Lawmakers weigh mortgage reforms
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Willie Ricks fell behind three months on his mortgage payments while on strike last fall at the Goodyear Tire & Rubber Co.
He and his wife ended up owing their bank $8,001, including late fees and other charges. When the Fayetteville couple mailed payments to stave off foreclosure, their bank routed the money to a “suspense” account instead of applying it to their balance.
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“All of a sudden, bam! I guess they heard the plant was on strike and this is the time to take someone’s house away from them,” Ricks said after a foreclosure hearing in December.
As foreclosures skyrocket across the state, lawmakers are considering new regulations meant to help families like the Ricks avoid losing their homes.
The details of one bill — the first in North Carolina to comprehensively address what are called servicing fees — are being hashed out this week.
Consumer advocates say new breeds of fees by lenders and servicing companies make it difficult to catch up on delinquent mortgages, contributing to the onslaught of foreclosures. The legislation, introduced as Senate Bill 1264, clarifies the types of fees that would be allowed and requires lenders to apply payments immediately.
Ricks eventually crossed the picket line and pulled from his savings to save his home off Hoke Loop Road. Yet many other families aren’t so lucky.
A Fayetteville Observer investigation found as many as 1,100 homes in Cumberland County fell into foreclosure and were sold at courthouse auctions in recent years.
Nearly half of the failed mortgages were on homes bought or refinanced less than four years earlier. As many as a third were within three years, strongly suggesting that buyers either got loans they couldn’t afford or stumbled on adjustable interest rates.
Overall, nearly 5,000 homes in Cumberland County sold at auctions from 2001 through 2005, the analysis found. Such turnover has eroded neighborhood property values, ruined family finances and spawned a frenzy of risky investing that sometimes leads to more homes lost.
Another bill pending in the General Assembly could help track unscrupulous brokers by requiring all deeds of trust — documents for mortgage loans filed at courthouses — to list the broker’s name and license number.
And mortgage fraud would become a felony under another proposed statute, supported by the state attorney general.
Yet other reforms haven’t made it so far, including added defenses for homeowners when a lender sues to foreclose. Also, the bills don’t tackle questions of how lenders determine if borrowers are capable of paying on loans.
Bill’s prospects
Lawmakers and interest groups are privately debating compromises on the bill regarding servicing fees. As many as 10 groups representing mortgage and banking interests oppose certain provisions, which an industry spokesman described as a “dramatic departure from existing laws in the state.” The lending industry is well-financed and influential in North Carolina.
Al Ripley, of the N.C. Justice Center, is lobbying for the legislation on behalf of the consumer-advocacy group.
“It’s in a state of flux right now,” he said Wednesday. “...The most discussion is focusing on the servicing standards, and what those servicing standards should say.”
Lenders are increasingly using servicing companies to manage their loans. Those companies make money by charging for everything from late payments to “drive-bys” — sending someone to a mortgaged property to ensure that it is kept up.
Sponsors of a House version of the bill include Reps. Rick Glazier and Margaret Dickson, both Democrats from Fayetteville.
“Homeownership is a very good thing — it’s the greatest asset most people will have,” Dickson said. “You don’t want people to lose it. You want them to be responsible about borrowing, but you always want the people lending to be responsible lenders.”
The nationwide crash in the subprime market is giving some traction to the legislation. Critics of subprime loans — typically to borrowers with poor credit — blame them in part for the increase in foreclosures in North Carolina. Foreclosure cases in this state have risen 174 percent since 1998, up to 45,512 by last year.
“I think in every legislative district, there are people losing their homes,” said Chris Kunkle, a lobbyist with the Center for Responsible Lending in Durham.
Cumberland County is a bit of an anomaly. The 1,571 new foreclosure cases filed in 2006 were about 5 percent fewer than in 2005, but overall numbers have held steady since the 1990s. The cases are the first step in foreclosure and don’t always result in an auction.
