Fixes made in 2007 not enough to halt foreclosures
Lawmakers, advocates look to stem tide in the year ahead
By Binyamin Appelbaum, Globe Staff | January 2, 2008
An estimated 2 million American homeowners face increased monthly mortgage payments this year. Many cannot afford the increased payment, or find buyers for their homes. They face foreclosure.
Also in 2008, state and federal officials must decide how to regulate subprime loans. The industry is gone for the moment. Lenders sold about $26.3 billion of subprime loans in the third quarter of 2007, down more than 80 percent from the roughly $139 billion sold at the peak of the boom in the fourth quarter of 2005, according to Standard & Poor's. But its recovery in some form is widely considered inevitable.
Both issues remain substantially unresolved. The steps taken in 2007 were modest. The problem continues to expand.
"We have only begun to see the foreclosures," said Debbie Goldstein of the Center for Responsible Lending, a leading borrower advocacy group. "We have a lot of work to do."
What happened in 2007:
Several plans were announced to help subprime borrowers by preventing increases in their monthly mortgage payments. In December, major mortgage companies agreed to freeze payments on perhaps 250,000 loans. The Federal Housing Administration said in August it would help refinance a similar number of borrowers into loans with fixed interest rates, which has the same effect.
The federal government passed one law addressing foreclosures. The Mortgage Forgiveness Debt Relief Act, signed by President Bush on Dec. 20, reduces income taxes for some foreclosed families. If a person bought a home for $100,000, and owed $110,000 at the time of foreclosure, the foreclosure wipes out the entire debt. The government previously viewed the difference between the debt and the value of the home as taxable income. Now it does not.
The nation's largest mortgage lender, Countrywide Financial, became a leader in helping its troubled borrowers. The company reported that it reworked loans for 77,090 borrowers through November. The pace of those efforts is increasing. The company helped 15,472 borrowers in November alone. Countrywide also drew praise in November when it agreed to allow the Boston-based Neighborhood Assistance Corporation of America, a longtime industry critic, to modify loans on its behalf.
The Federal Reserve, which regulates the mortgage industry, proposed rules in December limiting a variety of practices at the core of subprime lending, such as using penalty fees to discourage borrowers from refinancing. The Fed's action was applauded by lenders for its moderation, and criticized by consumer advocates for the same reason.
Massachusetts went further, imposing the nation's strictest set of mortgage laws and regulations. The state banned some of the practices the Fed chose to limit, including refinancing penalty fees and bonuses for mortgage brokers who sell loans with higher interest rates. Legislation awaiting action by the US Senate would toughen federal law in similar ways.
What may happen in 2008:
Borrower advocates say the lending industry lacks the power to help all the borrowers who need it. They are pressing for a change in federal law that would allow bankruptcy courts to modify mortgage loans. Under current law, mortgages on a primary residence are the only kind of loan the courts can't reduce or erase. A change in the law would allow judges to set affordable payment terms for borrowers who file for bankruptcy protection. It would also create a system for handling competing claims when a borrower holds mortgage loans from more than one company.
Both chambers of Congress have passed legislation increasing the availability of a federal program that helps troubled borrowers refinance into fixed-rate loans. The Federal Housing Administration allows companies to make loans they otherwise wouldn't by promising to repay the lender if the borrower doesn't. But the FHA only guarantees loans below a threshold - in the Boston area, below $362,790. The House and Senate both want to raise that limit, but they haven't agreed on a new threshold. If and when they do, the FHA could help more borrowers refinance.
The FHA is unusual in its willingness to work with borrowers who have missed mortgage payments. Most of the other efforts to help borrowers focus on those who haven't missed payments yet - but may not be able to afford a payment increase. Those borrowers are easier to help, but they don't need help as much, a dilemma that hasn't been fully confronted.
A federal judge in Cleveland ruled in late October that mortgage companies could not foreclose on a home unless they presented paperwork showing they owned the home. That sounds like a technicality, but in the modern mortgage industry, ownership often is transferred electronically. In some cases, it seems no one is quite sure where to find the ownership documents. Other federal judges in Ohio have since entered similar rulings, dismissing dozens of foreclosure actions.
Attorneys for borrowers in other states are asking judges to make similar rulings. If they do, it could slow the pace of foreclosures, and give lenders another incentive to negotiate new agreements with borrowers who fall behind on payments.
Binyamin Appelbaum can be reached at bappelbaum@globe.com. 
