States Tackle Foreclosures In Absence of Federal Help

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By Dina ElBoghdady and Renae Merle
Washington Post Staff Writers
Wednesday, April 16, 2008

This month alone, Philadelphia's sheriff delayed foreclosure auctions of 759 homes at the city council's urging. Maryland extended the time it takes to complete a foreclosure. State leaders in Ohio recruited more than 1,000 lawyers to aid distressed borrowers.

Frustrated by the slow pace of federal action on behalf of struggling homeowners, some states and cities have struck out on their own to stem an alarming rise in foreclosures that has depressed home prices in most parts of the country and eroded local governments' revenues as property taxes and utility bills go unpaid.

Nine states have committed more than $450 million to "loan funds" aimed at refinancing the mortgages of at-risk borrowers, according to a study by the Pew Charitable Trusts. A handful have brokered deals with major lenders who have pledged to ease terms for some troubled loans. A few states have lengthened the time it takes to complete a foreclosure.

"What the states are saying is: 'We can't wait any longer for the federal government. We have to get ahead of this,' " said Tobi Walker, a senior officer at the Pew Charitable Trusts. "The states are experiencing this pain more directly than the federal government is."

Their efforts have yielded mixed results but underscore the pressure local lawmakers face. The number of homes entering foreclosure nationwide is the highest since the Mortgage Bankers Association started tracking the data in 1979. Nearly every state has been hit to some degree. New foreclosures climbed at least 20 percent in 47 states from December 2006 to December 2007, according to Pew.

In some ways, states and cities are better positioned to tackle the fallout than the federal government, housing experts said. They are more familiar with their communities and better able to tailor responses. Local governments lack the resources and clout, however, to effect large-scale change.

At the root of the problem are the lax lending standards that enabled borrowers with little money or poor credit to take out loans they could not afford when home prices shot up in the first half of the decade.

After the housing market softened in late 2005, an increasing number of borrowers could not sell their homes or refinance their way out of trouble. Mortgage default rates started rising.

Some states responded by creating loan funds they could use to refinance the most distressed borrowers. Pennsylvania created two new funds in November to cope with the recent mortgage problems.

One fund offers refinancing for troubled borrowers who have adjustable-rate loans if they meet certain criteria, including a cap on household income and limits on debt relative to income. These borrowers are offered cheaper, more predictable, 30-year fixed-rate mortgages.

The other fund is more aggressive, purchasing loans outright from lenders and then setting up affordable repayment plans with homeowners. In those cases, the agency works with lenders to reduce the mortgage's principal, instead of just rescheduling payments or temporarily reducing the interest rate.

Pennsylvania has refinanced 40 loans and negotiated principal reductions for an additional 38 under the two programs since they were adopted in November, said Brian Hudson, executive director of the state's Housing Finance Agency. In most cases, lenders have agreed to cut the principal by 15 to 30 percent.


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