State Strategies to Address Foreclosures

Many factors have shaped the recent spike in subprime mortgage foreclosures, including climbing interest rates, falling housing prices, financially overextended buyers, nontraditional mortgage products, speculation, and predatory lending practices that jeopardize the ability of homeowners to pay their mortgages. This Issue Brief examines current and proposed state actions that address challenges in the subprime lending market, help families avoid foreclosure, and prevent predatory lending practices.

During the first quarter of 2007, the percentage of home mortgages entering foreclosure reached its highest point in 28 years. An estimated 2.4 million borrowers with subprime home loans originated between 1998 and 2006 have already lost or will lose their homes to foreclosure.

Foreclosures often cluster in certain neighborhoods, particularly those that are predominantly low-income or minority. Multiple foreclosures in a community can lead to lowered property values, crime, and the deterioration of property, which can cut into a state’s tax revenues.

States have a long history governing mortgage lending and foreclosure practices through statute and regulation. States are well-suited to reach out to troubled borrowers to help connect them with the resources necessary to either avoid or mitigate the impact of foreclosure. In response to the recent wave of foreclosures, state policymakers are tailoring initiatives to meet the needs of their citizens and the challenges they face, including:

• Protecting consumers from foreclosure “rescue” scams;
• Connecting borrowers to counseling and resources;
• Facilitating workouts and refinances by working with loan servicers and establishing foreclosure prevention funds; and
• Slowing the foreclosure process.

At the same time, states are acting to prevent future foreclosures by:

• Banning common predatory practices;
• Adopting regulatory guidelines for subprime and nontraditional mortgage products;
• Tightening regulation of mortgage brokers and loan originators;
• Increasing criminal penalties for mortgage fraud, enforcing existing lending laws, increasing funding for supervision, and pursuing violators; and
• Educating homebuyers.

States are using the above strategies to prevent unnecessary foreclosures while working to preserve homeownership and the availability of financial options for low-income residents.

Also see:

• Presentation: State Strategies to Address Foreclosure
  A presentation to the Federal Reserve Board of Governors Division of Community Affairs (October 9, 2007)
  Stephanie Casey Pierce, Policy Analyst, Special Projects
  Kheng Mei Tan, Policy Analyst, Housing & Community Development