States are in the forefront of policymaking to minimize damage from the mortgage meltdown. President George W. Bush on Thursday (Dec. 6) announced a groundbreaking agreement with major lenders to temporarily freeze sub-prime interest rates that are set to rise, but California Gov. Arnold Schwarzenegger got there first: He unveiled a similar deal last month.
"(Bush's plan) essentially captures the same spirit of what we announced in Fresno a couple of weeks ago," Preston DuFauchard, the commissioner of California's Department of Corporations, said in a conference call after the president's announcement. Both plans are limited to borrowers current on their monthly payments but who will have trouble paying higher rates that kick in the next few years.
California is not the only state to address the crisis.
"A lot of states concluded that in the absence of federal action, they need to act quickly on their own," said Allen Fishbein, the director of housing and credit policy for the Consumer Federation of America, which advocates for pro-consumer policies.
Their efforts come as the already bad mortgage problem is about to get worse. This year 1.5 million homes will enter foreclosure, the Mortgage Bankers Association reported Dec. 6, and more will do so next year.
Much of the problem is faced by borrowers who took out loans that started with low interest rates but that reset at much higher rates after a few years. In the next two years, some 2 million so-called subprime loans are scheduled to become much more expensive.
Regions of the United States that have been hardest-hit include the West, the Midwest and the South. Nevada, California, Florida, Ohio and Georgia posted the highest foreclosure rates in October , according to RealtyTrac, a foreclosure tracking database.
Experts say part of the problem is that borrowers don't talk to lenders as soon as they know they're in trouble. About 50 percent of those in foreclosure didn't attempt to speak to their lenders first to seek options such as loan modifications. So some state efforts have focused simply on increasing communication.
Iowa's hotline has received 4,200 calls since it launched in September, according to Mike Thompson, the executive director of the Iowa Mediation Service.
"It's a lot more than anybody anticipated. A lot of people were thinking if we got 500 a month it'd be a lot, and in the first week we had 500," Thompson said. About 520 callers are using the service to talk to their lenders, while another 100 already have worked out agreements.
Nine states have set up foreclosure prevention funds to help homeowners refinance. Michigan soon could be the 10 th state; the state House this week passed and sent to the state Senate a bill to create such a fund.
But some question how effective these funds are. Maryland set up the country's first foreclosure prevention fund in June 2006, but it has helped only 13 people so far.
Bill Ariano, deputy director of the state agency that runs the program, said it will help more homeowners as time goes on, but noted that there's a limit on who can benefit. He cited a woman with a salary of $52,000 who purchased a home that cost $520,000.
"What would allow a person to believe that they could afford that amount of debt?" Ariano said. "Is there a public purpose in assisting those types of people?"
States also are trying to prevent future mortgage problems by fixing conditions that led to the crisis. Lawmakers in several states now require lenders to ensure the borrower can repay. Last week Massachusetts enacted laws that require borrowers to be counseled before taking out big loans and lenders to be licensed. A Michigan House committee recently approved a set of bills to regulate lenders.
States also are banning predatory lending practices such as prepayment charges, which impose huge penalties if borrowers try to refinance. Minnesota and North Carolina have restricted prepayment charges, Michigan is considering doing so, and California and Nevada plan to address the practice in their next legislative sessions.