Stateline Story

Ohio Tries to Fend Off Foreclosures on Home Loans

For Joel Ghitman, director of the Ohio Housing Finance Agency , the phones have barely stopped ringing in the past three weeks.
 
The number of calls doubled to 200 a day after the state launched a first-in-the-nation program April 2 to help homeowners whose once-affordable mortgage payments are now busting family bank accounts.
 
Ohio led the country with the highest overall foreclosures rates in the last three months of 2006, followed by Indiana and Michigan, according to the Mortgage Bankers Association .
 
"We're painfully aware of the situation in Ohio," Ghitman said. The independent agency noticed about a year ago that more Ohioans were falling behind on their mortgage payments and, in some cases, losing their homes because they defaulted on their house loans.
 
Ohio joins other states, the federal government, advocacy and consumer groups, lenders and brokers in trying to find ways to help struggling homeowners, particularly those who took out riskier "subprime" adjustable-rate loans that required little or no down payment but now have much steeper interest rates kicking in, causing sticker shock for many borrowers.
 
The Ohio program is designed to help strapped borrowers refinance their mortgages. The Ohio agency has a network of 185 lending partners in the state that will work to offer 30- or 20-year loans with "fixed" rates that won't change. All borrowers are required to participate in one-on-one financial counseling as part of the Opportunity Loan Refinance Program . "It is extremely important that buyers are educated about the process," Ghitman said.
 
The agency will rely on the issuance of taxable bonds to finance the program and expects to help about 1,000 families. If demand is higher, the agency said it will issue more bonds and hopes that up to $500 million each year could be provided.
 
Ohio's weak economy, like Michigan and Indiana's, is part of the problem. People who lose their jobs often can't make their house payments. And with the softer housing market, borrowers may have a hard time refinancing or selling their homes to cover their losses. The "subprime" mortgage, a relatively new kind of loan aimed at people with little credit history or credit problems, accounted for about half of the loans in foreclosure in Ohio, Indiana and Michigan.
 
The loans are called subprime because the borrowers' limited or checkered credit history does not qualify them for "prime" loans with lower rates that banks offer to their best customers. Subprime mortgages carry higher interest rates to make up for the increased credit risk. During the housing boom, critics charge that unscrupulous lenders hid the true costs of subprime loans from borrowers who may not have known the true cost of the mortgage. Consumer groups say virtually all "predatory mortgage lending occurs in the subprime market.
 
"There's a lot of finger-pointing in Congress and in statehouses over who should have seen this coming," said Christopher Kukla, who tracks state issues for the Center for Responsible Lending in North Carolina. The consumer group projects as many as 2.4 million borrowers will lose their homes because of defaults on subprime loans.
 
Advocates worry the problem will only get worse. Some 1 million subprime loans are expected to reset to higher rates this year, according to industry predictions.
 
"Some rates just exploded for people," said Elizabeth Renuart of the National Consumer Law Center in Massachusetts. She said a homeowner who took out a $200,000 mortgage would have paid just $740 a month in the first two years under a "teaser" 2 percent introductory interest rate, but then the monthly payment could skyrocket to $1,600 under a typical subprime loan arrangement that hikes the interest rate to 9.36 percent.
 
About 70 percent of subprime loans are handled by brokers regulated by states. Only a small portion of subprime mortgages are serviced through national banks and their subsidiaries. The U.S. Supreme Court on April 17 made clear that the federal government - not states - can regulate mortgage-lending subsidiaries of national banks, thus stripping states of their authority in that segment of the lending industry.
 
Critics argue that the federal government and states both should have acted faster to monitor subprime mortgages to make sure borrowers weren't getting in over their heads. At least five hearings already have been held on Capitol Hill. States have come under fire for either lax or uneven enforcement of their regulations that apply to mortgage brokers and loan officers in non-bank companies, which are involved with most subprime loans.
 
"There's a lot of confusion about who supervises what," said John Ryan, executive vice president of the Conference of State Bank Supervisors (CSBS), which represents state banking departments. CSBS is working with American Association of Residential Mortgage Regulators on a national licensing system and database for the mortgage industry that would enable states to track whether a broker got into trouble with regulators in another state. Thirty states have agreed to participate when the project kicks off next year.
 
Minnesota may lead the way on the state legislative front. Gov. Tim Pawlenty (R) is expected to sign legislation that requires lenders to take extra steps to make sure a borrower can afford a loan's monthly payments, a move hailed by consumer and housing advocates. "These reforms are the first state legislative response to the current foreclosure crisis," Paul Satriano of the Minnesota Association of Community Organizations for Reform Now (ACORN) said in a statement .  
 
Specifically, the Minnesota measure prohibits lenders from making mortgages that the borrower has no ability to repay, either from the outset or after the interest-rate increase. It also places a 5 percent cap on the points and fees that can be charged, including any kickbacks from the lender to the broker, referred to as "yield spread premiums."
 
Here is a sampling of what other states are doing:
 
  • Colorado has a foreclosure prevention hotline (1-877-601-HOPE) that offers free advice and counseling.
  • Connecticut Gov. M. Jodi Rell (R) set up a task force to study the issue, and lawmakers are considering an Emergency Mortgage Assistance Program.
  • Illinois Attorney General Lisa Madigan (D) will convene statewide summits and develop legislation to tighten regulations and provide more protection to borrowers.
  • Indiania may create a program to provide free mortgage-foreclosure counseling and education to homeowners in danger of defaulting on their mortgages.
  • Massachusetts is considering creating a new foreclosure prevention fund.
  • New York Attorney General Andrew Cuomo (D) is investigating subprime mortgage lenders, and the state is launching a public information campaign regarding mortgage fraud.
  • Ohio Gov. Ted Strickland (D) established a task force to "provide a unified response to improve prevention methods and manage foreclosure issues in the state."
  • Texas is considering legislation that would require financial counseling for home buyers getting riskier mortgages.
 
Ohio admits its Opportunity Loan Refinance Program is not a panacea. Ghitman said some of the callers wanting information about the new refinance program are "so far down the path of foreclosure, we can't assist them." He called the program "a very good step ... but it won't solve the problem in Ohio."
 
In the meantime, financial institutions and advocates are stepping up their efforts to help strapped homeowners.  Freddie Mac and Fannie Mae , both created by Congress to support homeownership, have announced campaigns. While neither lends money directly to borrowers, both invest in mortgages. Freddie Mac said it will buy as much as $20 billion worth of subprime mortgages with the idea that the loans are refinanced with fixed rates or longer reset periods.  The housing advocacy group, Neighborhood Assistance Corporation of America , announced this month it will commit $1 billion to refinance subprime loans for low-income people.