Testimony of Rep. Sharon Treat
Sponsor

LD 1418, “AN ACT TO PRESERVE HOME OWNERSHIP AND STABILIZE THE ECONONY BY PREVENTING UNNECCESSARY FORECLOSURES”

JOINT STANDING COMMITTEE ON INSURANCE & FINANCIAL SERVICES
APRIL 28, 2009

Senator Bowman and fellow members of the committee. My name is Sharon Treat, and I represent House District 79 (Hallowell, Farmingdale and West Gardiner) and am proud to serve with you on the Insurance & Financial Services Committee. I appear before you today to introduce what I believe to be critical legislation to address a serious problem here in Maine.

In the 5 years from 2004 to the end of 2008, foreclosure filings in the Maine State Courts increased 148%, from 2,134 to 5,293. Between just 2007 and 2008, the increase was 46.5%. Estimated foreclosures in 2009, based on projected court filings, data from the Department of Professional & Financial Regulation, and data on seriously delinquent mortgages (90 days past due), will be 6,900, a leap of over a thousand additional foreclosures in a single year.

Who are these people? They are our neighbors and family members. Certainly some got in over their heads with mortgages they could not afford. But many foreclosures are the outcome of predatory mortgage practices, including misleading and deceptive disclosures of true rates and fees, loans initiated before this Legislature banned these predatory practices in 2007.

But it can happen to anyone. The leading cause of bankruptcy in the U.S. is illness and medical bills – more than half, according to a Harvard study published in the journal Health Affairs. Most of the medical bankruptcy filers were middle class; 56 percent owned a home. Lose your job, lose your health insurance. Get sick, and lose your home: unfortunately, that’s a reality.

Its happening to a lot of us. Based on the data above, one in twenty mortgages in Maine this year will be either in foreclosure or more than 90 days past due. Increasingly, we are seeing more and more legitimate, prime mortgages going into foreclosure.

Where and when will it end? Not any time soon: Maine’s seasonally adjusted March 2009 unemployment rate was 8.1 percent, up from 7.8 percent for February and 5.0 percent for March 2008. Rates for many counties far exceeded this figure – topping 13% in Piscataquis and Washington counties in March, for example. This isn’t going to turn around for a while.

What are the consequences?

• Foreclosure is disruptive if not devastating to families, and is taking a terrible toll on our economy and the social fabric of our communities.

• Foreclosures saddle financial institutions with properties they don’t want, have to maintain, and sometimes can’t sell, certainly not for the value of the mortgage – indeed recent studies have found the average loss to the mortgage holder of over 60%.

• Foreclosures drive down property values and reduce the tax revenues that fund our schools and pay for local services and roads. It is estimated that 42,127 Maine homes will suffer price declines related to the foreclosure of a neighboring home during 2009. Maine will lose, directly and indirectly, $133,000,000 in property values due to foreclosures over 2009. The Joint Economics Committee of the U.S. Congress estimates that Maine’s loss in property tax revenues due solely to subprime foreclosures over 2008-2009 will be over $2.5 million.

This legislation is intended to stem the tide of these foreclosures by providing a way for homeowners to negotiate with lenders and mortgage servicers before a foreclosure action is final, under the supervision of the courts and with the assistance of HUD-certified housing counselors. It is intended to prevent foreclosures that could be avoided.

It doesn’t throw money at this problem, it doesn’t mandate a particular result in any foreclosure action, and it doesn’t require any financial institution to sign onto any deal unless it wants to.

Here’s what it DOES do:

• Establishes a beefed up counseling program and hotline at the Maine State Housing Authority to help homeowners understand the foreclosure process, their rights and obligations, and to help them figure out their finances and what alternative loan terms might work for them. The goal is to avoid the foreclosure process altogether if possible, and if not, to guide homeowners through that process and give them the information they need to work out a new agreement if possible.

• Improves the information provided to homeowners when they are served with legal papers initiating foreclosure, and extends the time to “cure” the pending default and avoid foreclosure by 60 days. We need plain English and simple forms, non-threatening language and information about counselors who can be trusted not to scam already beleaguered homeowners.

