Wednesday, September 12, 2007

Iowa Foreclosure Hotline Intended to Help Borrowers & Lenders

Attorney General Tom Miller unveiled a project Tuesday aimed at avoiding a flood of subprime mortgage foreclosures in Iowa.  The pilot project will work to help borrowers and lenders modify loan terms so that borrowers can make payments – and keep their homes – and lenders can do much better financially than if they foreclosed on a mortgage.

“We are especially motivated to help borrowers because there has been a lot of misconduct by some in the subprime industry,” he said.  “Many borrowers got into problem loans because of some type of fraud or deception.  And most subprime loans were refinancing loans to existing homeowners.  Now, people who owned their homes for years are losing them because someone put them into a bad loan.”

Miller said the Mortgage Foreclosure Hotline Project also is needed because many consumers may not even know who to talk to about their loans.  “In many cases, the party that originated the loan is long gone.  Most loans go to other companies and ultimately to investors who buy big batches of loans and leave the ‘servicing’ up to yet other companies,” he said.

“Many borrowers are in a jam now who got into loans because of misconduct and fraud by people who no longer own the loans or aren’t even in business.  We will do all we can to prevent people from losing their homes to fraud,” he said.

Miller urged Iowans facing a mortgage foreclosure to call 877-622-4866 (toll-free) to reach the Iowa Mediation Service.  Iowa Mediation Service will take information from borrowers and then explore if a loan modification might work for both the borrower and lender. “We are convinced it makes sense for everyone to try,” Miller said.  “It won’t work in every case, but when it works, it’s a win for all.  Payments continue to lenders.  Borrowers remain in their homes.  Neighborhoods stay much stronger.  We all benefit.”

Miller said Iowa’s subprime foreclosure rate is over 8.6% – fourth in the nation.  “The foreclosure crisis will only get worse before it gets better,” he said, especially since millions of ‘hybrid ARMs,’ or adjustable-rate mortgages, will adjust upward this year and next.  “Borrowers suffer ‘payment shock’ when their monthly payments shoot up hundreds of dollars and just keep climbing.  They can’t make the payments and they face foreclosure,” Miller said.

Mike Thompson, Director of Iowa Mediation Service, and Miller urged Iowans to call the toll-free Iowa Foreclosure Hotline—877-622-4866—if they are in default or foreclosure, or if they think they can’t afford new higher payments when an adjustable rate moves up.

“The earlier people call, the better,” Miller said.  “Be prepared to gather and provide your full financial information.  Don’t ignore the problem.” Miller said statistics show that about 50% of people foreclosed upon never contact their lender.  “We hope people feel more comfortable contacting a third party, the Mediation Service, to see if anything can be done.  The Mediation Service will definitely work with borrowers if it looks like there’s a way to avoid foreclosure that works for everyone.”

During the Farm Crisis of the 1980s, Miller said, thousands of farm foreclosures were avoided thanks to mediation.  Iowa Mediation Service conducted hundreds of successful mediations during the Farm Crisis.  “That experience sparked the idea for this project,” he said.  “The bottom line is that everyone benefits when they avoid foreclosure.”

Formal mediation was compulsory for farm foreclosures in the 1980s, but the new project is voluntary, Miller said.  “This time, it’s not so much formal mediation as facilitation or negotiation to reach a result that works for all.  It’s an intermediary role.”

“The foreclosure project will work through the maze, figure out who needs to be connecting, and see if a loan modification can be found that works for all,” Miller said.  Most of the work will be by telephone, since few subprime loans are owned by local financial institutions.

An example of how the foreclosure-prevention project might work: 

Many Iowa homeowners may be in a “2/28 hybrid ARM” or adjustable-rate mortgage originated a few years ago by a mortgage broker.  That means a fixed, low ‘teaser’ rate was applied for two years – but then, for the 28 years remaining on the loan, rates could adjust upward as quickly as every six months.  In reality, loan rates almost always adjust upward, leading to ‘payment shock’ for the borrower as monthly payments increase rapidly.  A loan that was fixed for two years at, say, 6% might rapidly adjust up to 10%.

In this example, the Mortgage Foreclosure Hotline Project might locate and call the “servicer” (since the loan likely is owned by secondary-market investors) and work to modify the loan from an adjustable rate at 10%-and-rising to a fixed mortgage at, say, 7%.  That would enable the borrower to afford the payments, enable the lender to continue receiving payments, and avoid costly, time-consuming and expensive foreclosure that benefits no one.

The Mortgage Foreclosure Hotline Project

The Foreclosure Hotline is a pilot project at this point, Miller said.  “We will see if Iowans use it and if it works, and if it does we will expand it as needed,” he said.  The Attorney General’s Office already has succeeded in helping borrowers and lenders find mutually-beneficial loan modifications, he said.  “It can work for all.”

Miller said his office is providing $4,500 for Iowa Mediation Service to ‘gear-up’ the Foreclosure Hotline Project.  The $4,500 is from payments made to Iowa by Ameriquest Mortgage Company in a settlement of a national consumer fraud case led by Miller alleging that Ameriquest engaged in various unlawful mortgage lending practices.  “The goal is just to find common ground between borrowers and lenders,” he said.  Lenders would agree to modify their loans, but they would do far better than if they had to proceed to foreclosure.  Borrowers would continue to make payments.

Miller said borrowers typically are faced with foreclosure as a result of one or more of three situations:  fraud, such as deception, appraisal fraud or “bait-and-switch” tactics; “unsuitable” loans that were never right for the borrower; or a “life-event,” such as loss of job or sickness that makes borrowers unable to pay.

The foreclosure project will work with any borrowers and lenders, regardless of the cause, Miller said.  “We’ll be in the business of finding solutions, but if we run into evidence of fraud, we’ll try to tackle that, too, of course.” Miller said another crucial motivation for the project is that foreclosures harm everyone, not just the immediate borrower and lender.  “Studies show that, for every foreclosure, the value of other homes on the same block goes down by about one percent,” he said.  “Multiple foreclosures can devastate a street and undermine whole neighborhoods and communities.”

National efforts:

Miller also has organized a ten-state task force to meet with mortgage servicing companies and investors to find ways for them to modify more troubled subprime loans instead of foreclosing.  He said the national effort paralleled the Iowa project because it is driven by the principle that borrowers, lenders, investors, and mortgage servicing companies all have an interest in avoiding foreclosure.  “We are appealing to everyone’s enlightened self-interest,” Miller said.

mortgage fraud