The state’s foreclosure prevention bill that will help thousands of homeowners in East Boston, and across the state, find ways to stay in their homes by working with banks was passed by the House last week.
The legislation, Senate Bill 868/House Bill 3516, An Act to Prevent Unlawful and Unnecessary Foreclosures, was filed by Attorney General Martha Coakley in January 2011. After the bill was filed, Senator Anthony Petruccelli, Chairman of the Joint Committee on Financial Services and Representative Carlo Basile, Vice Chairman of the Joint Committee on Financial Services, worked to push the crucial bill that would help curb the rate of foreclosures here in Eastie and the state.
“Thanks to the efforts of my colleagues in the Financial Services Committee, we have passed critical legislation that gives much needed protection to home owners,” said Basile. “Now, instead of foreclosing immediately, banks must assess the value of a foreclosure versus offering a loan modification. If the foreclosure is worth less than the projected payout of a foreclosure, the banks must offer the modification which benefits both parties.”
Petruccelli and Basile, through the Joint Committee on Financial Services, heard testimony in support of legislation that would prevent foreclosures by requiring loan modifications when it is in the financial interest of the borrower and the lender.
“Two years ago we passed legislation that gave borrowers a 150 day right to cure loans in default and that was our approach to create a conversation between banks and borrowers and give the opportunity for both parties to work out ways to keep people in their homes,” said Petruccelli. “However, we found that some larger banks were starting the clock at day one and allowing the 150 days to run out without any meaningful discussion with the borrower on ways to prevent foreclosure.”
The bill will address these issues and set in statute a procedure to help prevent unnecessary and unlawful foreclosures.
Specifically, the loan modification legislation requires creditors to analyze a borrowers current monthly statement; analyze according to a net-present value test whether offering the borrower a loan modification to an affordable monthly mortgage payment is more valuable to the creditor than the losses it will incur upon foreclosure; and take into account the interests of the creditor, investors and taxpayers where the creditor has received federal or state money.
“If the bank stands to loose more money doing a foreclosure they will be required to work with the borrower on a loan modification that makes sense for both parties,” said Petruccelli. “For example if a borrower is sitting on a $250,000 note and the bank can only sell that property in foreclosure in today’s market for $175,000 the bill sets up procedures for a lender to work with the borrower to take reasonable steps and in a good faith effort to prevent foreclosure.”
The bill does not require loan modifications in all circumstances, nor does it require loan modifications that do not make economic sense. In those instances where the modification of a loan with risky features is more profitable, the creditor must identify what the affordable monthly payment would be and offer a plan that reduces the interest rate of the loan, reduces the principle of the loan, or increases the amortization period. The result is a continuing, though decreased, income stream for the lender or investor, that value exceeds the expected losses of a foreclosure, and allows for borrower’s to stay in their homes.
“The single biggest thing that we can do to spur economic recovery is to address the foreclosure crisis – this bill is part of that solution,” said Coakley. “This bill proposes a reasonable means to achieve large-scale loan modifications for homeowners, allowing people to stay in their homes and avoiding the negative impact of increased abandoned properties in our communities. It does this without asking the banks to sacrifice their bottom lines to do it.