• Requires lenders and homeowners to participate in a mediation program established under the aegis of the existing mediation program of the Maine court system. This program will have mediators trained in the financial nitty-gritty of mortgages and the standards the FDIC uses to determine ability to pay and mortgage value. No one will be forced to accept a particular outcome, and hopeless situations are eligible to trigger a waiver of the requirement.

• Insures decision-makers are present. Of critical importance: the homeowner must be prepared with the financial details and paperwork, and the representative of the lender or mortgage servicer must have the authority to cut a deal and produce the paperwork proving ownership of the mortgage. Telephone participation is OK if the lawyer for the lender has the authority to sign the paperwork.

• Helps out renters who right now have no rights and can end up in the streets through no fault of their own. Renters will get notice of the foreclosure action and, just as is the case now if your apartment building is sold in a regular sale, if there is a lease the lease continues and the property must be maintained unless and until the lease is terminated by the usual legal means.

• Improves and consolidates data collection and listing of foreclosed properties. Current data collection and reporting is splintered and confusing, limiting its usefulness for policymakers and evaluation of current and future programs. Foreclosure listings are not easily identified for purchase for affordable housing.

• Includes funding mechanisms for the mediation and counseling programs. The mediation program would be funded through a fee paid by the plaintiff in the foreclosure action; the counseling program would be funded by eliminating the exemption from the real estate transfer tax for deeds from a mortgagor to a mortgagee in lieu of a foreclosure, deeds from a mortgagee to itself at a public sale, and deeds of foreclosure.

The proposals in LD 1418 are of proven effectiveness and consistent with a nationwide trend at the state level.

This legislation was put together with a lot of consultation and research. There are successful mediation programs throughout the country that provide useful models and data demonstrating success. We also know from Maine’s experience over many years that alternative dispute resolution (ADR) works well. Maine is a national leader in the use of ADR – foreclosure actions are some of the only cases currently exempted from ADR requirements established in court rules. Right now, the Maine courts are exploring the mediation option in foreclosure cases; the Commission on Foreclosure Diversion established by the Supreme Judicial Court has met twice and plans to report its recommendations on an expedited schedule.

Several mandatory and voluntary programs have been implemented at the state and local level in including in Philadelphia, New Jersey, New York, Central Florida, North Carolina, Connecticut, and Ohio. Some states have implemented programs through court administrative order, and others have passed emergency legislation.

• New Jersey's foreclosure mediation program allows a homeowner facing the threat of foreclosure no-charge access to housing counselors and lawyers who first try to come up with a loan payment plan that may involve reduced penalties and or lower interest rates. If the out-of-court approach doesn’t work, a judge appoints a mediator to bring the lender and borrower together to develop a pay-back plan. The Mortgage Stabilization and Relief Act was passed by the New Jersey Legislature in December 2008.

• The Philadelphia Diversion Pilot Program, implemented in May 2008 by court order, already has a clear record of success, and provides a model for Maine to replicate. Between April and July 2008 alone, 430 of 552 of homes scheduled for sheriffs sales were permanently removed from the list (230) or had the sale postponed (200). Of the group of 55 cases handled by one of the non-profit legal service providers between June and August 2008, 27 (49 percent) have had a loan modified and 13 (24 percent) have a loan modification in progress. Philadelphia had 6,200 foreclosures in 2007, nearly mirroring the 2009 projections for Maine.

• Ohio's House Bill 3 is a home foreclosure bill that calls for a six-month moratorium on banks taking homes and would allow judges to modify the terms of loans and requires more advance notice of foreclosure to homeowners. Ohio already has a court-established Foreclosure Mediation Program Model; although each district has flexibility in designing its program they share similar core features, including the process by which parties come to mediation and how the mediation is conducted.

