The requirements of the state’s new foreclosure law, which compels lenders to offer loan modifications to homeowners who received predatory mortgage loans, may ultimately encompass a wide swath of lender’s portfolios – if homeowner advocates have their way.
The law, passed last August, is the latest in a series of broad changes to the state’s foreclosure procedures since the housing crisis began that are aimed at helping keep homeowners in their homes. It requires lenders to offer borrowers a chance to have the terms of their loan modified before they can proceed with a foreclosure. And if banks choose not to modify the loan, they will have to provide an accounting of why they believe a modification is infeasible, which the borrower may challenge.
But those additional protections weren’t meant to apply to all loans, only “certain mortgage loans,” which have characteristics common to some of the worst loans given out during the housing boom such as: loans whose interest rates spike after a few years; “negative-amortization” loans in which total debt would increase even if the homeowner made the required monthly payments; and “no-doc” loans which were issued without the lender bothering to verify the borrower’s income and assets.
The law also states that if a lender can’t determine whether the loan is a “certain mortgage loan” it should proceed as if it were.
And that “is very important, because I would argue almost every loan would have to come under this, because how would you know?” said Nadine Cohen, managing attorney of the consumer rights unit at Greater Boston Legal Services. During the housing boom, the vast majority of loans were sold onto the secondary market to be packaged into mortgage-backed securities, often changing hands several times. The original loan documents may now be hard to trace.
“[I]t’s going to be very hard for the servicers, particularly if the loan was sold a number of times, to know if the loan has those characteristics,” Cohen said. “You have to see the origination documents, what the debt-to-income ratio was back when someone got the loan, [which was] maybe five years ago … I think we can use it to apply [modifications] to a very large number of loans.”
That’s just what local lenders are worried about. While the sloppy origination practices that characterized subprime lending have gone extinct along with most subprime lenders, bankers are concerned that even sound loans may be encompassed by some of the law’s criteria.
A Difference Of Opinion
“There’s going to be a pretty big divergence in terms of how institutions are going to determine if a loan qualifies for those protections,” said Jon Skarin, a spokesman for the Massachusetts Bankers Association, with some institutions launching reviews of their entire portfolios to attempt to figure out which loans may or may not be eligible.
Community banks and credit unions may have an easier time addressing the issue. Smaller institutions have smaller portfolios, and may be able to quickly review their troubled loans on a case-by-case basis. And if an institution is only servicing loans held on its own books, it will have easy access to the necessary origination paperwork.
“There’s people that are going through the process, there’s people that have already completed the process of identifying loans. Some of the characteristics are easy to identify. Some are not so easy,” said Deborah Sousa, executive director of the Massachusetts Mortgage Banker’s Association.
But Sousa said more guidance is needed from the Division of Banks as to what loans meet the “certain mortgage” guidelines. Often, when banks refinance a loan for an existing customer, they require much less documentation than when dealing with a new customer. Would that loan not be considered fully documented and thus fall into the “certain mortgage” bucket?
Such points of contention may provide an opening for homeowner advocates to argue that their client’s loan is covered by the new law. And with the law stating a foreclosure cannot commence until the loan modification review is complete, this could further drag out foreclosure timelines.
“We say, that according to the statute, you can’t publish a foreclosure notice without going through these steps. And publication is generally at the end of the process. So I think there’s going to be some back and forth in the courts on this issue,” said Cohen.
Email: csullivan@thewarrengroup.com
