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Is your state unfriendly towards homeowners? Probably. Further, most states are particularly unfriendly towards homeowners being foreclosed upon.
A new report from the National Consumer Law Center (NCLC) reveals that three out of five states allow for so-called fast-track foreclosures without any court oversight. In addition, the report, titled “Foreclosing A Dream: State Laws Deprive Homeowners of Basic Protections” found that 33 states do not require direct notification of homeowners when a lender begins the foreclosure process. As a result, state foreclosure laws may actually be contributing to the current foreclosure crisis.
“The bottom line is that most state laws are not part of the foreclosure crisis solution today; the are a big part of the problem,” explains John Rao, NCLC staff attorney and co-author of the report. “Most Americans not well-versed in property law would assume that homeowners have greater rights than renters, or at least equal rights. The stark reality is that while most states updated their landlord/tenant laws decades ago to give renters basic due process protections in the eviction process, no similar reform effort has been made to assist homeowners in the foreclosure process. Many state foreclosure laws were enacted in the 19th and 20th centuries and have gone largely unchanged since that time. These laws came into effect at a time when the residential mortgage industry, to the extent it existed at all, bore no relation to what exists today. Significantly, these laws pre-date the enormous changes in the mortgage market that began in the 1980’s”
Changing laws at the state level to protect homeowner rights will not bring an end to the financial crisis, according to NCLC experts. It will, however, help to slow the pace of foreclosures giving other efforts such as the Obama Administration’s stimulus and housing plans time to take effect and for the effect to be felt by ordinary Americans.
“The foreclosure crisis continues to spin out of control. Modernization and improvement of state foreclosure laws can significantly help blunt the impact of the crisis on individual homeowners and communities,” said Geoff Walsh, staff attorney and co-author, National Consumer Law Center. “The method by which homes are foreclosed in this country is almost exclusively controlled by state law. States have historically decided under what circumstances a homeowner can lose a home to foreclosure and what procedure a mortgage holder must follow. This traditional role for states presents a tremendous opportunity for state policymakers to take a fresh look at their foreclosure laws. While reform of state laws will not end the current foreclosure crisis, it can significantly reduce the number of foreclosures.”
Among the state level reforms suggested in the NCLC report are:
Mandate judicial supervision over foreclosure proceedings of all residential mortgages. Currently, 30 states and the District of Columbia allow mortgage holders to bypass the courts and due process to move directly to take away and auction off homes belonging to homeowners the mortgage lender alleges have fallen behind in their payments. By allowing mortgage holders to bypass the courts and use non-judicial procedures to take homes away from their owners creates enormous barriers for homeowners who want to assert legal claims or raise defense against lenders, servicers and mortgage holders. The NCLC recommends that states either abandon the power of sale method and require judicial foreclosure or they should incorp0rate essential due process protections into the existing non-judicial procedure.
Require mortgage holders to consider loss mitigation, including loan modification and other workout alternatives, as a condition to allowing foreclosure of a home. In every state but two (California and Connecticut), mortgage holders can move directly to foreclosure without being required by state law to consider or discuss ways to avoid loss of the home with homeowners. States have broad authority to set conditions upon a mortgage holder’s right to foreclosure. For example, states have always had the authority to require mediation in certain categories of disputes and could require mediation in home foreclosure cases.
Require that homeowners be given a right to cure a default by catching up on missed payments, without penalty, at least 60 days before a mortgage holder demands immediate full payment of the entire mortgage balance and before beginning any foreclosure proceeding. Mortgage holders in 29 states have no obligation under state law to stop a foreclosure once a foreclosure proceeding has begun even if the homeowners comes up with the funds to catch up on the delinquent payments and all incurred penalties and fines. According to the NCLC report, homeowners should be sent a notice that clearly informs them that before the end of the designated time period, they can stop the foreclosure by paying up the installments they are behind without payment of any default related costs or fees.
Guarantee homeowners the right to reinstate the mortgage by paying the arrearage and costs up to the time of a foreclosure sale. Nearly half of the states have enacted statues that provide for this right to reinstate a mortgage after the holder demands payment of the entire loan balance (acceleration). Such laws are cost neutral for the mortgage holder because borrowers typically pay all reasonable foreclosure costs incurred up to the time of reinstatement. State law should mandate a form of notice to homeowners that provides detailed information about the foreclosure process and steps the homeowner can take to avoid foreclosure, including the right of reinstatement and loan modification options.
Require that homeowners be personally served with the notice of sale or foreclosure complaint. There is no requirement that homeowners in 33 states or the district of Columbia be personally served with a foreclosure notice or legal documents that start a court foreclosure case. State laws should, according to the NCLC, require that no matter which type of foreclosure proceeding is permitted, the mortgage holder must provide proof of personal service of the legal documents which both commence the foreclosure proceeding and schedule the sale, or the mortgage holder must document repeated good faith attempts to make personal service on the homeowners.
Create and adequately fund programs that provide emergency financial assistance to homeowners facing foreclosure. At least eight states (Connecticut, Maryland, Minnesota, New Jersey, North Carolina, Pennsylvania and Washington) already have statewide programs offering assistance to homeowners experiencing temporary financial difficulties such as loss of employment, illness, disability, death, divorce or legal separation.
Prohibit mortgage holders from pursuing homeowners for deficiency judgments after foreclosures. Mortgage holders in 36 states and the District of Columbia can currently pursue so-called “deficiency claims,” in which the mortgage holder seeks to reclaim the difference between the amount owed on the loan and the price at which the foreclosed property was sold, against homeowners even after the foreclosed home has been sold at auction. Deficiency judgments can drive former homeowners into bankruptcy or burden them with an insurmountable debt obligation. Deficiency judgments can also create an unfair windfall for mortgage holders and reward them when their lack of marketing and publicity leads to a foreclosure sale at a winning bid far below market value. All states should simply enact outright bans on deficiency judgments after home foreclosures, according to the NCLC.
In addition to modernizing the homeowner “unfriendly” laws cited above, the NCLC also advocates improving foreclosure legislation by:
Providing homeowners with a statutory right to redeem and reacquire title to their home, for a fixed period of time after a foreclosure sale. “Redemption” after a foreclosure sale allows a homeowner a fixed period of time in which to set the foreclosure sale aside and regain title to the home by paying the sale price, interest and costs of the sale. The payment compensates the mortgage holder or other purchaser for their financial outlay. The right to redeem after a sale should uniformly apply to all residential mortgage foreclosures.
Require judicial supervision over the accounting of foreclosure sale and proceeds and a prompt release of any surplus to borrowers. In many states, the accounting of sale proceeds and the distribution of any surplus left after payment of the mortgage debt are handled almost entirely by the mortgage holder or a private trustee, without any explicit procedures or formal court review.
“In recent months, a wave of foreclosures has swept million of American families from their homes. The magnitude of this crisis defies easy comprehension: more than 8 million American families are expected to lose their homes to foreclosure in the next four years. Much has been written about the financial and economic causes of this disaster. Much less notice has gone to another factor that has accelerated and multiplies this grave loss of homes and savings: antiquated state laws that in some ways afford fewer protections to homeowners than to renters,” the NCLC report concludes.
View the entire report online at http://www.consumerlaw.org/
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