Massachusetts May Mandate Mortgage Modifications

Voluntary efforts to modify troubled homeowners' mortgages have proved less than successful, with many consumers complaining that lenders seem to be uninterested in helping them avoid foreclosure.

Despite a federal program aimed at helping homeowners get a modification, a small percentage of mortgages have achieved a permanent modification. Some homeowners who started the program, only to be denied a modification, ended up in worse shape than before.

The State of Massachusetts may be poised to address the foreclosure crisis on its own. Massachusetts Attorney General Martha Coakley has drafted legislation that would set standards and mandate loan modifications when it is financially beneficial for the banks.

The legislation, An Act to Prevent Unnecessary and Unreasonable Foreclosures, has been introduced in both chambers of the Massachusetts legislature.

Voluntary measures not working

"The effects of the housing crisis have rippled through all sectors of our economy, and we need to continue to address the subprime lending which largely contributed to this crisis in order to appropriately stabilize our economy," Coakley said.  "We know that voluntary loan modifications will not prevent unnecessary foreclosures. This bill establishes standards to ensure creditors undertake commercially reasonable efforts to avoid unnecessary foreclosure."   

"This bill is an important tool to stabilize the housing industry and provide much-needed protections for homeowners," said State Senator Karen Spilka (D-Ashland), the Senate sponsor of the bill.  "The squeeze on homeowners is painful enough already in this climate; we must make sure banks are dealing fairly with homeowners by providing proper documentation and only foreclosing when absolutely necessary. At the same time, we must give banks the tools to provide home loan modifications when economically feasible. All of these steps will provide much needed stability in the housing market and allow both owners and lenders to move forward."

"Attorney General Coakley has made it a major priority to address the foreclosure crisis in Massachusetts, which has hit communities such as mine, particularly hard," said Representative Steven Walsh (D-Lynn). "This legislation will benefit working families as well as creditors and I am eager to work with Attorney General Coakley towards its passage."

'Commercially reasonable' efforts

The bill aims to prevent additional foreclosures by mandating loan modifications in certain circumstances. Specifically, the loan modification legislation requires creditors to take commercially reasonable efforts to avoid foreclosure upon certain mortgage loans secured by homes that are occupied by the owners as their principal residences. 

Additionally, these loans must contain certain risky features, such as interest-only loans, adjustable rate mortgages, and loans with short-term introductory interest rates.  The legislation also provides a safe harbor for creditors to comply with this requirement of commercial reasonableness.

The legislation also addresses problems with foreclosures highlighted in the recent decision by the Massachusetts SJC, U.S. Bank v. Ibanez, by prohibiting foreclosures where creditors lack the documents supporting their purported right to foreclose, and prohibits passing on certain fees and costs to homeowners.  Specifically, this legislation:

• Codifies the recent SJC decision in Ibanez by requiring a creditor commencing foreclosure to show it is the current legal holder of record of the mortgage.  The bill also forbids misrepresentations to courts concerning holder status;

• Prohibits passing on to third parties the costs of remedying prior improper foreclosures or absence of recorded assignments;

• Prohibits "junk fees" (for goods or services not performed) tacked on during foreclosure and prohibits bribes, referral and similar fees for foreclosure business; and

• Requires recordation of assignment establishing the creditor as present holder of the mortgage before it can foreclose on the property.

A violation of this legislation will constitute a violation of the Massachusetts Consumer Protection Act, Coakley said.

Coakley's office has brought predatory lending cases against two major subprime lenders, Fremont Investment & Loan/Fremont General and H&R Block/Option One Mortgage Corporation.  Most recently, Coakley settled with investment giants Goldman Sachs and Morgan Stanley for their role in securitizing subprime loans.