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For immediate release – Wednesday, January 20, 2010.
Contact Bob Brammer – 515-281-6699 or rbrammer@ag.state.ia.us.

States: Six of Ten Delinquent Borrowers Are Not Involved in Loss-Mitigation Efforts

State Foreclosure Prevention Working Group report predicts an acceleration of foreclosures unless improvements are made in foreclosure prevention.

Citing a rising tide of delinquent loans outpacing servicer outreach and loss-mitigation efforts, a group of state attorneys general and banking regulators is calling for stepped-up foreclosure prevention efforts to help homeowners.

There will be an acceleration of foreclosures unless improvements are made in foreclosure prevention efforts, warned the State Foreclosure Prevention Working Group in a report issued Wednesday that cited disturbing trends and offered recommendations for action.

The new Report of the State Working Group notes that six out of ten seriously delinquent borrowers are not even involved in loss-mitigation efforts – and that borrowers who are involved in loss-mitigation and foreclosure prevention face a process that is seriously backlogged. [Go to Report.]

“We certainly have not turned the corner on the foreclosure problem, despite major and commendable federal and state efforts,” said Iowa Attorney General Tom Miller, a leader of the State Foreclosure Prevention Working Group. “We’ve said it before, and we are saying it now: Servicers must do even more to slow the tide of unnecessary foreclosures.”

Miller led a national news conference telephone call Wednesday announcing the Group’s Fourth “Analysis of Mortgage Servicing Performance.” Miller was joined on the call by Richard Neiman, Superintendent of the NY State Banking Dept., and Mark Pearce, North Carolina Chief Deputy Commissioner of Banks.

The State Foreclosure Prevention Working Group, which consists of 12 state attorneys general (AZ, CA, CO, FL, IL, IA, MA, NV, NC, OH, TX, WA), bank regulators for NY, NC, and MD, and the Conference of State Bank Supervisors, was founded in 2007 and has issued three prior reports (all four reports can be found at www.csbs.org.)

“From the beginning, our guiding principle has been that we should do everything possible to prevent unnecessary foreclosures,” Miller said. “Not every foreclosure is avoidable, but finding an alternative solution usually is in the best interest of the homeowner, the mortgage holder, and also the neighborhood and local community,” he said.

Miller strongly urged any Iowans facing foreclosure or difficulty making their payments to call the Iowa Mortgage Help Hotline at 877-622-4866. Callers will receive free, confidential and effective assistance and guidance. “The Hotline can’t help everyone, but please make the call to see if it can help you,” Miller said. “It may be able to help you work through the maze and find out if a loan modification or other solution can be found that saves your home and works for all.” [Go to information on the Iowa Mortgage Help Hotline)

Findings of the Working Group Report include (excerpts):

  • Six of ten seriously delinquent borrowers are not even involved in loss-mitigation efforts. The total number of struggling homeowners not on track for any foreclosure prevention assistance continues to grow. HAMP has helped slow down the foreclosure crisis, but current efforts have been insufficient to get ahead of the foreclosure problem.

  • Both loss mitigation and foreclosure efforts appear to be backlogged. The average time to complete a loan modification for some servicers is over six months.

  • Most modifications result in payment reductions, but principal reductions remain rare. Given the correlation between negative equity and likelihood of default, the failure to write down principal in connection with loan modifications is a glaring flaw in current efforts.

  • Prime loans are increasingly driving the rising delinquency rates. The foreclosure problem is broad-based and not isolated to poorly-written or exotic loan products.

The Working Group report said the federal Home Affordable Modification Program, or HAMP, has led to offers of loan modification assistance to over 1.1 million homeowners, but the report says early indications are that servicers have been unable to implement the program effectively, and many homeowners with trial modifications are not yet qualified to transition to a permanent loan modification.

“To be sure, we would be in a much worse place without these efforts,” the States said, but “these efforts must be improved.”

Recommendations of the Working Group Report include (excerpts):

  • Servicers should suspend foreclosure proceedings on any loan involved in the loss-mitigation process. In some cases, homeowners have lost their homes while being told they are being considered for a loan modification. This is unacceptable.

  • Loss-mitigation programs must be improved to prioritize principal reduction in areas of significant home price declines. Loan modification programs that rely on monthly payment reductions alone will have limited success in creating sustainable homeownership in states where a large percentage of mortgage loans are significantly “underwater” (e.g., loan balance is greater than the home’s market value.)

  • Servicers should pay particular attention to reforming payment-option ARM loans. If unaddressed, the payment shock on these loans, coupled with the high proportion that are significantly “underwater,” will push a significant portion of payment-option ARM loans into foreclosure.

  • The HAMP program must increase transparency and reduce paperwork in order to reach its potential. While the Treasury Dept. has made positive steps in reducing paperwork burdens, we believe more streamlining is necessary to reduce burdens on both servicers and homeowners.

  • States should consider expanding homeowner counseling programs or implementing temporary foreclosure mediation programs or other such measures. Given the numbers of homeowners facing foreclosure or likely to face foreclosure in the next 12-24 months, it is likely that many will fall through the cracks of even the best-implemented system for working out mortgage loans.

  • Both servicers and Treasury should provide better options to keep unemployed homeowners in their homes. Unemployment and loss of income are key catalysts to a mortgage default. While unemployment insurance partially fills a short-term gap in income from job loss, unemployed homeowners face significant hurdles in keeping their homes.