While Congress has been talking recently about finally responding to the foreclosure crisis that is plaguing our economy, attorneys general have been busy helping troubled homeowners at the state level.  Attorneys General are filing lawsuits, lobbying legislatures for tougher mortgage lender laws, and partnering with mortgage servicers and community development groups to help rescue homeowners from foreclosures. As the highest law enforcement officers start demanding action, mortgage servicers are going to have to start paying attention.

 For instance, Illinois Attorney General Lisa Madigan is going after mortgage brokers and lenders who she claims used abusive lending practices. She filed suit in November against the Chicago-based mortgage broker One Source Mortgage, alleging the outfit drew in hundreds of clients by advertising low rates on option adjustable rate mortgages (ARMs) but failed to inform borrowers that those rates would adjust upward, often very quickly.

A loan officer told one borrower his interest rate of 0.95% would last the entire first year of the loan, but it jumped to 7.5% after the first month. In order to help the people who have been misled by their brokers, Madigan helped initiate a bill, now before the state legislature, requiring foreclosure notices to include an explanation of options that borrowers have to help them retain their houses. She has also used her influence with lenders and servicers to step up their foreclosure relief efforts and work closer with community groups offering counseling to at-risk borrowers.

Another example of Attorneys General fighting against the current wave of foreclosures is Lori Swanson, Attorney General for Minnesota, who was a force behind a new state law requiring mortgage brokers to act in the best financial interests of their clients, much as attorneys do for clients or CEOs do for their companies. Instead of selling a mortgage like a car, this law requires that mortgage brokers take on the duty of agency, acting on the borrower's behalf. This means brokers can't stick borrowers with sub-prime loans just because they pay out more in fees and commissions to the broker. It also means brokers are obliged to make sure borrowers understand exactly what kinds of costs and obligations they're signing up for. Swanson is also going after companies which are taking advantage of desperate homeowners by charging fees upwards of $2,000 and falsely promising to save their homes from foreclosure.

In Massachusetts, Attorney General Martha Coakley went after a particularly insidious foreclosure scam crime called "equity stripping." This involves people persuading borrowers to temporarily assign them title to their homes so the foreclosure can't proceed. They promise to make payments while homeowners repair their finances and get back in a position to pay their mortgages again while the home rescuer is actually working with a crooked appraiser to inflate the value of the home. They then resell the house at a big price to a straw buyer who obtains a mortgage based on the inflated appraisal. The crew disappears with the cash from the sale and the one-time owner loses the house. By leading this fight, Coakley got state regulations changed to ban for-profit foreclosure rescue companies and in turn make these scams impossible.

In March, New York Attorney General Andrew Cuomo reached an agreement with Freddie Mac and Fannie Mae, the government sponsored enterprises (GSEs) created to keep funds flowing in home mortgage markets. They promised to buy mortgage loans only from lenders who used independent appraisers to value real estate. This was done because appraisers often inflate home values to ensure the sale or re-financing. If an appraisal comes in low, underwriters won't approve the deal because it means the loan is not fully secured by the value of the asset. These inflated appraisals contributed to the overheated prices of the bubble years.

Most loans now trade through the GSEs, so the pact has the effect of preventing all loan originators from using anything but independent appraisers, not only in New York but nationwide. However, there has been some opposition from federal bank regulators. The Office of the Comptroller of the Currency has claimed that states have no authority over the nationally chartered banks that may be making these loans. In response to The Office of the Comptroller of the Currency, state AGs have formed the State Foreclosure Prevention Working Group, under the leadership of Tom Miller, the Attorney General of Iowa, encouraging lenders to offer more workouts to borrowers. Among other things, the group has pushed for better reporting of mortgage workouts from lenders and servicers in order to help the borrowers understand the progress that is being made toward the avoidance of foreclosures.

Along with the request for better reporting, the State Foreclosure Prevention Working Group has done released a report in April that found half of the people asking servicers for help in avoiding foreclosure were not getting it. That is a tragic number; so many foreclosures are fundamentally avoidable and unnecessary.

Source: CNN Money