More Social, Family, & Housing Policy Plays

Not more than a day or two passes without front page coverage in The Wall Street Journal, New York Times, or local newspapers of America's mortgage foreclosure crisis. While the impact on Wall Street has been historic and substantial enough to warrant direct action by the Federal Reserve, the real crisis is being felt in residential neighborhoods throughout the country.

Foreclosure filings, which include default notices, auction sale notices, and bank repossessions, topped 2.2 million in 2007 -- an increase of more than 75 percent from 2006, and nearly 250 percent from 2005 rates, according to RealtyTrac. The crisis is vast, not just in the number of filings, but in the regional diversity of markets. It has landed hardest in the Rust and Sun Belts and has affected suburbanites nearly as frequently as city dwellers.

The impact of mortgage foreclosure is truly devastating. As the single greatest source of wealth in this country, the loss of one's home can create financial havoc that shuts the door on the American Dream for entire generations. Once several homes in a neighborhood are lost to foreclosure, property values plummet and even families who are current on their mortgage feel the blow.

While Americans wait on Congress and the administration to act, several states have chosen to move forward to help homeowners navigate this crisis. Many states are working to connect homeowners to additional resources and counseling services and have established homeowner education programs and foreclosure prevention plans in order to prevent future foreclosures.

In Michigan, House Majority Floor Leader Steve Tobocman, a DLC Fellow, has been working with the Michigan State Housing Development Authority (MSHDA) to provide immediate relief to homeowners at risk of losing their homes. As a result of his efforts, the Michigan Legislature has passed a bipartisan package of bills that empowers MSHDA to refinance distressed loans.

Known as the Save the Dream program, this initiative offers two new loan products: an Adjustable Rate Refinance Program for homeowners trapped in adjustable-rate mortgages; as well as a Rescue Refinance Program for homeowners who have missed up to three payments in the past year. Homeowners with a credit score as low as 620 in adjustable-rate mortgages will be able to refinance into a 30-year fixed rate mortgage at affordable rates estimated to be 6.625 percent. Similarly, homeowners who were more than 30 days late on up to three payments in the past year and have a credit score of 575 also will be able to refinance into a 30-year fixed rate mortgage at 6.625 percent. In order to qualify for the program, Save the Dream borrowers must have a household income less than $108,000 and a sliding-scale requires that the value of the home be less than $224,000.

The Save the Dream package has already created waiting lists at Michigan banks. It was signed into law on April 2, 2008, by Gov. Jennifer Granholm and is expected to complement the state's new loan officer registration laws, anti-predatory lending legislation that is being debated in the state House, and stricter penalties against fraudulent appraisals to create a comprehensive state response to the foreclosure crisis in Michigan.

In Ohio, the Ohio Housing Finance Agency (OHFA) and Gov. Ted Strickland have established the Opportunity Loan Refinance Program to address the high foreclosures in Ohio. The OHFA was the first housing finance agency in the country to develop a refinance mortgage product designed to help those homeowners that typical refinance programs may find too risky.

The Opportunity Loan Refinance Program gives borrowers the opportunity to find an appropriate mortgage for their current financial situation with an affordable 30-year fixed-rate financing alternative for up to 100 percent of their home's value. In order to be eligible for the program, individuals must live in a home that is being refinanced and the household income cannot exceed 125 percent of the area median income. Borrowers also have the option to decide on a 20-year fixed rate second mortgage. The second mortgage option is available for up to 5 percent of the appraised value of the home and can be used to pay off any fees relating to the existing mortgage. In addition, the program requires borrowers to attend at least four hours of U.S. Department of Housing and Development (HUD) approved counseling before closing the loan. If the mortgage payment is 30 or more days late, OHFA requires additional counseling.

In Maryland, the Lifeline Refinance Mortgage Program was developed by the state's Community Development Administration (CDA). Lifeline's refinancing options are available only to those whose property is their primary residence. In addition, property owners cannot exceed the maximum household income limits, the current appraised value limits, or loan-to-loan value limits. The program offers fixed-rate mortgages for a 30-year to 40-year amortization. Unlike the program in Ohio, lifeline does not allow the loan to exceed 85 percent of the property's value. Lifeline requires homeownership counseling if the homeowner's credit score falls below 680.

In Delaware, the State Housing Authority developed the Delaware Emergency Mortgage Assistance Program (DEMAP). The DEMAP assists Delaware homeowners in preventing residential mortgage foreclosures. In order to qualify for the program, homeowners must be residents of Delaware and must not have a household income above 115 percent of the state median income. When submitting their application, homeowners need to show their foreclosure notice, they must be going through a financial hardship beyond their control, and demonstrate that they will be able to resume their mortgage payments in the near future. Borrowers may choose between two types of loans: continuing and non-continuing. Both loans have a fixed 3 percent simple interest rate and a maximum loan amount of $15,000. The continuing loan pays the delinquent balance and helps make ongoing payments for no more than 12 months or $15,000; whereas the non-continuing loan just pays the past due balance not exceeding 12 months or $15,000.

Finally, the State of New York Mortgage Agency (SONYMA) offers the Keep the Dream refinancing program, which has set aside $100 million to help families refinance out of high-risk loans. The program helps those families with adjustable-rate, interest-only, or other mortgages refinance out of their loan into a 30-year to 40-year fixed-rate mortgage. To be eligible, borrowers can have up to 125 percent to 165 percent of the area median household income depending upon the county. Similar to other refinancing assistance programs, the Keep the Dream program requires borrowers to complete a homeowner education course. If they become delinquent for 30 days or more on their refinanced mortgage, borrowers need to participate in early delinquency intervention counseling.

During this mortgage crisis, states would be wise to take action to not only assist individual homeowners from getting stripped of their greatest asset, but also to minimize the rippling effect of this crisis through neighborhoods across the country.

Resources:

"Gimme Shelter,"
By Paul Weinstein Jr., PPI Policy Report:
http://dlc.org/ndol_ci.cfm?kaid=114&subid=236&contentid=254479

"State Strategies to Address Foreclosures,"
By Stephanie Casey Pierce and Kheng Mei Tan, NGA Issue Brief:
http://www.nga.org/Files/pdf/0709FORECLOSURES.PDF

Fact Sheet: Predatory Mortgage Lending,
Center for Responsible Lending
http://www.responsiblelending.org/pdfs/2b003-mortgage2005.pdf

A Snapshot of the Subprime Market
Center for Responsible Lending
http://www.responsiblelending.org/issues/mortgage/
quick-references/a-snapshot-of-the-subprime.html

State Legislative Scorecard
Center for Responsible Lending
http://www.responsiblelending.org/issues/mortgage/statelaws.html

Sheltering Neighborhoods from the Subprime Foreclosure Storm
Special Report by the Joint Economic Committee http://www.jec.senate.gov/Documents/Reports/
subprime11apr2007revised.pdf

Contacts:

Honorable Steve Tobocman
House Majority Leader
Michigan House of Representatives
State Capitol
PO Box 30014
Lansing, MI 48909-7514
(517) 373-0823 stevetobocman@house.mi.gov

Mr. Paul Weinstein Jr.
COO (Chief Operating Officer)
Progressive Policy Institute
600 Pennsylvania Avenue, SE
Suite 400
Washington, DC 20003
(202) 547-0001 pweinstein@ppionline.org