“There ought to be a law!” People say this all the time when they are frustrated or want a problem to go away. Lawmakers often say it too, except they have the power to actually make a law. This is certainly the case today regarding the issue of foreclosures. Both lawmakers and their constituents are actively looking for potential legislative solutions to stem the tide of foreclosures. But can we really legislate our way out of this problem?
All levels of government – local, state and federal – are looking for ways to stop foreclosures and help families stay in their homes. The Wisconsin REALTORS® Association has participated in many such conversations with state lawmakers and other organizations searching for possible solutions, which generally fall into three categories on the foreclosure continuum.
The Foreclosure Continuum
Ideas for possible foreclosure legislation fall into three general categories, each representing different parts of the foreclosure process – prevention, intervention and stabilization.
Prevention focuses on the pre-mortgage stage of home buying when a borrower is getting the original loan. The goal is to structure the financing in a manner that is sustainable for the borrower and thus prevent foreclosures down the road. There are many existing programs in this stage such as counseling, financial literacy classes, help lines and predatory/subprime awareness promotions. Lawmakers looking at this part of the transaction are focusing on ways to simplify and clarify available assistance.
Intervention occurs at the time a homeowner has fallen behind in mortgage payments and lenders have begun the foreclosure process. The goal at this stage is to seek remedies that could keep families in their homes. There are many existing programs at this stage as well, such as early-warning outreach programs, legal support, mortgage refinancing or restructuring options, and existing counseling through private and government agencies. Many lawmakers are talking about extending the process at this stage to give lenders and borrowers more time to work out a solution.
The final stage is stabilization, in which a foreclosure either has occurred or will shortly. The goal at this stage is to speed up, rather than slow down, the process and get foreclosed properties back on the market and sold as soon as possible. For this stage of the process, lawmakers will be seeking to protect vacant properties and expedite the laborious paperwork between the banks, their asset managers and real estate agents.
Wisconsin Compared to Other States
According to the Federal Reserve Board, Wisconsin compares favorably to many parts of the nation regarding foreclosures. They ascribe this to fewer subprime loans in our state relative to others. Overall, Wisconsin has 15.2 percent subprime loans per 1,000 units, compared to 23.4 percent nationally. Of these loans, only 14.1 percent are in foreclosure. Moreover, only 0.8 percent per 1,000 units in Wisconsin are REO (bank held) properties compared to a national average of 2.5 percent per 1,000 units.
Wisconsin also has fewer properties in foreclosure than many of our neighboring states, and certainly far fewer than other states that experienced hyper-appreciation due to flippers and past unsustainable demand. Early December statistics showed one in every 1,341 units in Wisconsin was in foreclosure (ratio of 1 / 1,341). This compared favorably to our Midwest neighbors:
• Michigan: 1 / 396
• Illinois: 1 / 410
• Minnesota: 1 / 858
• Iowa: 1 / 2,640
We also do much better than some of the hardest hit states in the nation:
• Nevada: 1 / 73
• Arizona: 1 / 149
• Florida: 1 / 157
• California: 1 / 231
• Colorado: 1 / 390
• Georgia: 1 / 391
• Texas: 1 / 934
New Proposal in Wisconsin
While many lawmakers are considering possible legislation, one state senator, Lena Taylor (D-Milwaukee), has publicly announced her intention to introduce a bill on the subject as soon as the Legislature begins session in early January.
Senator Taylor, Chair of the Senate Housing Committee, intends to introduce legislation requiring lenders to offer mediation to homeowners in default on their mortgage before moving forward with any foreclosure procedures. Under Senator Taylor’s bill, titled the Mortgage Mediation Act, homeowners could request mediation with lenders to negotiate potential remedies to avoid foreclosures such as adjusting interest rates or principal, extending repayment schedules or modifying the terms of the loan. The mediation must begin within 20 days of the request and the foreclosure would be deferred for at least 90 days after the request. Banking organizations generally applauded Senator Taylor’s efforts but withheld final judgment until they can read and analyze the actual legislation.
Can New Laws Really Help?
Most foreclosures result from economic stress caused by divorce, health problems or loss of a job rather than unsustainable, faulty mortgages, or adjustable rates. This raises the larger question of whether or not there can be meaningful legislative responses to help keep families in their homes. The answer is, it depends. But so long as foreclosures continue to rise, people and lawmakers will continue to say, “there ought to be a law.”
Michael Theo is Vice President of Legal and Public Affairs for the WRA.
Published: 1/12/2009
