Three new laws make foreclosures tougher on lenders to force them to do more loan modifications.
June 18, 2009 -- DETROIT, MI – On May 20th, Governor Granholm signed new laws into effect that will put more pressure on lenders to work out loan modifications as opposed to just foreclosing.
The new laws, PA 29, PA30 & PA 31, go into effect July 5th and force lenders to perform several addition steps before foreclosing. Interesting that the effective date falls right after Independence Day.
The new laws only apply to foreclosures started after July 5th and only on real estate that is the primary residence of a mortgage borrower. The laws also expire in two years. The state legislators appear to be pretty optimistic the housing crisis will be over by then. More likely, there won’t be anyone with a mortgage that hasn’t been foreclosed on or had their mortgage modified by then.
Lenders will be required to give written notice to a defaulting borrower, providing the name and phone number for a real person the borrower can speak with. What’s more, this person has to have the authority to negotiate and approve a loan modification. Anyone that’s had to deal with the customer service department at a lender can tell you how frustrating it is to get someone on the phone that can make a decision. So, this is great news.
Lenders will also be required to send a defaulting borrower a list of state approved housing counselors and gives borrower the right to require a lender’s authority person to meet with the borrower and the counselor to work out a loan modification. Once a borrower asks for this meeting, the foreclosure is put on hold for 90 days.
The laws basically mimic Obama’s “Making Home Affordable” program by requiring a borrower’s housing related debt be no more than 38% of their gross monthly income. Also outlined is how to get to the 38% figure – lowering the interest rate to as low as 3% for at least 5 years, and/or extending the loan term to up to 40 years, and/or deferring up to 20% of the principal balance until the end of the loan term, sale or future refinance.
If the borrower qualifies under this outline, but the lender refuses to approve the loan modification, then the lender must go through a judicial foreclosure. This means they have to take the borrower to court, a lengthy and costly endeavor. In other states where judicial foreclosure is required, it can easily take 18 months for this to happen. This is a huge penalty to lenders and should force most of them to approve a loan modification.
The new laws were written so that federally chartered lenders cannot claim “federal pre-emption” and ignore state laws. A great move by the state legislators.
The laws also have exceptions that defer to FNMA and FHLMC loan modification plans.
There are doubts about the number of available counselors to meet with borrowers and representatives from their lenders. This may work in a borrower’s favor though as lenders may prefer to wait until a counselor is available versus pursing the judicial foreclosure process.
Of special interest is how the new laws will affect FHA and VA mortgages. FHA & VA loans were not addressed in the Obama loan modification plan. So, will the new Michigan laws force FHA & VA lenders to modify loans down to 38% of a homeowner's gross monthly income?