Banks would foot the bill to buy homeowners more time

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Stressed borrowers ought to be given the opportunity to pursue loan modification remedies before the lender forecloses on their home.

That is the heart of Colorado Senate Bill 71, proposed by Sen. Angela Giron, D-Pueblo. Under her legislation, lenders would need to work with a borrower “to effectuate a cure for default rather than move directly into the foreclosure process.”

Ideally, the procedures would buy a homebuyer time to get his or her finances in order, time to reconcile a messy financial situation and time to save their home. Advocates say it’s a bill that could help stabilize the housing market.

But, if you are the institution holding the loan, that time equals money. And, if money is tied up in lengthy foreclosure procedures, it is not circulating to other borrowers. And, that, lenders say, could have unintended consequences.

“SB71 is a dream bill for defense litigators that could drag out foreclosure for years,” said Barbara Walker, executive director of Independent Bankers of Colorado. “If you change state law to complicate matters to make it more difficult, you will find all lenders will stop making these kinds of loans.”

IBC, which represents about 70 community banks in the state, opposes the bill. So does the Colorado Bankers Association, which represents about 180 banks in the state.

Foreclosing on a residential property already is a long process, said Jenifer Waller, Colorado Bankers Association senior vice president. Proceedings don’t begin until a buyer is at least 90 days behind.

Sometimes the foreclosure procedure takes about one year. Giron’s proposal, Waller said, lengthens that time by regulating the number of times a lender must contact a borrower before proceeding with foreclosure, the amount of response time allowed, and the requirement to detail every possible option to avoid foreclosure.

But, Giron says slowing down the process and allowing a good-faith effort to explore options is key. She worries about the “spillover” costs of foreclosures to neighborhoods when homes sit vacant thereby devaluing the other homes.

“I see this as an opportunity to address an issue that is a primary drag on our economy,” Giron said. “According to the Center for Responsible Lending, foreclosures are happening 12 times faster than loan modifications.”

Her bill also would open the opportunity for a challenge — if, for example, a borrower did not feel a lender provided all the possible loan modification program options.

“We are very interested in how this impacts the overall availability of credit,” Waller said. “If the money is held up, it can’t be sent to another borrower.”

Rules and more rules

Home foreclosures have been on the nation’s mind since the U.S. subprime mortgage crisis of 2008, when there was a rise in subprime mortgage delinquencies and in foreclosures.

Since the housing crisis began, banks have been dealing with new state rules each year, and this year they expect to see federal financial rules rolled out as a result of the 2010 Dodd-Frank Wall Street and Consumer Protection Act. Banks, do not yet know the full details of those rules, Waller said.

“It is asking the industry to operate in constant state of flux,” Waller said. “Instability is not good for any industry.”

Although big banks are the ones with the most residential mortgage lending, community banks are full-service lending institutions and they don’t want to see more regulations piled on, Walker said. More requirements take time, staff and ultimately will cost the borrower more, she said.

“Ever since subprime lending hit the fan, every year since then, we have had some kind of mortgage lending legislation in the state,” Walker said. “Most of them have introduced adverse consequences to the borrowers, making financing harder to get and more expensive to get.”

SB71 requires lenders to provide distressed home buyers with a description of all options for avoiding foreclosure, including programs like the Home Affordable Modification Program, a federal program for for loan modification on home mortgage debt. HAMP expires in December, 2012, but there are other options such as refinancing, repayment, short sale or deed in lieu of foreclosure.

“We hear so many stories that the current situation with modification is pretty broken and biased toward denial,” said Corrine Fowler, Colorado Progressive Coalition economic justice director. CPC, a state-wide advocacy organization, supports the proposed legislation. “The (lenders) don’t have a process for processing a modification application in a unified way.”

Fowler said the proposed legislation would lay out a process that ensures borrowers had time to apply for a loan modification without the stress of a foreclosure hanging over their heads.

“Borrowers are finding foreclosures are going through before their modification application has been reviewed,” she said. “We are hoping that by creating a unified process it gets people off that duel track.”

Under the proposal, homebuyers can dispute denial of any loan modification program and question whether the lender provided all the available information about avoiding foreclosure, Waller said. And, there are no time limits on resolving the dispute.

“It would require lenders to know every available program . . . it becomes impossible to comply with,” Waller said.

Loan modification can help a distressed borrower stay out of foreclosure, according to Fitch Ratings, a global rating agency. But, about half of the modification loans will default again within a year, according to its November report.

In Colorado Springs, foreclosures were down in 2011 and are expected to continue to decline in 2012. There were 3,603 foreclosures starts in 2011 — down 25 percent from 2010.

Banks don’t want to be in the real estate business, said Gary Markle, Central Bank & Trust market president. He said his bank already conducts its own foreclosure relief efforts.

“They want to work with the customer, try to understand what went wrong, why it went wrong, what options they have, could they restructure or extend the term? — just things like that they want to go through the analysis to ensure they have looked at every opportunity,” he said. “From a commercial banking perspective, I don’t think SB71 is really any more than what our bank does.”

But, SB71, Waller said, is viewed by some bankers as a delay tactic based on the idea that it is better to keep a buyer in the home. For some borrowers, foreclosure may be the best remedy, she said.

“It is unfortunate, but not always is keeping a person in a property they cannot afford beneficial,” she said.