Friday, December 21, 2007

Stabenow law offers debt help but foreclosure crisis rages on

U.S. Sen. Debbie Stabenow's Mortgage Forgiveness Debt Relief Act has now been signed into law. The Michigan Democrat's legislation frees individuals from paying income tax when they have had a part of their mortgage loan forgiven or have been forced to foreclose. It is a measure to remove the insult of additional taxes after the injury of foreclosure.

Even with this legislation, there is more work ahead to help borrowers stay in their homes, keep credit affordable and stave off a recession. There is plenty of blame to go around in Michigan's foreclosure crisis and not all of it in Michigan. Politicians are scrambling to respond to a crisis that was years in the making and could have been prevented through sensible regulation and appropriate oversight. Other recent actions include:
    • The Bush Administration announced an entirely voluntary plan for mortgage servicers to consider instead of outright foreclosure when borrowers fall behind on payments.

    • The Federal Reserve Bank has approved a set of rules that resemble pre-1980 lending practices - that require evidence of borrowers' income and ability to repay loans and full disclosure of the terms of a loan to borrowers before closing the deal.

    • Congress is considering legislation that would allow the Federal Housing Authority to refinance sub-prime loans due to reset at higher interest rates. The FHA would reduce down-payment requirements and increase loan amounts to accommodate the loans.

    • The Michigan Legislature is considering a sheaf of bills that would require licensing for loan officers and prohibit predatory lending practices.

    • Michigan Attorney General Mike Cox last week sponsored a foreclosure prevention forum at Cobo Center that attracted thousands of borrowers behind on their mortgage payments.

Michigan has recorded over 135,000 foreclosure filings this year. The Detroit area ranked second highest in the third quarter for the rate of households in foreclosure -- one out of every 33 households. Wednesday, RealtyTrac announced that nationally 201,950 foreclosure filings were reported last month, compared with 120,334 in November 2006. Nevada, Florida and Ohio had the highest rates of increase over the year.

While the situation in Michigan is not unique, it is exacerbated by our declining manufacturing economy. Here are some of the ingredients that went into making Michigan's mortgage mess:

    • Repeal of the Glass-Steagall Act in 1999. In 1933, this federal act was created to separate investment and commercial banking activities in order to prevent the speculative excesses of the type that preceded the Great Depression. Sixty-six years later, the walls protecting mortgages from becoming fodder for financial speculation finally came down.

    • Not enough mortgage examiners. The Michigan Office of Financial and Insurance Services (OFIS) is responsible for regulating the mortgage industry in Michigan. OFIS has an insufficient number of examiners - 12 to regulate over 2,800 companies making mortgages.

    • Mortgage loan officers in Michigan are not licensed. Nor does the state require background checks. Convicted criminals can become loan officers.

    • Inadequate consumer education. At the epicenter of the foreclosure crisis, Detroit HOPE, a coalition of lenders and consumer advocates, was formed in 2005 to reduce foreclosures in the metro area. In 2007, by September, the group had only held three foreclosure-prevention workshops. Only about 75 people attended each seminar.

    • Unethical, but legal, practices. Offering adjustable-rate mortgages to sub-prime borrowers is not illegal. Lax federal and state regulation has permitted giving loans without verifying income or ability to repay.

    • Unclear jurisdiction. According to the Conference of State Bank Supervisors, matters of jurisdiction are still being worked out between the states and the federal government in the courts. This April, in Watters v. Wachovia, the U.S. Supreme Court ruled that state-chartered subsidiaries of national banks are exempt from state regulation. OFIS Commissioner Linda A. Watters had advocated for state regulation of state-chartered subsidiaries. Numerous organizations filed amicus briefs, as well as every state attorney general in the nation including Washington, D.C., and Puerto Rico.