The state’s foreclosure prevention bill backed by Senator Anthony Petruccelli and Representative Carlo Basile 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 sent to the Governor’s desk 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, Petruccelli, Chairman of the Joint Committee on Financial Services and 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.
“As I noted when the bill emerged from the committee, we have worked extremely hard over the course of the session, and throughout the conference committee process, to produce a meaningful, reasonable approach to address the outstanding foreclosure crisis,” said Petruccelli. “I am hopeful that this new law will help families and our communities for years to come.”
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 requires banks and other lenders to offer loan modifications to borrowers in certain circumstances to avoid foreclosures. Lenders must conduct a complete financial analysis of the borrower and determine if it would be more beneficial to receive lower monthly mortgage payments or the anticipated recovery from a foreclosure.
There is a 150-day timeframe for deciding whether or not to offer the loan modification, which may come in the form of a reduced interest rate or principal, or an extension of the loan repayment period. The modified loans would allow borrowers to stay in their homes, lenders to avoid foreclosure costs and potential market losses, and neighborhoods to avoid the problem of abandoned properties and vacant lots.
“I commend my colleagues on the conference committee for this prudent piece of legislation. It represents a good compromise that will undoubtedly help many people in the Commonwealth. This bill will help people to keep their homes, save local communities from the adverse effects of unnecessary foreclosures, and stabilize the housing market, thus strengthening our economy,” Basile. “Even banks have acknowledged that it often makes more financial sense to create an affordable payment plan rather than foreclosing and selling a home at a substantial loss. This bill gives us a fair and reasonable approach to offer modifications to more than 100,000 Massachusetts borrowers. We can keep people in their homes without sacrificing the banks’ bottom lines, and save families and communities.”
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 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.
“We commend the House and Senate for passing this critical legislation to assist struggling homeowners and help Massachusetts fully recover from the foreclosure crisis,” said Coakley. “This bill establishes first-in-the-nation standards that will promote reasonable loan modifications and keep people in their homes without requiring banks to sacrifice the bottom line. We thank Speaker DeLeo, Senate President Murray, Chairman Costello, Chairman Petruccelli and the Conference Committee for their leadership on this important issue and for working so diligently on behalf of the residents of the Commonwealth.”