They’re Not Waiting for Washington

With the drama playing out in the Senate about whether a bill responding to the mortgage crisis as well as enhancing regulation of Fannie Mae and Freddie Mac will get out of the Banking Committee with enough Republican support to both pass and avoid a veto, a Washingtonian might be forgiven for not paying attention to what’s going on in the states. (Some wonder whether we ever do.) But in fact, there is a good deal of action-as well as frustration at the lack of activity inside the Beltway.

State action is focused both on preventing foreclosures and on dealing with their aftermath-the vacant and vandalized properties; decline in the tax base; increased demand for community services; and enhanced need for affordable housing, both owned and rented. On preventing foreclosures, several states (Ohio and Massachusetts among them) started working a year ago on bond programs to enable borrowers having trouble to refinance. Especially in the face of Congressional delays in making additional tax-exempt bond authority available, these programs have not been very successful. So while counseling and refinance programs are still getting some attention, states are moving on to other strategies.

Foreclosure moratorium bills are pending in Minnesota (where a one-year deferment has passed the Senate), New York (where a one-year moratorium has passed the Assembly) and Massachusetts. Mainly, these reflect dissatisfaction at not being able to get servicers to move and are, like the Bankruptcy Law change that has so far been blocked at the federal level, an attempt to change the negotiating dynamics and force servicers to the table.

But moratoria are not the only types of laws being considered. Georgia has just enacted a law that requires the security interest entitling someone to foreclose to be filed in court prior to the foreclosure sale and that the notice of foreclosure include the name, address and telephone number “of the individual or entity who shall have full authority to negotiate, amend, and modify all terms of the mortgage with the debtor.” These safeguards, which ensure both that the foreclosing entity has the right to take the property and that the borrower has one last effective chance to negotiate, are particularly valuable in a non-judicial foreclosure state like Georgia, where foreclosures can occur very quickly. They would also be helpful in judicial foreclosure states where, for example, judges have begun to throw out foreclosure petitions because the underlying security interest can’t be produced.

Renters are also getting increasing consideration. Following New Jersey’s lead, a bill is pending in Massachusetts that would prevent a lender from evicting tenants from foreclosed properties without “just cause,” such as non-payment of rent. In part this reflects concern for tenants, but it is also a reflection of the fact that foreclosed property that is vacated is far more likely to turn into a vandalized property that demands more services and brings down neighborhood property values. Of course, making sure the new landlord provides maintenance and utilities (a particularly important issue in a New England winter) may prove challenging.

But recognizing that there are already many properties that have been foreclosed on and that the trend is unlikely to stop any time soon, states and-more immediately-local governments are focusing attention on what to do with property already in foreclosure (or foreclosed property’s close cousin, property subject to tax liens). The State of Michigan has an aggressive land banking law, which Genesee County-where Flint, one of the hardest-hit cities in the country, is located-has been using since 2003 to acquire, hold and reuse tax-lien property. That land bank is now being used to acquire homes being lost in the current crisis.

In Cleveland, the city has partnered with the state and a group of community-based organizations to buy 300 homes to forestall foreclosure, buy an additional 300 vacant properties for demolition and construct 150 new units for a lease-purchase program. In Chicago the Troubled Building Initiative has been placing vacant buildings that, if left unattended, would have to be demolished, with one of several community based organizations for reclamation. And many Chicago partners are working on a variety of strategies to get foreclosed property back into circulation for either rental or affordable homeownership.

There is undoubtedly more going on elsewhere. The point is, they’ve stopped waiting for Washington out there in the country. But it sure would be nice if Washington got its act together to help.