State's 370% Foreclosure Rise Prompts Task Force to Call for Corrective Measures

By KATE PRAHLAD, Capital News Service

ANNAPOLIS (November 29, 2007) - Maryland needs to change its mortgage laws, improve outreach to vulnerable borrowers and create emergency funds for families in mortgage trouble if it is going to stem a rising foreclosure rate, a task force said Thursday.

The report by the Homeownership Preservation Task Force comes as Maryland's foreclosure rate shot up 370 percent from June 2006 to June 2007, moving the state from 40th in the nation to 15th for foreclosures.

"The foreclosure spike is a national phenomenon, and Maryland has not escaped the challenges," said Department of Labor, Licensing and Regulation Secretary Tom Perez, who co-chaired the task force.

RealtyTrac, a national foreclosure tracking company, estimates that there was one foreclosure for every 806 households in Maryland over the past year. While the state's rate grew 370 percent, the national rate was up 87 percent, RealtyTrac reported.

"Today, we're 15th," he said. "Our goal is to be 50th. We're moving in the wrong direction."

In June, Gov. Martin O'Malley established the task force and charged it with finding ways to curb the growing problem. The task force report to the governor Thursday suggested stronger underwriting and lending standards, as well as more oversight for the mortgage industry.

It also called for better education to help homeowners avoid predatory lenders, and more access to better financial products for people purchasing or refinancing homes.

Perez said the immediate issue is homeowners on the verge of or facing foreclosure. One task force suggestion is the creation of a fund to provide case-by-case interventions to prevent foreclosure, allowing more stable monthly payments or time for a property sale to troubled owners.

Some of the recommendations to the governor will require changes in Maryland law "to reign in bad players and practices," according to the report. The report also recommends a regulatory change to increase the time between default and foreclosure from 15 to 90 days.

"What you're not seeing in there perhaps are some specifics in terms of what it might cost to fund some of the programs" recommended in the report, said Jacqueline Lampell, spokeswoman for the Department of Housing and Community Development. "That's because we don't really even know what the full impact of foreclosure will be."

Foreclosures disproportionately occur from subprime loans, those offered to borrowers who have less than optimal credit and have difficulty getting a traditional loan. Subprimes tend to have higher interest rates and options such as adjustable and teaser rates, according to the report.

A Maryland Bankers Association survey showed that adjustable rate mortgages in Maryland grew from 1.6 percent of the total mortgages in 2000 to 11.7 percent in 2007.

Mosi Harrington, executive director of Housing Initiative Partnership Inc. in Hyattsville, agreed that she has seen a huge rise in foreclosures due to subprime loans.

"Particularly in Prince George's County, there was a high number who got subprime loans, and who got adjustable rate mortgages," Harrington said. "We like fixed-payment mortgages, where people are not overstretching. But in this environment with such expensive housing, it's difficult to afford anything."

Prince George's had the highest number of foreclosures in the second quarter of 2007, with 1,192 in the quarter, a 300 percent increase over the same period a year earlier.

But even comparatively affluent Montgomery County saw a 1,679 percent increase, going from 34 in the second quarter of 2006 to 605 in the same quarter of 2007.

Homes sold in foreclosure sell for less and can decrease property values around them, a trend that perpetuates "at-risk" communities, the report said. One task force recommendation is to identify and help those areas that face large foreclosure numbers.

There is a substantial likelihood that things will get worse before they get better, Perez said, citing Maryland's strong economy as a delay for the foreclosure spike.

"There's no one magic bullet fix to foreclosure. That's a fact," Perez said.

"Losing a house is a huge setback," Harrington said. "It's one of the ten most traumatic life events, up there with losing a spouse."

"But it doesn't mean you'll never recover from it," Harrington said.


