Expand Economic Opportunity and Reduce Child Poverty

Prevent Mortgage Foreclosures

Mortgage defaults and home foreclosures have become prominently featured in our recent news. This has exposed a problem that low-income families have faced for decades: exorbitant fees, subprime prepayment penalties, and steering customers toward higher priced loans when they could qualify for better loan products. And, for people with already scare resources these forms of predatory lending can have devastating consequences. [i]

Research finds that foreclosures don’t just devastate the individual family, but can have detrimental effects on communities. Research estimates that homes foreclosed due to subprime mortgages between late 2008 and late 2009 will drive down the prices of neighboring properties by $352 billion. [ii] See the state-level impacts on property value that compose this national number.

What Can Policymakers Do?

While much work needs to be done at the federal level, state have an important role to play by helping people facing imminent foreclosure to stay in their homes and preventing high-risk mortgages from being made in the first place.

· Enact foreclosure prevention measures. States can help curb foreclosures through foreclosure intervention laws, counseling services, and foreclosure-prevention loans. As of April 2008, 20 states had foreclosure intervention laws, 25 states had statewide home foreclosure counseling efforts, 13 states had a mortgage foreclosure crisis hotline, and nine states had established a loan fund to help homeowners refinance or provide short-term loans. [iii] See an analysis of state foreclosures and protections developed by the Pew Center on the States and more policy options developed by the Center for Responsible Lending.

· Strengthen protections against predatory mortgage lending. While the federal Home Ownership and Equity Protection Act (HOEPA) provides some protection from very high-cost sub-prime loans, states have found that mortgage lenders have identified loopholes in these measures. Thus, states have been passing supplemental legislation expanding the kinds of loans prohibited to protect consumers. According to research by the Center for Responsible Lending, states with strong anti-predatory laws are finding fewer low-income families taking out loans with abusive terms. [iv] A number of states have used North Carolina’s model mortgage lending law in fashioning their own state laws.

In addition to curbing the availability of high-cost, high risk loans, states have also been exploring:

• Reforming underwriting standards
• Requiring lenders assess a borrower’s ability to repay
• Requiring lenders to verify borrowers income
• Liming of banning prepayment penalties, and
• Prohibiting lenders from steering consumers to higher cost products.

An update of state policy options and activities is available from the Center for Responsible Lending.

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