• The Connecticut Homeowner’s Equity Recovery Opportunity Loan Program. Under a program established by legislation, all owner-occupied, residential real property loans are subject to foreclosure mediation if the foreclosure commenced after July 1, 2008. When the lender begins a foreclosure on residential real property the lender is required to give 60 day notice to the borrower which includes a foreclosure mediation request form. At the mediation the lender and borrower must be present, although the lender may send counsel if counsel has the authority to agree to a proposed settlement, so long as the lender is available by telephone or electronic means. Mediators are employed by the Judicial Branch, trained in mediation and all relevant aspects of the law (as determined by the Chief Court Administrator), and have knowledge of the community-based resources that are available and mortgage assistance programs.
Although the opt-in mechanism in Connecticut limits participation (there is a 32% mediation request rate), where there is mediation the success rate is high – a 72% success rate with 57% of homeowners remaining in their homes (see attached chart).

Other states are taking action as we speak. The Washington Legislature just unanimously passed a bill that sets aside $250,000 for a statewide program to help distressed homeowners work out loan modifications or other arrangements with their banks. Under SB 6033, a statewide pool of volunteer professionals will be recruited to help families and individuals with incomes up to 140 percent of the county median income renegotiate their mortgage terms.

New York legislators are reported to be considering expanding their current notification laws to include renters. Last year, the New York Legislature approved a measure that requires lenders to give homeowners a 90-day notice before starting foreclosure proceedings. Now they are considering a proposal that would require lenders to give renters two 30-day notices – one to tell the tenants that the house has been foreclosed and they need to move and another to evict any remaining tenants.

Texas SB 47 gives debtors a 45-day notice period to cure their loan problems and the requires that lenders contact debtors, or prove they tried to, and give them a written "notice of foreclosure" form that lists options homeowners have to try and stay in their homes. This bill also says homeowners must be given a description of the options to prevent foreclosure, a list of resources available and where the debtor can get assistance filing a complaint concerning the foreclosure process. It has passed the Texas Senate and is in the Texas House.

Florida Senate Bill 1038 and Senate Bill 1646, Landlord Tenant Relations and Mortgage Foreclosure, would require adequate notice to tenants who live in a property facing foreclosure. The bill requires a landlord to return the security deposit within five days after the property is sold and subjects the landlord to potential criminal charges if he or she does not comply. Other states, including Michigan and Minnesota, have proposals in the works.

Summary

LD 1418 is a comprehensive approach to starting to resolve a serious – and growing - social and economic problem. The counseling, mediation and notice provisions essentially wrap around the financial incentives the Obama Administration is proposing, which will provide incentives for servicers to negotiate more loans. LD 1418 provides the mechanism to bring the parties to the table and work out a deal.

The financial institutions and loan servicers will object to the mandatory nature of the mediation program, and to the provisions giving renters some rights. They worry that the 90 day notice to cure and mediation will unreasonably extend an already lengthy foreclosure process.

The issues with rental properties are certainly complex. I am open to reasonable solutions, but at bottom, we need to remember that currently the renter is without rights and at the mercy of a process that can leave families suddenly homeless, through no fault of their own. Something needs to be done.

We know from programs in other states that mediation is incredibly effective – but if and only if the parties participate. An effective program that homeowners don’t participate in is window-dressing. A program the homeowner participates in, but where the loan servicer lacks authority to sign a deal, or fails to prove ownership of the mortgage, is likewise useless.

From the Connecticut data we know that an opt-in program isn’t good enough because only 32% of homeowners participate. From the Philadelphia program we know that active outreach and counseling is essential. The successful programs require decision-makers to participate: with the vast majority of loans sold or the paperwork held by third parties, we can’t continue to clog the courts with foreclosure actions where the foreclosing party can’t even prove it owns the mortgage.

I understand the reluctance to extend the foreclosure process by even one day and to pay a penny more in costs. But in the end, if this program achieves anything close to the Connecticut or Philadelphia success rates - where over 50% of the homeowners worked out a deal enabling them to stay in their homes - financial institutions will be far better off, avoiding being stuck with foreclosed properties they must pay to maintain and try to sell in a terrible real estate market. The extra time will help homeowners cure their impending defaults and stay in their homes. The mediation process itself can be very expeditious as experience elsewhere has shown. “A stitch in time saves nine.”

I don’t think we can afford half measures – let’s do this right. I urge your support of LD 1418 and look forward to working with you to pass an effective, comprehensive bill. Thank you.