Maryland Homeownership Preservation Task Force Report, Nov. 29, 2007

November 29, 2007

The Charge: In response to rising default and foreclosure rates throughout Maryland, Governor Martin O'Malley established the Homeownership Preservation Task Force on June 13, 2007. The Task Force was charged with developing an action plan to address escalating foreclosure rates and identify effective ways to preserve homeownership for Marylanders. The American dream can become a nightmare unless we create a sound structure to ensure sustainable homeownership. The Governor designated Raymond A. Skinner, Secretary of Housing and Community Development (DHCD), and Thomas E. Perez, Secretary of Labor, Licensing, and Regulation (DLLR), as Co-Chairs of the Task Force. The specific objectives of the Task Force were to:

-- Identify and assess available financial resources (public and private) to assist Maryland homeowners with inappropriate mortgages and recommend additional programs or financial products aimed at reducing the number of new foreclosures in Maryland;
-- Review ongoing outreach, counseling, and educational programs and activities that focus on foreclosure prevention and recommend changes or enhancements as needed;
-- Examine current laws and regulations in Maryland governing the mortgage industry and the foreclosure process and recommend necessary changes, including legislative and regulatory actions where warranted; and
-- Collect and analyze data to plan for current and future needs and monitor foreclosure activity.

The Problem. The Task Force was convened to address the foreclosure spike, which has affected every jurisdiction in Maryland. RealtyTrac ranks Maryland 15th worst based on the number of total foreclosure filings per household for August 2007. The trend toward higher foreclosure rates has the State moving in the wrong direction. Further, it is likely that the increase in foreclosures has not yet reached its peak. Many adjustable rate mortgages (ARMs) taken out in 2004, 2005, and 2006, during the height of the housing and refinancing boom, are scheduled to reset to higher rates in the coming months. The higher interest rates will raise monthly mortgage payments and put many more homeowners at risk of losing their homes to foreclosure.

Maryland pays a substantial cost as foreclosure rates rise. Families lose their homes, are uprooted and their lives are disrupted. Their ability to obtain credit suffers and any equity in the home, quite often a family's chief asset and largest source of wealth, is lost. Lenders lose money, averaging about $50,000-$60,000 lost per home sold in foreclosure. Employees in the mortgage industry lose jobs as lenders reel from the weight of defaulting loans. Residents suffer from depressed home values and the blight of vacant housing, and communities with fewer involved residents become destabilized. Governments lose tax revenues and often must bear the cost of foreclosure sales.

Identifying Issues, Finding Solutions. There are front-end measures that can avert future crises and support sustainable homeownership to minimize the effect of default and foreclosure. A number of the Task Force recommendations address prevention:

-- Stronger underwriting and lending standards and stricter regulatory oversight over the mortgage lending industry;
-- Better homeowner education and understanding of the mortgage transaction so homeowners can avoid predatory players and inappropriate mortgage products and loan terms; and
-- Greater access to sound, affordable financial products for home purchases and refinancings.

Marylanders currently in unsustainable loans or in fraudulent transactions, who are now facing default or foreclosure, need interventions. Task Force recommendations that address the critical needs of homeowners in distress include:

-- Innovative financial products that provide critical gap funding for homeowners who, with some access to financial resources and assistance, can preserve their homes;
-- Stronger laws and enforcement, both regulatory and criminal, to reign in bad players and practices;
-- Foreclosure counseling for homeowners to make sound choices at a difficult time; and
-- An improved foreclosure process that gives homeowners opportunities to avoid or minimize the effects of foreclosure.

The Task Force formed three Work Groups to address the problems and solutions.

The Financial Resources (FR) Work Group closely analyzed data about subprime markets and subprime borrowers, types of transactions, and credit scores on a local and national scale. The FR Work Group presented and explained existing DHCD homeownership programs including the Governor's Home Owners Preserving Equity (HOPE) Initiative. It looked to local programs, other states' initiatives, as well as trends and direction from government-sponsored entities including HUD, Fannie Mae and Freddie Mac for creative solutions appropriate for Maryland. The FR Work Group focused on expanding front-end financial resources to promote sustainable homeownership. These efforts include promoting housing counseling opportunities, financial literacy programs, and increasing the availability of sound financial loan products. The group also proposed solutions, including short-term funding for homeowners in crisis and funding for mortgage workouts to avoid foreclosure.

