When it comes to putting out fires, the Massachusetts Legislature could learn something from the professionals in the Boston Fire Department (BFD).
Through the first three quarters of last year, the BFD responded to 72 percent of all calls in less than four minutes, according to a report prepared by the mayor’s office. The Legislature recently responded to an emergency of its own – except its response time, and its response in general, are far less impressive.
Last week, in recommending passage of House Bill 4323 – meant to prevent unlawful and unnecessary foreclosures in the commonwealth – the committee of conference slapped the legislation with an emergency preamble.
The preamble makes the law effective immediately after it is signed by Gov. Deval Patrick. No 90-day implementation window, no “effective Jan. 1” language. Hey, it’s an “emergency,” and emergencies demand rapid response, right?
Except the foreclosure fire has been raging in Massachusetts for upwards of five years now. If the BFD boasted that kind of response time, Boston would have long since burned to the ground in a raging inferno.
The fact that the Legislature is taking action to help prevent unlawful and unnecessary foreclosures, all in the name of “[protecting] forthwith the citizens of the commonwealth,” is admirable.
But bankers and lenders are residents of this commonwealth as well, and rather than extinguish the fires of regulatory hell that have been burning around them for months, this legislation only serves to stoke the flames.
The law requires lenders to determine the financial impact of modifications of certain burdensome mortgage loans versus foreclosure on those same loans. As it’s written, “In all circumstances where the net present value of the modified mortgage loan exceeds the anticipated net recovery at foreclosure, [the lender must agree] to modify the loan in a manner that provides for [an] affordable monthly payment.”
So, hypothetically, if a loan modification will net a lender $110,000 over 15 years, and a foreclosure action will net $100,000 today, the lender must choose the former option – even if choosing the latter might make more financial sense.
Additionally, if the loan was underwritten with a loan-to-value ratio (LTV) at or exceeding 90 percent and with a debt to income ratio (DTI) exceeding 38 percent, it is eligible for modification consideration. Lenders we have spoken to worry that broad definition could sweep up thousands of FHA loans, often written with LTVs north of 95 percent and DTIs hovering near 40 percent.
FHA loans are expressly designed to help low and moderate-income buyers get into a home – are we really to believe that these loans are now also potentially too burdensome?
And the law excludes loans financed by the Massachusetts Housing Finance Agency and the Massachusetts Housing Partnership Fund – as if those state agencies have never written potentially burdensome loans of their own.
Finally, there is the problem of the emergency declaration itself. Because there is no time built in for lenders to adapt to the strict new changes, new foreclosure procedures – and the all-critical compliance checks that will accompany them – will have to be adopted literally overnight. This in an era where even seemingly innocuous word changes on disclosure forms are scrutinized by teams of lawyers for weeks and months to ensure compliance.
If woefully overworked compliance officers and risk management teams weren’t already tempted to engage in self immolation, we imagine it will certainly be an appealing option now.
Our political leadership has now had a half a decade to fully consider foreclosure prevention legislation that is fair to both overly burdened homeowners and their lenders alike. Instead, what we’ve gotten seems to be a knee-jerk reaction to a long-smoldering “emergency” designed to take advantage of wildly pro-consumer sentiment at a time when bank-bashing is all the rage.
And it all seems sadly destined to keep the foreclosure fires burning, in some form or another, for years to come.
