By Alfred Ripley
For the Salisbury Post
Foreclosure filings are skyrocketing in North Carolina. In recent years, the numbers of filings have increased nearly threefold to an all-time annual high of over 45,000 in 2006. The reason for this increase? The main culprit, according to recent studies, is the large and growing number of home loans made by subprime lenders. While subprime loans have been around for decades, they didnt used to be as damaging or widespread as they have become in recent years.
When homes are foreclosed because subprime mortgage lenders have made unfair loans, or used abusive practices in assessing fees or collecting on the loans, not only do families face homelessness but communities and our economy suffer in numerous ways. This is not a theoretical problem.
Foreclosures often cause property values to decrease, and this depreciation hurts the homeowner and the whole neighborhood.
In todays market, subprime loans account for a significantly larger proportion of the market than ever before. Moreover, many subprime lenders are now making what are called exotic adjustable rate mortgages that feature low teaser interest rates that quickly adjust to much higher, often unaffordable levels shortly after the loan is finalized. These loans sometimes include prepayment penalties, balloon payments and often dont provide for taxes and insurance to be set aside in an escrow account thus subjecting borrowers to sudden and unexpected costs. In addition, most lenders quickly sell the loans they make to investors on the secondary home loan market so that they no longer have to be concerned with whether the loans foreclose or not. This encourages lenders to make riskier loans.
The only good news is that while home foreclosures have skyrocketed, there is something that we can do about it. North Carolina should consider amending its lending laws to require lenders to determine whether or not a borrower really has the income and resources to repay the loan-not just the low, initial teaser rate, but the real, long-term rate that will be charged once the interest rate adjusts. While such a law might force a few potential homebuyers to wait a little longer in order to realize their dreams, it would also save thousands from experiencing the nightmare and long-term financial damage of a foreclosure.
A second factor contributing to the states foreclosure problem is the predatory servicing of home mortgage loans. Loan servicing is the process of collecting loan payments and fees on home mortgages. In order to increase profits, some servicing companies charge borrowers unreasonable, and sometimes illegal, fees or process payments in such a way that fees are triggered. Many servicing companies also make it hard to get loan statements or other information that shows if loan payments are misapplied or improper fees charged. The result is that borrowers have a hard time proving that the loan servicer is cheating them especially given the expense and difficulty in finding a knowledgeable lawyer for a homeowner already on the edge of not having enough money to pay the mortgage. Too frequently, the fees add up and borrowers are tipped into default and, eventually, foreclosure.
Servicing problems can be addressed. The state should ban the most unfair servicing abuses. Giving borrowers the right to receive statements and other information will help homeowners monitor their loans, stop abusive practices and prove what abusive servicers are doing.
A final concern is the lender-designed foreclosure process itself. Currently, North Carolina law allows lenders to use the court system to foreclose on borrowers, but effectively denies borrowers the opportunity to raise defenses to abusive servicing practices. According to the rules, as long as the lender can show that there was a debt thats overdue, there is virtually nothing a borrower is allowed to argue even if the loan was serviced in a blatantly unfair way. This law should be changed to bring more balance to the process.
These changes to North Carolina law ensuring borrowers can afford the loans they get, requiring loan servicers to treat borrowers fairly, and improving the foreclosure process will, over time, significantly reduce the number of foreclosures in the state. Given the magnitude of the problem, theres no time to waste.
Alfred Ripley is legal counsel for Consumer and Housing Affairs at the NC Justice Center, an anti-poverty organization based in Raleigh.