North Carolina is bracing for a projected 60,000 home foreclosure cases in 2008—a 20 percent increase over last year's total—and policymakers are scrambling to shield the state from the worst consequences of a national housing meltdown.
State efforts are hampered, however, because most of the subprime mortgage loans were made by out-of-state banks and mortgage companies, which operate under national banking charters, not state regulations. These lenders haven't been subject to North Carolina's tough laws against predatory lending since 2003, when the Office of the Controller of the Currency, an obscure federal agency, issued a hotly disputed ruling.
In that decision, the OCC said federal regulations—which are much weaker than North Carolina's—"pre-empt," or trump, nearly all state banking laws. (The rare exceptions are in cases involving state-chartered banks and loan companies.)
As a result, states have been excluded from regulating real-estate transactions that historically had been under their watch, N.C. Attorney General Roy Cooper says.
The 50 state attorneys general have fought the Bush administration on the OCC rule, but to no avail. "It's unconscionable," Cooper says, adding his office still investigates fraud cases.
The U.S. Supreme Court has upheld the OCC's ruling.
Consumer advocate Al Ripley, staff attorney at the N.C. Justice Center, shares Cooper's frustration. Yet Ripley says some of the major banks and mortgage lenders, though not obligated to comply with North Carolina's regulations, do so voluntarily to show they're "good citizens."
Recently, North Carolina has embarked on a number of initiatives to help curb the mortgage crisis: New laws crack down on fraudulent lending; the state is providing more assistance for consumers to negotiate loan "workouts"; and there are additional safeguards for homeowners if their house goes into foreclosure.
In 2007, the General Assembly passed several laws establishing mortgage fraud as a defined criminal felony. In addition, mortgage lenders and brokers are now required to inform prospective borrowers when they are buying a subprime mortgage; lenders also must disclose whether borrowers qualify for a better, lower-rate product from the same bank or mortgage company. Large bonuses for "steering" customers into more expensive, higher-rate products are prohibited.
Lenders and brokers found to be "routinely misleading consumers" (with five such cases defined as a "pattern of conduct") can be prosecuted under racketeering charges; they also can be held liable for substantial civil penalties if consumers sue, according to state Rep. Dan Blue, D-Wake, one of the chief legislative sponsors.
The new laws also beef up protections for renters living in houses where foreclosure is pending. For the first time, all tenants have a right to be notified of the foreclosure and to break their leases if they choose. Previously, only tenants living in rentals with at least 15 units had such rights.
The 2007 legislation also armed homeowners against abusive practices by mortgage-loan servicing companies. (See "Stung by a middleman.") While the new law allows borrowers to have an itemized list of fees assessed during foreclosure—previously, borrowers couldn't see the charges—the rules are still heavily weighted in favor of the lender.
That could change this year, however. Blue, co-chair of the House Select Committee on Rising Home Foreclosures, is working with state officials, consumer groups and the N.C. Bankers Association to craft a new bill package for the next legislative session, which convenes May 13.
The bills are expected to include more funding for housing counselors, nonprofit legal services and affordable housing and loan programs.
The legislature also could weigh a moratorium on foreclosures involving the highest adjustable-rate, subprime mortgages. Lenders would be required to prove that they duly assessed the ability of the borrower to pay before making a subprime loan. Some lenders have made subprime loans knowing the borrowers didn't have the financial resources to pay them back.
If the bills become law, says Mark Pearce, deputy state banking commissioner, they could "slow the train down" on foreclosures.
Since borrowers headed for foreclosure can rarely afford legal advice, they need access to free counseling to help them navigate the legal process.
Cooper and N.C. Commissioner of Banks Joe Smith allocated $300,000 to support the 25 nonprofits in the state that have federally certified housing counselors. State and federal officials and consumer groups, are advising borrowers who fall behind in their payments, to contact the national HOPE NOW Hotline (1-888-995-HOPE), and they'll be referred to a trained counselor.
HOPE NOW is organized by the nation's biggest banks and mortgage lenders. Supported by U.S. Treasury Secretary Henry Paulson, it has recorded more than 1 million loan workouts since July, including 167,000 in January.
Housing counselors can sometimes can convince the lender to reduce the amount of the loan to the current property value, says Hazel Mack-Hilliard, director of housing foreclosure programs for Legal Aid of N.C. "The lenders will renegotiate when they get to the counselors and the lawyers, but they won't do it with the owners."