Multiplying fees
Senate Bill 1264 addresses two recent N.C. Supreme Court decisions that made it difficult to sue over illegal lending. The legislation would unfurl a two-year statute of limitations for suits over certain questionable loans. It would also put out-of-state lenders under the jurisdiction of North Carolina courts.
Glazier said that portion of the bill will likely go through.
What’s less certain are more contentious proposals aimed at fees, which Ripley has supported. He and the lending-industry groups are making progress toward a consensus, he said. They expect to present a revised version of the bill to lawmakers for their consideration next week.
“I think one thing it will do is stop or greatly reduce the abusive servicing we’re seeing on the marketplace right now,” Ripley said of the legislation. “That will better protect homeowners already in loans that are too costly or unaffordable.”
As written, the bill requires lenders and servicers to:
Itemize all the fees they bill to defaulted homeowners, instead of current practices of mailing a notice with a total amount due. Fees include past-due tax, late fees, service fees and “reasonable” attorney costs.
Assess the fees within 30 days of whatever triggered them. In other words, if a homeowner isn’t billed a late fee within 30 days of the late payment, the lender can’t decide later to try to collect the fee.
Better inform homeowners of their options and rights. Notices to delinquent borrowers would explain that they can ask a Superior Court judge to intervene; that skipping out on a foreclosure hearing puts the home at risk of sale; and that they can contest the case.
Hank Cunningham of the Mortgage Bankers Association of the Carolinas said the bill’s original wording would have ended up costing consumers more money. A better idea, he said, would be to clarify disclosures so people better understand the loans before they sign them.
He is the chairman of the association’s legislative committee.
“I think that any change to foreclosure is going to require lenders, consumer groups, etc., to sit down and make a reasonable approach to solving a problem,” Cunningham said. “I think this bill would make it very difficult — if passed just as it’s proposed — and very expensive to service loans in this state.”
Soldier’s home
After Sandra Kilby’s bank declared her mortgage in default, fees and other costs swelled to $6,000, including back payments. Kilby’s home in Hope Mills began its slide to foreclosure in November while her husband was deployed to Iraq. A problem with electronic transfers of his paycheck, and payments to their bank, made the loan delinquent, she said.
Kilby mailed payments, but her bank also failed to apply the money to her balance, she said. A representative at the bank refused to speak with Kilby by phone when she said her husband was away.
“They don’t want to work with us, so we can get the head start,” said Kilby, whose husband had to call the bank from the war zone. “No, they want to be stubborn.”
Under Senate Bill 1264, lenders must immediately apply payments toward principal and interest. Lenders wouldn’t be able to pile on more charges if a homeowner makes a full payment, even if the amount doesn’t cover overdue fees.
In January, the Kilbys cleared up their account and avoided losing their home three days before a scheduled auction.
Adjustable interest
An estimated one in five subprime loans issued in 2005 and 2006 will end in foreclosure, according to a study by the Center for Responsible Lending. The reason: many of these loans have adjustable interest rates, said Kunkle, the center’s lobbyist.
Hundreds of billions of dollars in adjustable mortgages in the U.S. will kick in with higher rates in the next couple of years.
North Carolina led the nation in 1999 with a law cracking down on predatory refinancing, in which homeowners “flipped” their mortgages at the expense of tremendous fees.
“(Adjustable interest) is the new wave of flipping,” Kunkle said. “This is the second generation of flipping, putting people in loans that they know two years down the line are going to be unaffordable.”
The center and other advocacy organizations want to require lenders to consider a borrower’s “suitability.” Banks sometimes approve borrowers based on a loan’s initial payments — with low “teaser” interest — instead of the amount when interest fully adjusts in two or three years.
Suitability requirements for underwriting loans are not included in the pending bills.
Ripley, of the Justice Center, said curbing service fees would be a significant step for consumers. Servicing abuses, he said, show up in nearly every loan he discusses with lawyers who take on foreclosure cases for low-income families.
“It’s really just shining sunlight on these fees being charged, and giving borrowers some way to defend themselves.”
Staff writer Matt Leclercq can be reached at leclercq@fayobserver.com or 486-3551.
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