Friday, April 27, 2007

Guest Post: Thoughts on Foreclosure Plan

Guest post by Mrs. sco

On Wednesday the Patrick administration announced its plan to stop mortgage fraud and help homeowners at risk of foreclosure. The plan adopts the recommendations of the Mortgage Summit convened last November. It aims to stop deceptive practices, increase oversight and regulation of mortgage providers, and educate consumers. If it works, it will be a huge win for vulnerable homeowners in Massachusetts.

Last fall I had the opportunity to work as a student advocate in the Predatory Lending unit of the Hale and Dorr Legal Services Center in Jamaica Plain. I heard the same story over and over: Unscrupulous lender targets homeowner with lots of debt. Lender feeds owner a story about how convenient it will be to pay off all their other debts and just get a single bill each month. Owner mortgages the house, misses a payment, and the bank forecloses. There are variations – the illness, death, divorce, or job loss that caused the missed payment; the sky-high interest rates, undecipherable payment plan, or bizarre insurance fees added to the mortgage (does anyone in the Boston metro area really need earthquake insurance?) – but it’s basically the same story.

There are two problems here: the circumstances that cause people to get into this mess in the first place, and the difficulty of remedying the situation. The first problem is impossible to resolve completely. There’s no way to ensure that everyone has enough money, luck, responsibility, and financial literacy to avoid debt or an unfair loan. But the administration does try to address this by providing a hotline for people to call when they start having trouble making payments. The hotline information will include referrals to reputable lenders and credit counselors vetted by the government. Crucially, the plan also includes an education initiative. The details aren’t fleshed out yet, but if buyers are given this information at the mortgage closing and also reminded periodically through public education campaigns, the program could be effective.

Of course, as I learned from my time at Legal Services, most people don’t seek help in advance – they keep holding out hope that they’ll dig themselves out of debt until the day they receive that foreclosure notice. At that point, they could still rely on laws like the Truth In Lending Act or the Massachusetts Consumer Credit Cost Disclosure Act to invalidate a deceptive or unfair mortgage. Here’s where the second problem comes in: if you can’t make a mortgage payment, you probably can’t afford to pay a lawyer. The few attorneys in the state who focus on pro bono foreclosure cases are so overburdened that they probably can’t help you either. And here, in my opinion, is the real strength of the administration’s plan: it increases regulatory fees for mortgage lenders and uses the money to create a mortgage fraud unit, so people who have been exploited by subprime lenders can actually take advantage of the recourse that the law already provides.

We’ll have to wait and see how the implementation of the new plan goes, but the very fact that the government is paying attention to this problem and not just leaving homebuyers to their own devices bodes well. Maybe it will force lenders to stop deceptive practices and start dealing with even uneducated consumers fairly, and the reforms will be so successful that they’ll eventually extend to all forms of consumer protection and not just mortgages . . . a girl can dream.