States Seek To Slow Soaring Foreclosures

As state lawmakers rush to reform lending practices that have contributed to a recent surge of mortgage defaults and foreclosures, consumer advocates say these efforts fall short of what is truly needed: a federal law protecting home buyers.

The number of foreclosures nationally jumped 47 percent in March from a year ago, according to RealtyTrac Inc., a problem concentrated among borrowers with shaky credit who took out higher-priced loans.

Amid fears that the distress in the so-called subprime lending market could spill over into the broader economy, some members of Congress are demanding reforms. But industry officials counter that increased scrutiny from regulators and investors has already triggered self-corrective measures, such as lenders demanding from borrowers more income verification and larger down payments.

On Thursday, Senators Charles Schumer, D-N.Y., Sherrod Brown, D-Ohio and Bob Casey, D-Pa., introduced a bill that would mandate tougher federal standards for mortgage lenders. They also advocated for greater public and private financing of consumer education programs aimed at helping homeowners avoid foreclosure.

Any new laws from Congress are far from certain, however. Senate Banking Committee Chairman Christopher Dodd, D-Conn., says increased regulatory oversight and voluntary actions by lenders are preferable to a government bailout. Dodd announced this week that several major participants in the mortgage market, including Citigroup Inc., JPMorgan Chase & Co. and HSBC Holdings Corp., agreed to adopt a set of principles for dealing with homeowners who face possible foreclosure.

Kurt Pfotenhauer, senior vice president for government affairs at the Mortgage Bankers Association, called Dodd's approach "responsible, thoughtful and forceful." A taxpayer-financed bailout plan doesn't make sense, he said, because "the mortgage finance industry is already stepping up to help those borrowers."

Determining what Congress should do is complicated by a lack of consensus about how much impact the subprime market's troubles may have on the economy.

Steven Wieting, senior economist with Citigroup, said tighter lending standards should result in lower levels of home sales in the coming years. He does not believe the mortgage market's troubles will hamper the economy in the short term.

As defaults rise, credit agencies Standard & Poor's and Moody's have in recent weeks downgraded or placed under review bonds backed by risky mortgages, particularly second mortgages that borrowers have used to finance 100 percent of a home's value.

Moody's predicted last week that investor losses on subprime mortgage bonds issued last year would likely be bigger than expected, as many borrowers will soon face higher — and unaffordable — interest rates at the end of their initial fixed-rate periods.

Christopher Thornberg, principal with Beacon Economics in Los Angeles, said the credit rating agencies should have been far more skeptical. "These things should have been rated as risky a long time ago," he said.

At the state level, lawmakers and government officials have been responding quickly to the mortgage market's troubles. There are more than 100 bills either introduced or already passed to deal with lending abuses and foreclosures, according to the National Conference of State Legislatures.

"The states are more nimble and more responsive to unfair practices," said Ed Mierzwinski, a consumer advocate with the U.S. Public Interest Research Group ."They've proven it time and time again."

Minnesota is trying to lessen the impact by spending $11 million to acquire foreclosed properties and reselling them to people with low incomes. Massachusetts is asking lenders to delay foreclosures for consumers who have filed complaints with state banking regulators. And Colorado lawmakers are considering a consumer protection bill that makes mortgage brokers responsible for pushing borrowers into loans they cannot afford.

Ohio has attracted attention for a new program, to be funded by the sale of $100 million in bonds, to help around 1,000 homeowners refinance their loans into traditional 30-year fixed rate mortgages. Doug Garver, executive director of the state-run Ohio Housing Finance Agency, said that demand for the program is expected to be high, but noted that his agency has limited funding capacity.

"We're not the sole answer to the problem in Ohio," he said.

One potential hindrance for states, some of which have spent years modifying mortgage lending regulations, is last month's Supreme Court decision that the federal government is the sole regulator of national bank subsidiaries. The decision could push more banks to become regulated nationally, rather than by states, some experts say.

Housing advocates who have long pushed for a nationwide law banning "predatory" practices such as excessive mortgage fees and penalties for early mortgage payments see the current crisis in the mortgage industry as the best opportunity in years for a national law.

John Taylor, president of the Washington-based National Community Reinvestment Coalition, said an absence of predatory lending laws at the federal level helped create the mortgage market's troubles, which should provide Congress with "crystal-clear evidence" that reforms are needed.

"What we need to do is create the kinds of consumer protections that will prevent us from getting into a situation like this in the future," he said.