The Education and Outreach (EO) Work Group examined the capacity of existing housing counseling and financial counseling resources in the State and national resources addressing foreclosure prevention. The EO Work Group focused particularly on the work of two homeownership preservation coalitions in Baltimore City and Prince George's County, which are experiencing high foreclosure rates. It is essential that homeowners have sufficient information about the importance of credit and the terms of the loan transaction to make good choices. The EO Work Group supported education and counseling from qualified counselors at the front-end of the loan transaction. However, homeowners in default and facing foreclosure require not only counseling, but also assistance with loss mitigation strategies and access to legal resources. While the HOPE initiative has provided initial funding to support and train nonprofit counselors, the group identified this as a critical ongoing need. Also, the group recognized the need to assure quality and consistency throughout the network of counseling providers. Equally critical is a statewide coordinated marketing and outreach campaign that links people to accurate information and quality assistance.

The Legal and Regulatory Reform (LRR) Work Group reviewed existing Maryland laws, regulations and practices related to the spectrum of mortgage loan transactions. The LRR Work Group derived good ideas from legislation and efforts of other states and national models. The members of this group examined front-end issues such as mortgage lending and licensing; addressed the harm that fraud and foreclosure scams create; and looked closely at the foreclosure process from the time of default to ratification of the sale. The LRR Work Group reviewed best practices in the industry, and looked closely at codifying those practices that serve to prevent abuses by some in the industry and level the playing field for all, whether regulated at the state or federal level. While all support rooting out fraudulent players, the consensus was that ultimately it must be the strength of our laws and the homeowner's ability to access those laws in a timely, meaningful way that is critical. These recommendations provide a basis for the reforms necessary to assure sound practices within the industry, to restore investor confidence and, most importantly, to support and preserve homeownership for all Marylanders.

Recommendations. The recommendations of the Task Force demonstrate the substantial consensus that emerged in all of the areas despite or, arguably, because of the range of perspectives and interests of the participants. The discussions and debates in this process were robust and extensive. Ultimately, the participants did not reach consensus on all matters raised. The Work Group reports note important arguments for which there was no consensus.

The Task Force is presenting this report and these recommendations to the Governor. The Governor has given high priority to finding solutions to the foreclosure problem because of its devastating impact on Maryland families. The Co-Chairs of the Task Force have emphasized throughout the process that the Governor would carefully review the Task Force report and recommendations. The recommendations are meant to provide the Governor with a framework for reform that reflects the consensus of the Task Force. The Governor may adopt a package that gives serious consideration to the work of the Task Force, but ultimately he will determine which components to support.

The members of the Task Force recommend the following major actions (a detailed summary of the recommendations is set forth in Chapter 5):

1. Create a "Homeownership Crisis Intervention Fund" to provide case-by-case interventions to prevent foreclosures and potential homelessness by: i) assisting households to move to an affordable, stable monthly housing payment; or ii) allowing time for the sale of property.

2. Expand options for homeowners to refinance or restructure mortgages to prevent foreclosure and address affordability.

3. Help communities that are in distress or are at-risk due to concentrations of foreclosure activity in certain neighborhoods or jurisdictions.

4. Promote sustainable homeownership resources through statewide outreach and marketing campaigns that will reach homeowners throughout Maryland.

5. Strengthen and expand nonprofit financial and housing counseling statewide.

6. Coordinate all public and private resources available in Maryland to sustain homeownership.

7. Increase the Commissioner of Financial Regulation's legal and regulatory oversight and enforcement of the mortgage lending industry to strengthen protections for homeowners and ensure the integrity of the industry.

8. Strengthen the laws and enforcement against fraud in mortgage transactions.

9. Improve Maryland's foreclosure process.

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