Banks Anticipate New Mass. Foreclosure Law
In the 41 communities of MetroWest, both foreclosure petitions and deeds have climbed this year compared to last.
Staying in their homes just got a little easier for Massachusetts residents when Gov. Deval Patrick signed legislation in August to prevent unnecessary and illegal foreclosures.
But those in the industry say that while the law is well intentioned, it has created new challenges for bankers. And the full effects aren't entirely clear.
Essentially, the law establishes a protocol to determine whether it's more cost effective for banks to offer a loan modification than to foreclose on a delinquent customer, though it only applies to certain types of mortgages, said Tim Davis, a consultant for the Boston-based Massachusetts Housing Partnership, a nonprofit that encourages affordable housing.
Now, banks will be held to a 150-day waiting period before they can move to foreclose, and they're required to file an affidavit with the registry of deeds testifying that they conducted due diligence for foreclosure prevention.
Davis said the same waiting period was already in place before the new law passed, but it was his impression that banks weren't actively pursuing foreclosure alternatives during that time.
Tackling 'Egregious' Mortgages
The types of mortgages affected may be best characterized as subprime, with features such as a down payment of less than 5 percent or a short-term adjustable interest rate, which varies as often as monthly based on benchmarks such as the LIBOR or treasury note yields.
"They probably were trying to tackle the loans that were most egregious, or most problematic, out there," Davis said of legislators who wrote the law.
As a result, banks will only have to apply the new formula to about 10 percent of mortgages that become delinquent, according to Davis. But banking officials are still wondering how the longer wait period and additional paperwork will impact them moving forward.
Paul Lesniewski, senior vice president of credit administration and loan work-up at Commerce Bank, which has offices in Marlborough, Milford, Shrewsbury and Westborough, said it will take some time for banks to get used to the new rules.
"Like any regulation, until you're truly familiar with it and can get the exact documentation in place, you're always a little bit skeptical about it," Lesniewski said. He called the new foreclosure regulations fair, saying they will keep foreclosures in check and will better protect debtors. But for now, Commerce is waiting for more detailed guidance from the Massachusetts Division of Banks. Regulators outlined initial steps in August but are expected to provide more details soon.
A Sensitive Subject
Talking to representatives from banking trade organizations, it's clear that the foreclosure law issue is a sensitive one in the industry.
A number of other MetroWest-area banks did not return calls seeking comment on the new foreclosure regulations, while others deferred comment to the Massachusetts Bankers Association.
Meanwhile, Mary Ann Clancy, senior vice president of the Massachusetts Credit Union League, which represents credit unions in the state, was careful to say her organization didn't oppose new foreclosure regulations. But she said members would have preferred a different version of the bill.
Clancy said credit unions tend to have lower foreclosure rates than banks, and the extra administration associated with the new law will slow down services, and increase costs to credit union members.
"To have another layer of rules out there is troubling," Clancy said.
Still, the league is doing its best to encourage compliance, she said.
Deborah Sousa, executive director of the Massachusetts Mortgage Bankers Association, said bankers support foreclosure protection for worthy cases, but she said the foreclosure regulations contain elements the association opposed. Countering Davis' point about the new law affecting only a small percentage of mortgages, Sousa said new law is quite broad.
"Part of the concern we initially raised is that the definition of 'certain mortgage loans' includes a lot," Sousa said.
For example, loans that didn't require documentation of income or assets are covered by the new regulations, but Sousa pointed out that many such loans are refinanced mortgages, not those one would typically consider subprime.
The other issue, Sousa said, is that most Federal Housing Authority (FHA) loans for first-time home buyers will be subject to the new law. And this might discourage banks from offering FHA mortgage products, which are backed by the federal government and require lower down payments, which Sousa sees as a potential unintended consequence. And the costs of servicing a loan will probably increase due to additional administration, she said.
"Ultimately, who is going to be pay for that? The consumer," she said.
However, Sousa said there were revisions to early versions of the foreclosure law that improved it significantly from the bankers' standpoint before it was passed. For example, a requirement that banks enter into mandatory mediation with borrowers was tossed.
Now, banks are waiting to see how it will truly shake out, once the Division of Banks issues additional details on implementation.
"It could have been a lot worse," Sousa said.
Jon Skarin, senior vice president at the Massachusetts Bankers Association, said the biggest difference now will be the legal threat to banks due to non-compliance to foreclosure regulations. The waiting period was established by prior legislation, but this law ensures banks will be held accountable, according to Skarin.
A Possible Benefit
Though the Massachusetts Bankers Association opposed the law, now that it's written, compliance is the only option, Skarin said. That might translate to updates in banks' programming and systems to ensure qualifying mortgages are subject to the new protocol. How disruptive it will be to bank operations will depend on how sophisticated an institution's system is, according to Skarin.
Asked whether banks will enjoy any benefits from the new foreclosure law, Skarin said he hopes customers headed for foreclosure will be more likely to communicate with the banks to avoid it, given their additional legal rights.
"Getting the borrowers to the table is sometimes the most difficult thing," Skarin said. n
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