State addresses foreclosure woes
Two thousand six saw a record number of North Carolinians lose their homes to foreclosure, according to statistics kept by the state Administrative Office of the Courts. A total of 45,512 homeowners went under – up 6 percent from the previous year and triple the number in 1998.
Part of the problem can be chalked up to external and personal factors such as job loss, divorce and health-care crises. Consumer advocates also suggest that the previous decade’s easy credit and new, creative financing arrangements for borrowers with troubled credit histories led to the recent collapse of what is known as the sub-prime housing market. A third culprit identified by advocates such as the Raleigh-based NC Justice Center is less than honest loan servicing practices, which often involve saddling unwitting borrowers with hidden fees, misapplying payments and refusing to communicate with borrowers who dispute their balances.
Loan servicing practices are what consumer advocates hope to address with legislation introduced April 10 in the state House and on March 21 in the Senate entitled “Protect Homeowners/Reduce Foreclosure.”
“The number of foreclosures in North Carolina hit an all-time high in 2006,” said Al Ripley, a staff attorney at the NC Justice Center who specializes in consumer rights, who helped craft the legislation. “There are going to be approximately a hundred thousand people that are going to face foreclosure this year, the next year and into early 2009. We need to do something to protect those people.”
Support for the legislation is heavily weighted towards Democratic lawmakers, with Republicans making up only two out of 10 of the cosponsors of the Senate bill and only one of 12 cosponsors of the House bill. The Guilford County lawmakers listed as cosponsors – all Democrats – are Sen. Katie Dorsett, Sen. Kay Hagan and Rep. Pricey Harrison.
Rep. Deborah Ross, the House Majority Whip and a cosponsor of the legislation, said protecting homeowners is one of the Democratic Party’s priorities this session.
“This is not something that will kind of go quietly into the night,” she said. “It’s certainly going to get a hearing.”
Ross said having Rep. Dan Blue, like herself a Raleigh Democrat, as a primary sponsor of the House legislation gives the bill an advantage. Blue chairs the Judiciary II Committee, to which the bill will go for hearings. She also noted that the support of Rep. Walt Church, a Burke County Democrat who has signed on as a cosponsor, bodes well, since Church is a retired banker.
The legislation is comprehensive.
To start with, it would overturn Shepard and Skinner, two NC Court of Appeals decisions upheld by the NC Supreme Court. Shepard determined that the statute of limitation on claims of usurious fees begins when a loan was signed rather than when the last payment is made. Skinner ruled that borrowers do not have the right to sue out-of-state trusts.
“The loan is purchased by a trust; those trusts are located out of state,” Ripley said. “If you want to sue the owner of the loan you have to go to New York to file a lawsuit. And there’s a two-year statute of limitations. Taken together, it puts the borrower at a great disadvantage.”
A key provision of the legislation is transparency.
Ripley said many borrowers do not realize that once they purchase a house, their loan is farmed out to two entities: a trust, which owns the loan, and a servicing company, which services the loan.
“The servicer gets paid a flat percentage,” Ripley said. “The only way the servicer gets paid more money is to apply fees. There’s an incentive for servicing companies to run up these fees…. The servicer has an economic incentive to see the loan go into foreclosure. The holder has an interest in the borrower keeping their home. They’re opposing market forces.”
The legislation requires that foreclosure notices include a detailed transaction history of debits and credits that “shall be clear and easily understood.” Foreclosure notices would also be required to include an itemization of past-due scheduled principal payments, interest due, past taxes due, hazard insurance, mortgage insurance premiums, late fees, homeowners association dues, attorney’s filing fees and other charges.
The legislation mandates that the lender or servicer credit all payments the day they are received and to correct errors related to the allocation of payments. Both provisions seek to protect borrowers from unfair late fees. Another section of the legislation limits the circumstances in which fees can be applied.
“Let’s say you’re late on your February payment and they charge you a fee,” Ripley said. “Then you make your March payment and they apply that to your fee instead of the principal. So you’re late on your March payment and you have another fee. This [legislation] helps control the way your payments are applied, and it stops so-called ‘fee stacking.'”
Ripley noted that borrowers are often ordered by their servicer to purchase homeowners insurance when they already have coverage, or are tagged with property preservation fees, more popularly known as drive-by fees, in which an agent is sent to make sure the property is still inhabited – circumstances attested to by a number of borrowers facing insolvency who were interviewed by YES! Weekly.
“What is a concern is that there are servicing companies that have required forced-place collateral insurance when you already have homeowners insurance,” Ripley said. “And if you don’t pay it they put you in foreclosure. The people who get caught in this are lower-wealth borrowers in sub-prime loans and they don’t have any money to go out and hire an attorney. Their home might be the only asset they have. If you don’t pay it they put you in foreclosure. If you do pay it you’re that much poorer and you’ll have that much more difficulty making your payments.”
Most significantly perhaps, the legislation imposes on the lender or servicer an obligation to avoid foreclosure unless they have offered “whenever feasible, a repayment plan, forbearance, loan modification, or other option to assist the borrower in bringing arrears current.”
“Sometimes a borrower might have a temporary hiccup,” Ripley said. “They might have had to repair their car to keep their job, so the lender will give them forbearance until they get caught up. Good lenders will do that. We just want the law to say that all lenders must do that.”
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