States should require mortgage servicers to negotiate loan terms with borrowers to prevent foreclosure and allow borrowers to pause a foreclosure sale should the servicer violate that requirement, two consumer advocacy groups said in a report released today.

The Center for Responsible Lending and Consumers Union said their recommendations would close gaps in foreclosure safeguards left by new federal mortgage servicing rules from the Consumer Financial Protection Bureau and by last year’s national mortgage settlement among 49 state attorneys general, federal officials and the five biggest mortgage servicers.

“Despite these recent advances, millions of families remain poised to lose their homes. There is room for states to build on these reforms and help avoid unnecessary foreclosures,” the report said. “Over the last several years, some of the most significant problems have included the failure to review homeowners for a loan modification and foreclosing on borrowers even as the servicer is considering an application for a modification,” or so-called “dual tracking.”

The consumer groups suggested states adopt legislation modeled on California’s Homeowner Bill of Rights, which bans dual tracking and explicitly requires servicers to consider foreclosure alternatives before beginning, or if a loss mitigation application is submitted after the loan is referred to foreclosure, continuing the foreclosure process.

The legislation also requires lenders to detail why a loan modification was denied and notify borrowers that they have the right to appeal a denial. The report also suggested servicers be required to submit an affidavit stating that they have complied in good faith with the state’s loss mitigation procedures.

The report further recommended that, as in the California law, if servicers violate any of these requirements, that borrowers be allowed to halt a foreclosure through either an injunction (in non-judicial foreclosure states) or a defense to foreclosure (in judicial foreclosure states) until the servicer complies with the law.

“If the servicer complies with the law’s requirements and determines after a full and proper examination that the homeowner does not qualify for a loan modification or other alternative, then the servicer may proceed with a foreclosure sale,” the report said.

“If the servicer determines that the homeowner does qualify for a loan modification or other loss mitigation alternative, then the home would be saved: the foreclosure proceedings would be dismissed, and an unnecessary foreclosure will have been averted.”

The California foreclosure law, which went into effect at the beginning of this year, has drawn some opposition from the real estate industry. At the time of its passing, opponents of the legislation worried that slowing the foreclosure process would hamper a housing market recovery.

study commissioned by the California Mortgage Bankers Association and other financial services organizations concluded that the legislation would help only “a tiny fraction” of homeowners who are behind on their payments and would increase costs for loan servicers, reduce home values, and make credit less available to California homebuyers by raising the risk of lending.

Moreover, the U.S. housing market is currently plagued by inventory shortages, partially because the number of completed foreclosures has fallen by double-digits compared to a year ago. The amount of time it takes mortgage loans to go through the foreclosure process is now measured in years, particularly in states where courts handle the foreclosure process and in states that have recently passed legislation designed to prevent foreclosures, according to a report last month from Lender Processing Services Inc.

Sean O’Toole, founder and CEO of ForeclosureRadar, blasted the California foreclosure legislation last year, which he said “naively thinks that slowing foreclosures will benefit homeowners and the economy by leaving those owners stuck in their prison of debt.”

“Bottom line is we think they’re working on the wrong problem. Foreclosures are part of the solution, not the problem. Negative equity is the real problem, and this bill does nothing to help homeowners underwater get out from being underwater,” O’Toole said at the time.



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