N.C. proposals would hinder foreclosures

North Carolina homeowners would be able to forestall foreclosure by asking their mortgage servicer for assistance if proposed rules from a state regulatory agency are approved.

However, some analysts question whether the proposals could be abused by homeowners.

The N.C. Office of the Commissioner of Banks submitted six proposals yesterday -- two on foreclosure and four on consumer disclosure -- in its effort to lower the state's foreclosure rate.

There have been 6,364 foreclosure filings in the Triad and Northwest North Carolina through Sept. 30, down 7 percent from the same period in 2008, according to RealtyTrac.com.

The proposals would also help the state implement the federal SAFE Act, which Congress passed in 2008 to set minimum standards for individual mortgage-loan originator licensing and registration.

The agency is accepting public comment on the proposals through Jan. 2.

"Currently, most mortgage servicers continue to advance toward foreclosure even when they are working with homeowners to modify the delinquent loan," the agency said in a statement.

"Unfortunately, servicers continue to struggle to qualify homeowners for assistance in a timely fashion, and in some cases, foreclosure occurs prior to the homeowner being considered for existing programs," the agency said. Allowing foreclosure proceedings to continue also adds "significant fees and costs to the loan."

A companion proposal would require a mortgage servicer to respond "promptly and clearly" to a request for assistance.

"The goal is homeowners not going through foreclosure when there are better options for the borrower and lender," said Mark Pearce, the deputy banking commissioner. "This also recognizes banks, mortgage lenders and servicers don't need more real-estate … to sell."

Tony Plath, a finance professor at UNC Charlotte, said that there needs to be a defined time limit for the regulation that would forestall foreclosures.

"That's needed so that delinquent borrowers can't drag out the period of default beyond something like, say six months, simply to gain rent-free living arrangements at the expense of their mortgage lender," Plath said.

"We should also consider building a foreclosure suspension-time period directly within the judicial foreclosure proceeding," he said.

The agency said that its proposed rules guard against homeowners "gaming the system."

The proposals come as Congress is debating whether nationally chartered financial institutions are subject to state consumer-protection laws, which are often stricter than federal ones.

For example, North Carolina's predatory-lending law is considered the nation's standard.

Large financial institutions say they want to deal with one federal regulatory agency to clarify their responsibilities. Congress is considering creating a Consumer Financial Protection Agency that would monitor products such as mortgages and credit cards.

The other proposed rules from the banking commission would:

□ Prohibit lenders from making loans if the use of the lender was required in order to obtain a discount from an affiliated party, such as a homebuilder.

□ Require mortgage lenders to provide an early disclosure that compares a proposed loan offer with a standard 30-year fixed-rate mortgage loan. The rule does not require a lender to offer a standard mortgage or prevent a borrower from choosing a nonstandard mortgage.

□ Prohibit compensation to lenders and brokers that are based on the terms of the loan.

□ Require clear labels of solicitations for refinance.

The agency said that these proposed rules are aimed at dealing with flaws in the mortgage market "that reduce the likelihood of the origination of fair, affordable and sustainable mortgages."

State Sen. Steve Goss, D-Watauga, said he believes that the proposed rules are a move in the right direction. "Every day, our office hears new reports from constituents of problems with their lenders," Goss said.

"Obviously the major concern is the threat of foreclosure, but others share experiences of lack of response from lenders, making it difficult for them to change the terms of their loan obligations," he said.

State Rep. Dale Folwell, R-Forsyth, said that his priority is making mortgages "accessible, affordable and transparent so that citizens can build value in their homes within their means."

Plath said that there could be unintended consequences to forestalling or delaying the foreclosure process.

"Mortgage loans will be more difficult to obtain because the risk of making mortgage loans under the proposed new regulations will rise for lenders," Plath said.

Which could lead to an even slower housing market and a slower rise in home prices, Plath said.

rcraver@wsjournal.com

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