Antiquated Laws Make Foreclosures More Likely

Many states have laws on the book that make it difficult for homeowners to avoid foreclosure, says a new report by the National Consumer Law Center, which is the basis for much of this post.

While many states have taken steps in recent years to strengthen the rights of renters, only a handful of states have updated their home foreclosure laws, which are now "tilted against homeowners" and acting as a little-understood factor that is helping to accelerate the U.S. home foreclosure crisis, according to a major new report by the National Consumer Law Center (NCLC). Based on a survey of existing state laws, the NCLC report identifies some of the most antiquated state law provisions, including "fast track" foreclosures without any court oversight in 30 states and no requirement of direct notification to homeowners in 33 states upon the initiation of foreclosure proceedings.

The center identifies these state laws as some of the most antiquated and unfavorable to homeowners.

Fast track foreclosure. In 30 states and the District of Columbia, mortgage holders who allege that homeowners have fallen behind on the payments can bypass the courts and move directly to auction off homes. To defend against the action, homeowners must get a judge to review the claims and stop foreclosure. This is not the case in Michigan where there is a well defined process that the lenders must follow over a period of time that is also defined by law.

No direct notification of foreclosure proceedings. In 33 states and the District of Columbia, there is no requirement that homeowners be personally served with a foreclosure notice. Michigan does require notification; however, that notice can be made through the mail and may never be received by the homeowner. Once the foreclosure process is under way notices will be physically posted on the property.

No requirement to find solutions other than foreclosure. In every state but California and Connecticut, mortgage holders can move directly to foreclosure without discussing the issue and other potential solutions with the homeowner. While that’s true in Michigan, my experience is that most banks at least try to see if there is some way to work something out with the homeowner, especially if the homeowner doesn’t ignore the initial pre-NOD (Notice of Default) letters from the bank. All too often that is the case with distressed homeowners who are in denial.

Eleventh-hour payments can be ignored. In 29 states, a mortgage holder has no legal obligation to stop foreclosure even if the homeowner comes up with enough money to bring the mortgage current, including paying penalties and fees. Michigan has a “redemption period”, during which the delinquent homeowner can make good and reclaim the property by paying off the mortgage and any penalties; however, that does not mean just getting caught up on payments.

Big penalties are legal. In every state but Massachusetts, New Jersey and Pennsylvania, a mortgage holder who claims a homeowner has fallen behind in payments can immediately impose default fees and costs that reduce the chances that the homeowner can catch up by making the payments owed.

“The bottom line is that most state laws are not part of the foreclosure crisis solution today; they are a big part of the problem,” say John Rao, attorney and co-author of the report. To read the whole report click here.

Michigan is among the states cited for some of these laws ands practices; however, Michigan does a better job than many on protecting homeowners against overly aggressive and hasty actions by lenders. Still, foreclosure in Michigan like elsewhere, is a slippery slope that once you start down makes it very hard to turn back and recover.