Senate Considers Foreclosure Relief Bill

The aid package, which is expected to pass, could help keep owners in their homes at a time when defaulting doesn't have the same stigma it once did.

By John Caulfield

The U.S. Senate could vote on a major bill aimed at rescuing troubled homeowners from foreclosure. The Foreclosure Prevention Act of 2008 is being co-sponsored by Senators Frank Lautenburg (D-N.J.), whose state could face between 13,500 and 16,500 foreclosures this year; and Ken Salazar (D-Colo.), representing a state whose foreclosures increased by 40 percent in 2007.

The bill is coming to vote at a time when lenders, lawmakers, and the public are panicking about the long-term impact on the economy if the rising tide of foreclosures doesn't subside. As home prices decline, homeowners cannot refinance loans that are worth more than the current value of their houses, which many either can't or won't sell at significant discounts.

Yesterday, Irvine, Calif.-based RealtyTrac reported that the number of homes facing foreclosure increased by 57 percent in January, over the same period a year ago. That means 233,001 homes received at least one notice from lenders last month that their mortgages were overdue. The foreclosure rate, nationwide, in January was one filing per every 534 homes. Thirty states had increases in the number of homes that received at least one filing, including Nevada, where the foreclosure rate hit 1 per every 167 homes.

The Foreclosure Prevention Act, which the Mortgage Bankers Association supports in principle, is nonetheless controversial because it would give bankruptcy court judges the authority to reduce a homeowner's mortgage payment, a provision that the bill's co-sponsors say could help 600,000 families. The bill would allow Housing Finance Agencies, or HFAs, to issue up to $10 billion in bonds to raise money they could use to help owners refinance their loans. It would also help communities ravaged by foreclosures and, if foreclosure is the last remaining option, would simplify the forms required in the process.

With close to 3 million homes having foreclosed over the past three years, and with signs that millions more could follow suit, the situation has become so dire that a growing number of homeowners are choosing to default on their mortgages, abandon their homes, and suffer the consequences to their credit rating. What may have opened this door is the Mortgage Forgiveness Debt Relief Act, which President Bush signed on December 20. The Act allows taxpayers to exclude up to $2 million of mortgage debt forgiven in 2007, 2008, or 2009 on their principal residence in a short sale. So if a lender repurchases a house from an owner at less than what its mortgage is worth, the difference is no longer taxable.

At least one Web site, HouseBuyerNetwork.com, specializes in arranging short sales. And other services are sprouting up in response to the foreclosure debacle, including YouWalkAway.com, a Carlsbad, Calif.-based Web site that launched on January 1. This site asks, "Is foreclosure right for you?" and offers a kit for $995 that, it claims, provides distressed homeowners a way to not only live in their homes "payment free" for up to eight months, but to walk away from their mortgages "without owing a penny" while they look for more affordable housing.

Several states, including California and Arizona, are considered to be "homeowner-friendly" in their laws governing bankruptcies and foreclosures. But Maddux admits he was a neophyte in this area. "Even with my experience I didn't know much about the laws," he tells BUILDER, "so imagine how much less a fireman or schoolteacher knows." That's when he started talking with Chad Ruyle, an attorney specializing in bankruptcy law, who became YouWalkAway's cofounder. (Maddux insists that his program is grounded in existing statutes, and while his site has drawn attention from regulatory agencies, the legitimacy of its offering hasn't been challenged.)

(Source: BUILDER Online News Service)
Publication date: February 27, 2008