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Hard Lessons in Helping Homeowners

By Martin O'Malley
Monday, March 9, 2009

For many months, because of federal inaction, the states acted alone to combat the rising tide of foreclosures across our nation. The plan recently announced by President Obama is a welcome effort that will help keep families in their homes. As critical details are worked out, it would be useful for federal leaders to look to the experience of states in crafting solutions.

For the past two years, we in Maryland have worked to help homeowners in distress. We passed a package of reforms that this newspaper called among the furthest-reaching in the nation. We strengthened lending and licensing standards for mortgage professionals and banned prepayment penalties and other defective features of loans. We eliminated the fast track to foreclosure to give homeowners more time to work with their lenders and develop alternative solutions that could allow them to stay in their homes.

These reforms addressed the problem prospectively, but homeowners with toxic loans continue to try in vain to get real help from their lenders. We created a hotline for citizens and convened an army of housing counselors and pro bono attorneys to provide advice. We reached agreements with six mortgage servicers to provide meaningful loss mitigation to homeowners in the state. Yet too many Marylanders still have been unable to access sustainable solutions. Our reach is limited, and most of the largest servicers fall under federal regulation. As a state, we've exhausted our options. Although we're helping more people than ever, more people than ever need our help.

Maryland's experience can provide lessons as the Obama administration prepares to implement its plan. Maryland was the second state to require loan servicers to report data regarding loan modification efforts. The data are startling: Many homeowners are receiving modifications that result in the same or even higher monthly payments because of a failure to forgive fees, penalties and arrearages. Few modifications result in a reduction of the principal balance. As long as servicers continue to refuse to reduce principal, meaningful relief will be impossible for all too many homeowners.

During our negotiations with servicers, we learned that in most cases they have substantial discretion to alter the terms and conditions of loans, including the ability to reduce principal. They all say they want to reduce foreclosures, but too many servicers lack the will to do so.

Homeowners need leverage to counter this lack of will, which is why the Senate must act quickly to reform bankruptcy law to allow judges to alter the terms of home loans. The House passed such legislation last week. Bankruptcy judges can alter the terms on car loans, boat loans and other consumer loans -- but not loans on a person's primary residence. This exclusion must be removed.

Congress should also require institutions receiving funds from the Troubled Assets Relief Program to demonstrate progress in providing sustainable modifications. These institutions should be required to report detailed data and should be held to benchmarks, including having to demonstrate a significant number of loan modifications that result in lower payments.

Another troubling truth we've learned is that minority homeowners were disproportionately offered subprime loans with higher interest rates -- 54 percent of African American homeowners and 47 percent of Hispanics, compared with 18 percent of whites. Federal officials should track modification data by the race and ethnicity of borrowers to ensure that there are no violations of the Fair Housing Act.

We must also aggressively regulate the emerging cottage industry of "mitigation specialists," who swoop down on distressed homeowners with offers of assistance that are often fraudulent. Scam artists are trying to exploit the unsuspecting homeowners seeking relief under this program, and it is vital that strong protections be put in place right away.

The pain of this recession is widespread. People across our nation are losing their jobs and homes. While we cannot save every home, with a meaningful state-federal partnership we can do much more to help those Americans in need.

The writer, a Democrat, is governor of Maryland.

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