Soaring foreclosure rates are sending states scrambling.
Their goal: to protect homeowners from a new crop of scam artists who claim they will "rescue" borrowers. At the same time, some states are forming funds that could provide affordable fixed-rate mortgages to those on the precipice of losing their homes.
The stakes are high: As many as 130,000 homeowners – the most in 30 years – are going into foreclosure each month. Experts worry that entire neighborhoods will decline – similar to what happened in the 1960s and '70s – as abandoned foreclosed homes cause property values to drop. Some elected officials are calling for federal legislation to prevent predatory lending and asking lenders to voluntarily hold off on raising mortgage rates for those most in trouble.
Here are some of the ways states are trying to help:
• Ohio, which has one of the highest foreclosure rates in the country, started taking applications this week to give fixed-rate loans to homeowners with subprime, adjustable-rate mortgages who've seen their monthly payments skyrocket beyond their means.
• Colorado is considering a law that would make it a criminal offense for appraisers to falsely inflate the value of homes in mortgage proceedings.
• Legislation is also under consideration in Indiana that would create free consumer counseling for those facing mortgage problems.
• At least four states have set up task forces to study foreclosures and recommend solutions.
• At least a dozen states have enacted laws designed to crack down on fraud by so-called "foreclosure consultants" who claim to help homeowners in trouble.
"States are rapidly reacting to foreclosures," says Heather Martin, an analyst at the National Conference of State Legislatures in Denver. "Some states are passing new laws. Some are creating studies. Some are trying to find out what their options are."
Ohio's problems and potential fixes
In some ways, Ohio has become a poster child for the problems and an example of a state now searching for solutions. In 2005, one in every 71 households filed for bankruptcy or had their mortgages foreclosed, says Gov. Ted Strickland (D) in a phone interview. "That problem has worsened in the last few months to the point it is a crisis in Ohio…. I have been told for every vacant home in a neighborhood, property values decline by 1 percent."
Governor Strickland says part of the problem is the "relatively flat" manufacturing economy. But, he adds, the state has also suffered from "predatory lenders that have taken advantage of folks in unscrupulous ways."
Last month, Strickland formed a foreclosure task force made up of public officials, lenders, and nonprofits. "We want to look at the total picture and devise solutions for the state to minimize the pain that's being felt out there," he says.
One of the state's solutions is for the Ohio Housing Finance Agency to issue $100 million in taxable bonds. The proceeds will finance fixed-rate mortgages for people who may be on the edge of foreclosure.
On Monday, the agency began taking applications, receiving close to 300 calls on that day alone.
"There was a lot of distress in the voices," says Rita Parise, program director. "Some we may be able to help, but numerous people were well into the foreclosure process, and we will not be able to help them."
Initially, the agency is estimating the new pool of money will provide refinancing for about 1,000 mortgages. "If the demand is there, we will go back in the market again and again," says Doug Garver, the agency's executive director.
While the financing could help, some Ohio officials believe even more urgent action is needed. In fact, Monday was the deadline for Cuyahoga County (Cleveland) residents to ask for property-value readjustments. Officials are expecting 50,000 homeowners, about 10 percent of the city's residents, to ask for downward revisions of their taxes.
Cuyahoga County Treasurer Jim Rokakis says communities need to work together with the mortgage service companies to head off more foreclosures. "I don't care if you want to call it a moratorium, or a cooling-off period. But for this to be most effective, we have to find a way to get them to agree to back off on adjustable-rate mortgage interest [hikes], and back off on foreclosures."
Laws to reduce fraud
The instances of fraud by so-called mortgage consultants who promise to save homes from foreclosure have grown along with foreclosure rates. New York is one of a dozen states, including California, Colorado, Florida, Georgia, Illinois, and Michigan, that have enacted laws putting limits on mortgage consultants.
"Foreclosure rescue fraud is now rampant across the United States," says Carolyn Carter, an attorney with the National Consumer Law Center in Boston. "In some parts of the country, whole neighborhoods are affected."
One such area is Queens in New York, where Phyllis Schiever-Ford, a retired social worker, lives with her extended family. She has an adjustable-rate mortgage. When her interest rate jumped to more than 8 percent, she got behind on her payments and this week was served with a foreclosure notice. "What I need is to get back on sure footing, and I'm getting there," says Ms. Schiever-Ford.
She's working with lawyers at St. John's University Elder Law Clinic to negotiate a solution. But the clinic is busier than ever. This week, the phone "has been ringing off the hook," according to Gina Calabrese, associate director of the clinic.
"Whenever our clients go into foreclosure, they're inundated with letters and notices from people promising to rescue their homes from foreclosure," says Ms. Calabrese.
New York's new law requires a warning about potential fraud to be included with the foreclosure notice. When a home is to be sold, the law also requires a written contract that spells out payments to be made, who will hold the deed, and any other buy-back or rental agreements. In addition, it gives homeowners five days to cancel any contract after it's been signed.
"Because it is so new, we don't know how it's going to work," says Ann Goldweber, director of the Elder Law Clinic. "It may not be a perfect solution, but it's certainly a step in the right direction."