists facilitate conversations between homeowners and the lenders or servicers. Too often, mediation is the first time many homeowners are able to speak to someone with authority about their foreclosure case.

But many out-of-state servicers frustrate the program's goals. They have more incentives to foreclose than to modify loans. Servicers charge homeowners late fees and default fees, fees not available after a loan is modified. They collect those fees and recover litigation costs far more quickly through a foreclosure sale than through a modification. And hiring staff to process modifications is far more expensive than the nearly automated process of foreclosure.

As a result, servicers delay modifications or refuse to modify even when the homeowner is entitled to relief and even though the loan's investors would benefit.

If a homeowner does not participate in good faith, mediation is terminated and the homeowner loses his home. Conversely, if a servicer refuses to participate in good faith, homeowners miss days of work and lose the money needed to keep their homes. Thousands of hours have been wasted in mediation at virtually no cost to the servicer.

To address the problems caused by servicers dragging their feet, House Bill 5270 requires parties to mediate in good faith. The bill also requires that servicers provide basic information, such as itemized bills, so homeowners can review the more than 15 separate charges imposed by servicers and their attorneys.

Everyone knows foreclosures cost homeowners their homes; they also cost Connecticut towns and neighbors. Towns spend, on average, more than $19,000 in police, fire and maintenance costs per foreclosure, while neighbors see their property values plummet from $2,000 to $6,800 per foreclosure. If this measure is passed and results in resolving even half of the current mediation cases, Connecticut towns and taxpayers would save more than $80 million, and neighbors would save hundreds of millions through preserved home value — all for the program's annual cost of $4 million paid by the state.

House Bill 5270 has one flaw. When the mediation program began in 2008, it was meant to be a temporary bandage on the nascent foreclosure crisis. The crisis has worsened since, and studies projecting minimal job growth in Connecticut this year and next bode ill for the unemployed and underemployed struggling to pay their mortgages. Nearly one in 12 Connecticut homeowners is more than 90 days behind on mortgage payments or in foreclosure — a new high — and payment shock from toxic adjustable rate mortgages will strike thousands in Connecticut over the next two years.

The program, especially if the proposed bill succeeds in unclogging the docket, will yield real results. As written, however, the bill would extend the program for only one year, to June 30, 2011. The sunset date should be eliminated — preventing foreclosures will continue to benefit Connecticut even after the foreclosure crisis passes.

Homeowners facing foreclosure will always be at a disadvantage — they lack the resources and experienced attorneys of the servicers. But the legislature can give them a chance against out-of-state mortgage servicers who abuse mediation, by strengthening and extending the foreclosure mediation program.

•Jeff Gentes is the foreclosure prevention staff attorney and Erin Boggs is the deputy director of the Connecticut Fair Housing Center.