AG Coakley: Addressing Foreclosure Crisis is Key to Economic Recovery
Testifies In Favor Of Legislation to Require Loan Modifications in Certain Circumstances
BOSTON – Calling addressing the foreclosure crisis “the single biggest thing we can do to spur economic recovery,” Attorney General Martha Coakley today testified before the Joint Committee on Financial Services in support of legislation that would prevent foreclosures by requiring loan modifications when it is in the financial interest of the borrower and the lender.
Senate Bill 868/House Bill 3516, An Act to Prevent Unlawful and Unnecessary Foreclosures was filed in January 2011 by AG Coakley and co-sponsors Senator Karen Spilka (D-Ashland), and Representative Steven M. Walsh (D-Lynn).
“The single biggest thing that we can do to spur economic recovery is to address the foreclosure crisis – this bill is part of that solution,” AG Coakley said. “This bill proposes a reasonable means to achieve large-scale loan modifications for homeowners, allowing people to stay in their homes and avoiding the negative impact of increased abandoned properties in our communities. It does this without asking the banks to sacrifice their bottom lines to do it.”
“The one thing that we cannot accept, however, is to do nothing,” Coakley added. “We’ve seen the consequences of that, and too many families and our entire economy are still suffering as a result of it.”
“This legislation take a common sense approach and requires that creditors complete a series of steps before foreclosing on an owner-occupied property,” said Representative Steven Walsh. “In the city of Lynn I have seen firsthand how foreclosures can devastate middle to low income families in neighborhoods I represent and this legislation can provide some extra tools to keep families in their homes and help to rebuild communities.”
“We need to make sure banks are dealing fairly with homeowners by providing all the proper documentation and taking reasonable efforts to avoid foreclosures,” said Senator Karen Spilka, the Senate sponsor of the bill. “By ensuring fair negotiations, this bill will provide much-needed protections for homeowners across the Commonwealth and will help stabilize the housing industry and economy.”
In her testimony today, AG Coakley pointed out that despite promises from the major banks, modifications are not occurring in Massachusetts on the scale needed to prevent further harm to communities and families. However, loan modifications based on a net-present value test as proposed in this legislation are economically sound for both lenders and borrowers. Noting that the bill provides a sensible process that takes into consideration the best interests of all parties involved, the AG outlined a legislative plan that if implemented, would require creditors to modify loans when an analysis shows that it’s more profitable to modify the loan than to foreclose. The legislation only applies to loans that have been identified as having certain risky features, typically associated with subprime loans, and in which the banks knew or should have known were destined to fail.
Specifically, the loan modification legislation requires creditors to analyze a borrowers current monthly statement; analyze according to a net-present value test whether offering the borrower a loan modification to an affordable monthly mortgage payment is more valuable to the creditor than the losses it will incur upon foreclosure; and take into account the interests of the creditor, investors and taxpayers where the creditor has received federal or state money. The bill does not require loan modifications in all circumstances, nor does it require loan modifications that do not make economic sense. In those instances where the modification of a loan with risky features is more profitable, the creditor must identify what the affordable monthly payment would be and offer a plan that reduces the interest rate of the loan, reduces the principle of the loan, or increases the amortization period. The result is a continuing, though decreased, income stream for the lender or investor, that value exceeds the expected losses of a foreclosure, and allows for borrower’s to stay in their homes.
The legislation would also codify two recent Supreme Judicial Court Decisions, Ibanezand Bevilacqua, by requiring a creditor commencing foreclosure to show it is the current legal holder of the mortgage.
A violation of the proposed legislation would constitute a violation of the Massachusetts Consumer Protection Act.
Since taking office in January 2007, combating the foreclosure crisis has remained a priority of Attorney General Coakley’s administration. By seeking accountability through litigation, regulation and other advocacy, the Attorney General’s Office has made a significant impact on those who live in the Commonwealth. On the enforcement side, the office has brought predatory lending cases against two major subprime lenders, Fremont Investment & Loan/Fremont General and H&R Block/Option One Mortgage Corporation. Tracing the roots of the problem to Wall Street, AG Coakley’s Office also settled with investment giants Goldman Sachs and Morgan Stanley for their role in securitizing subprime loans. The AG’s Office has also brought enforcement actions against mortgage professionals who engaged in loan application fraud and other loan origination misconduct.
On the regulatory side, AG Coakley enacted regulations to prevent predatory lending, and worked together with the Massachusetts Division of Banks for the enactment of legislation that provides additional protections for borrowers facing foreclosure. AG Coakley’s Office issued new regulations, effective in January 2008, governing the mortgage brokers and mortgage lenders in Massachusetts. These regulations, 940 CMR 8.00, significantly expanded consumer protections to address an array of unfair and deceptive practices in home lending that have contributed to the ongoing foreclosure crisis and harmed thousands of Massachusetts residents and their communities.
Attorney General Coakley continues to be a national leader in bringing actions on behalf of homeowners against companies relating to their role in the subprime market place. Over the past three years, AG Coakley has obtained recoveries from Morgan Stanley, Goldman Sachs, Countrywide, and Fremont Investment & Loan, for their roles in the subprime lending crisis. As a result of these actions, her office has recovered more than $563 million in relief for investors and borrowers, helped keep more than 24,700 homeowners in their homes, and returned nearly $52 million in taxpayer funds back to the Commonwealth.
More information about AG Coakley’s work during the lending crisis can be found here.