Report: Outdated state foreclosure laws are fueling nation's foreclosure crisis

Report: Outdated state foreclosure laws are fueling nation's foreclosure crisis

Marcia Coyle / Staff reporter

The National Law Journal

February 27, 2009

WASHINGTON — Antiquated state foreclosure laws — a number of which do not even require direct notice to homeowners — are helping to accelerate the nation's home foreclosure crisis, according to a report by the National Consumer Law Center (NCLC).

In a survey of existing state laws, the NCLC found that many of the laws now deprive homeowners of basic protections and, in fact, offer better protection to renters.

"The bottom line is that most state laws are not part of the foreclosure crisis solution today; they are a big part of the problem," said John Rao, NCLC staff attorney and co-author of the report. "The stark reality is that while most states updated their landlord/tenant laws decades ago to give renters basic due process protections in the eviction process, no similar reform effort has been made to assist homeowners in the foreclosure process."

Rao said that many state foreclosure laws, enacted in the 19th and 20th centuries and largely unchanged since, came into effect at a time when the residential mortgage industry, to the extent it existed at all, bore no relation to what exists today.

"Significantly, these laws pre-date the enormous changes in the mortgage market that began in the 1980s," he said.

The NCLC report includes the following findings:

• "Fast track" foreclosure: In 30 states and the District of Columbia, mortgage holders who allege that homeowners have fallen behind in their payments can bypass the courts and move directly to auction off homes.

"This denies homeowners due process protection comparable to that given many tenants. It also places upon homeowners the heavy burden to get a judge to review the mortgage holder's claims and stop the foreclosure."

• No direct notification of foreclosure proceedings: In 33 states and the District of Columbia, there is no requirement that homeowners be personally served with a foreclosure notice or legal documents that start a court foreclosure case.

• No effort required to find solutions short of foreclosure: In every state but California and Connecticut, mortgage holders can move directly to foreclosure without being required by state law to consider ways to avoid loss of the home, such as through loan modification.

• Eleventh-hour payments can be ignored: In 29 states, a mortgage holder has no obligation under state law to stop foreclosure even if the homeowner, just before the house has been sold, comes up with money for owed payments and all incurred penalties and fees.

• Additional penalties: In every state but Massachusetts, New Jersey and Pennsylvania, a mortgage holder who claims a homeowner has fallen behind in payments can immediately impose default fees and costs that reduce the chances that the homeowner can catch up by making the payments owed.

• Post-foreclosure penalties: In 36 states and the District of Columbia, mortgage holders can pursue so-called "deficiency judgment" claims against homeowners even after the foreclosed home has been sold at auction.

These claims, seeking to recover the difference between the amount owed on the loan and the amount collected from the foreclosure auction, can be pursued without condition in 15 states and the District of Columbia, and only under certain conditions in the other 21 states.

"States have historically decided under what circumstances a homeowner can lose a home to foreclosure and what procedure a mortgage holder must follow," said NCLC staff attorney and report co-author Geoff Walsh. "This traditional role for states presents a tremendous opportunity for state policymakers to take a fresh look at their foreclosure laws. While reform of state foreclosure laws will not end the current foreclosure crisis, it can significantly reduce the number of foreclosures."

The NCLC report makes recommendations, including the following:

• Mandate judicial supervision over foreclosures of all residential mortgages.

• Require mortgage holders to consider loss mitigation, including loan modification and other workout alternatives, as a condition to allowing the foreclosure of a home.

• Require that homeowners be given a right to cure a default by catching up on missed payments, without penalty, at least 60 days before a mortgage holder demands immediate full payment of the entire mortgage balance and before beginning any foreclosure proceeding.

• Guarantee homeowners the right to reinstate the mortgage by paying the arrearage and costs up to the time of a foreclosure sale.

• Require that homeowners be personally served with the notice of sale or foreclosure complaint.

• Create and adequately fund programs that provide emergency financial assistance to homeowners facing foreclosure.

• Prohibit mortgage holders from pursuing homeowners for deficiency judgments after foreclosures.

• Require judicial supervision over the accounting of foreclosure sale proceeds and a prompt release of any surplus to the borrowers.