Although federal policy governs many of the transactions involved in home foreclosures, state policy plays an important role as well. A number of states are pursuing strategies that are considered promising by experts in the field.[i]

What Can Policymakers Do?

A number of states are taking action led at times by legislation and judicial action. In some states, foreclosure proceedings are primarily managed by the court system, and in others the process is governed only by state statutes (see state-by-state breakdown). Regardless of these policy differences, however, the following options are available to all states:

• Require mediation in foreclosures. Mediation can enhance communication between borrowers and lenders, can expand borrowers’ knowledge and protection by including a professional arbiter (such as a judge, attorney, or other third party), and can improve transparency and oversight of foreclosure transactions. In some states, courts have enacted requirements. For example, the New Jersey judiciary mandated a statewide foreclosure mediation program.

• Create a moratorium on foreclosures, or extend timeline. By freezing or delaying foreclosures, states can provide borrowers and lenders with additional time to explore restructuring options, including accessing new market products and federal assistance that may be delayed due to the high demand on servicers. For example, Connecticut legislation creates an option for mediation with a freeze on foreclusures during the mediation period. North Carolina enacted legislation requiring notice 45 days prior to foreclosure, and engaging the Commisioner of Banks in identifying subprime loans that may be appropriate for restructuring to avoid foreclosure.

• Enact protections against predatory mortgage lending. States can prohibit lending practices that result in the loss of home equity by unsuspecting consumers. These practices include negative amortization, prepayment penalties, credit insurance financing, home loan refinancing to the detriment of the consumer, high interest rates not justified by risk factors, and excessive foreclosures. The most effective state policies are those that include specific restrictions on unfair practices that supplement restrictions included in federal law. For example, North Carolina enacted the first comprehensive law protecting against predatory mortgage lending in 1999 and has since strengthened those protections in 2007.

• Provide counseling and financial assistance. For families in danger of foreclosure, states can provide foreclosure counseling assistance, legal aid, and financial assistance. For example, Arizona is one of many states that have established a foreclosure prevention hotline, and Illinois has established a Homeowner Assistance Initiative to aid families with multiple foreclosure prevention services.