Elizabeth Warren, Head of the New Consumer Financial Protection Bureau, Which will Administer Overhaul of Foreclosure Processes (Image Source: New York Times)
As a follow up to our last post about the state of New York’s new proposal to provide counsel to all residents undergoing foreclosure, today, we present another innovative new proposal that could further bolster the position of homeowners during this critical time. The New York Times recently reported that many state attorneys generals have presented a list of demands calling for new regulation that would prohibit banks from beginning the foreclosure process while the borrower is simultaneously working out a mortgage modification.
The term “mortgage modification” appears to be one of art. Since the article is unclear, I suppose this could include anything from taking out a second mortgage to pay for college tuition or a healthcare expense to proactively seeking a large-scale overhaul intended to stave off foreclosure. In either case, it seems unfair, on its face, for banks to initiate foreclosures while a modification is actively underway, as this not only stymies the modification process but also creates confusion about the bank’s ultimate aim—to foreclose or to work with the borrower?
The demands take place in a highly politicized context, as housing advocates continue to express dismay over the “robo-signing” scandals, where, in an attempt to ensure that the foreclosure process was moving forward without delays, lawyers and other banks signed thousands of documents without thoroughly reviewing them, leading to embarrassing mistakes.
The demands also mark an expansion of power for the government’s newly created Consumer Financial Protection Bureau (which would administer the changes), headed by prominent Harvard law professor and securities industry expert, Elizabeth Warren. While Warren is yet to gain any kind of (usually requisite) congressional confirmation, she has already received notoriety, as banks regard her as a tough, no-nonsense regulator eager to re-stack the cards against them. The government, along with consumers, has expressed considerable confidence in her ability to be a strictly enforce the law and therefore provide a divergence from the past. This package, with Warren as its public image, has backing from the Departments of Treasury, Justice, HUD, and the Federal Trade Commission.
While the proposal marks a shift from ongoing practices, the economic effects are unclear. Banks argue that the package serves as a merely a “band-aid,” since in the long term, many of these borrowers cannot afford their homes, period. Moreover, the package may enable many of the more than 2 million delinquent properties to reenter the market, which would further depress home values and, by extension, private wealth and equity.
From our perspective, while the foreclosure crisis has resulted in economic pain for many, our low-income clients have shouldered perhaps the greatest burden. In addition to the broad economic effects, our clients have had to face the human consequences of having to move out of their homes and onto the streets. Delaying foreclosure proceedings would provide many of our clients the possibility of turning over their homes to the market and making a capital gain, perhaps even retaining some equity. Furthermore, it would provide a means for low-income citizens to wait out the recession until the job market revives and affordable housing becomes a palpable reality.