by Henry Lane, Attorney
Lane & Hamer, Whitinsville, MA
Since neither efforts at the state or federal level have had a significant impact on the number of foreclosures over the last five or six years, the Massachusetts legislature recently made its third attempt at addressing the problem. The legislation, aimed at "preventing unlawful and unnecessary foreclosures," addresses two problems, one minor and one more substantive. The minor and more technical issue addressed by the legislation is the new requirement that before a mortgage lender can begin foreclosure proceedings, the lender's ownership of the mortgage must be clearly documented in the Registry of Deeds. This legislative fix addressed the confusion that has arisen in recent years because of the sale and packaging of large pools of mortgage loans to various investors. Since the mortgage loans were sold in groups and the transfers were often only documented by non-governmental loan servicing companies, it was often difficult to determine who actually owned a particular mortgage loan and consequently, almost impossible for a homeowner facing financial difficulty to effectively communicate with their mortgage lender.
The second and more substantive change is a new requirement that before a home mortgage lender can begin the foreclosure process, it must take "reasonable steps" and make a "good faith effort" to avoid foreclosure. The legislation goes on to define what reasonable steps are and what constitutes a good faith effort. Essentially, the legislation requires that before a lender can start the foreclosure of a mortgage, it must determine whether the lender and its investors would be better off if the lender completed the foreclosure and sold the property at a foreclosure auction or if it modified the loan in a way that made it affordable for the current homeowner. If the lender determines that it would be better off if the loan terms were modified, the lender must offer the current homeowner modified loan terms.
On the face of it, the legislation seems perfectly reasonable and a casual observer might question why the legislature felt compelled to pass a bill requiring mortgage lenders to do what would appear to be in their own economic best interest. Furthermore, based on the limited success of prior state and federal efforts to stem the rising tide of foreclosures, it would seem reasonable to be somewhat skeptical about the prospects for this latest legislative effort.
As with most legislation of this nature, the enactment is limited in its effectiveness. The first limitation is the result of a compromise by the joint legislative committee appointed to reconcile House and Senate versions of the bill. A mandatory mediation component of the legislation was deleted before passage. Obviously, the requirement for mandatory mediation would have significantly delayed every foreclosure and would have also significantly increased the cost of foreclosure because the lender would have incurred the cost of the mediation service and of the personnel required to process the mediation.
Secondly, the legislation requiring reasonable steps and a good faith effort by mortgage lenders to avoid foreclosure is limited to modifications of certain classes of mortgage loans such as so-called "subprime" mortgages, mortgages that were originated with a very high loan to value ratio (95%), so-called "no documentation" loans and other loans that exceeded normal underwriting standards or had "teaser" rate or balloon payment features.
Finally, the net effect of the legislation is somewhat blunted by the fact that the loan modification process essentially requires the homeowner to re-apply for the loan by providing all of the same income verification and documentation ordinarily required for a standard mortgage loan. The mortgage lender then is allowed to use up to a 45-year repayment period to determine whether or not a loan modification would be more advantageous to the lender than a regular foreclosure. Past experience suggests that the typical struggling homeowner faced with a mortgage balance greater than the value of their home, is reluctant to sign onto a modified loan with a term of up to 45 years in the hope that sometime in the future their struggle to make payments will result in some home equity. Under the circumstances, many struggling homeowners may simply accept the inevitability of foreclosure and decide that starting over is a better option.