With flaws in the mortgage marketplace revealed almost daily it comes as no surprise that thoughts about fixing the system have begun to emerge.
On Capitol Hill, both Sen. Chris Dodd (D-CT), chairman of the Senate Banking Committee and Rep. Barney Frank (D-MA), chairman of the House Financial Services Committee, have begun to drop hints that it may be time for the federal government to sponsor foreclosure relief efforts nationwide.
But what steps can be taken by the government? Isn’t a mortgage agreement a contract? And don’t lenders have a right to foreclose when borrowers fail to make their payments?
It turns out that mortgages are indeed lawful contracts between borrowers and lenders. However, lender foreclosure rights have often been limited, especially when large numbers of property owners cannot repay existing mortgage debt.
“People may be surprised to learn that the ability to foreclose is far from absolute,” says James J. Saccacio, chief executive officer of RealtyTrac.com, the nation’s leading foreclosure marketplace. “For instance, there have been many foreclosure moratoriums. These are typically short-term emergency measures designed to protect property owners until markets return to normal. Such moratoriums have often been good for both borrowers and lenders because as values rise the ability to fully repay debts increases.”
A look at foreclosures during the past 75 years shows that the enforcement of mortgage contracts has repeatedly been stopped or limited as a matter of public policy. As examples:
During the Depression, at least 25 states banned farm foreclosures. (See: Farm Foreclosures in the United States During the Interwar Period by Lee J. Alston).
In 1934, the U.S. Supreme Court ruled in the Blaisdell case that the state of Minnesota had the right to suspend foreclosures.
During the 1980s, the Farmers Home Administration established farm foreclosure moratoriums.
In places impacted by hurricanes, earthquakes and floods, huge mortgage holders such as Fannie Mae and Freddie Mac have suspended late fees, collections and foreclosures; stopped disaster-related negative reports to credit bureaus; temporarily reduced or suspended monthly payments and even lengthened loan terms.
The Soldiers’ and Sailors’ Relief Act of 1940 prevents foreclosures while a borrower is on active military duty and unavailable to attend a court hearing.
Rather than stopping foreclosures by blanket legislation, an alternative approach has been to help borrowers directly. At least three states actually advance money to borrowers in limited circumstances:
In Pennsylvania, as much as $60,000 is available under the state’s Homeowner’s Emergency Assistance Program (HEMAP). Applicants can use the program to bring loans current or to support monthly payments for as long as two years.
In Massachusetts, the state operates the MI Plus program. This plan is somewhat like private mortgage insurance (MI) but with a twist: If a borrower finances a home with coverage under the state’s MassHousing insurance program, each policy automatically has a hardship provision which will pay as much as $2,000 a month for up to six months if someone loses a job or has another short-term difficulty which could result in a mortgage foreclosure.
Lastly, North Carolina has evolved the Home Protection Pilot Program and Loan Fund, a plan designed to assist those who have lost jobs. Under the program qualified borrowers can receive a zero-interest loan up to $20,000; mortgage payments for as long as 18 months for someone in a job training program; or enough to bring a loan current. A borrower can have up to 15 years to repay the loan.
“We don’t know what steps — if any — the federal government will take concerning the current foreclosure crisis, when such steps will be taken or what specific proposals will be adopted,” says Saccacio. “What we do know is that a number of common-sense and useful programs have been developed by several states and under the Soldiers’ and Sailors’ Relief Act.
“It’s plain that other states will want to adopt programs similar to those now in place in Massachusetts, Pennsylvania and North Carolina,” Saccacio continued. “Each is a clever example of low-cost planning that offers foreclosure relief to distressed borrowers. Interestingly, each plan also has a funding and repayment mechanism so that money paid out to borrowers is ultimately returned to the state.”
Peter G. Miller is the author of The Common-Sense Mortgage and is syndicated columnist in more than 110 newspapers.