Michigan tries to Slow Foreclosures with New Laws

Three new laws make foreclosures tougher on lenders to force them to do more loan modifications.

June 18, 2009 -- DETROIT, MI - On May 20^th, 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 5^th 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 5^th 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 only problem is that the laws don't apply to FNMA, FHLMC, FHA and VA mortgages.  These loans are expected to follow Obama's loan modification plan, but that plan is voluntary.  So, homeowners may still be in a pickle if they have one of these loans.

Also, there aren't enough counselors available 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.

I'd like to see figures on how many mortgages fall under the requirements of these new laws.  It's estimated that FNMA/FHLMC currently control over two-thirds of the loans in this country.  Adding in FHA and VA probably pushes this number close to 75% or more.  That means that these new laws may help only 1 in 4 mortgage borrowers. 

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Drew Sygit writes and speaks about the mortgage & real estate industries.  He holds mortgage industry designations CMPS, CMC, CRMS, CMLO, CALO, has an MBA and is an approved industry instructor.  He's presented, spoken and/or written for HUD, the Financial Planning Association, Financial Planners Association of Michigan, Michigan Association of CPA's, Institute of Continuing Legal Education, Oakland Real Estate Investors Association, North Oakland County Board of Realtors and numerous industry publications.  He also publishes his own blog:  http://drewsmortgagenews.blogspot.com.  He can be reached at dsygit@TheLendingEdge.com.