THE STATES AND THE FORECLOSURE CRISIS DIRECTIONS FOR CALIFORNIA

1
THE STATES AND THE FORECLOSURE CRISIS
DIRECTIONS FOR CALIFORNIA

• Lewis Center Foreclosure Conference
• May 1, 2009
• Alan Mallach, Nonresident Senior Fellow
• The Brookings institution

2
Starting points

• Californias foreclosure crisis affects home
  owners, tenants, neighborhoods and entire cities
  and counties
• Multifaceted actions and strategies are needed to
  respond to the crisis and foster future recovery.
  
• Stabilization and recovery will require both
  short-term and long-term strategies

3
Implications

• Measures should be put in place to protect
  homeowners and tenants
• Actions should be taken to protect neighborhoods
  and communities
• Steps should be taken to prevent a recurrence of
  the crisis in the future.
• New approaches to affordable home ownership
  should be designed and put in place.

4
The state role is a central one

• States have the broadest scope to address these
  issues, including the legal authority to deal
  with
• The foreclosure process
• Code enforcement and nuisance abatement
• landlord/tenant law
• mortgage broker regulation

5
The state role

• Greater emphasis should be placed on using the
  states legal and regulatory authority, not
  spending its money
• In a state with hundreds of impacted cities and
  counties, many with limited capacity to deal with
  the crisis, the state can also play a critical
  role in building their capacity and helping focus
  their efforts.

6
Protect homeowners

• Help borrowers gain greater access to counseling
  and short-term assistance
• Ensure a fair foreclosure process
• Encourage creditors to pursue alternatives to
  foreclosure
• Prevent predatory and fraudulent foreclosure
  rescue practices.

7
Foreclosures destabilize communities

• Foreclosures undermine the viability of
  neighborhoods and communities, impose burdens on
  local government, and diminish property values.
• BUT
• Most of the harm comes from the link between
  foreclosure, disinvestment, vacancy and
  abandonment, not from foreclosure as such.

8
Protect homeowners and tenants and reduce
vacancies

• Protect owners and tenants after foreclosure
• Eliminate foreclosure as grounds for eviction of
  tenant in good standing
• Consider allowing owners to remain in properties
  as tenants
• Keep properties occupied maintain property
  values and neighborhood stability

9
Ensure maintenance of vacant properties

• Impose legal responsibility on foreclosing entity
  for vacant property prior to and after
  foreclosure sale
• Give cities and counties broad code enforcement
  and nuisance abatement authority
• Provide effective means to collect costs of
  nuisance abatement including liens and judgments
• Provide receivership and spot blight tools

10
Protect communities

• Build local government power and capacity to
• Conduct effective code enforcement and nuisance
  abatement
• Recover of nuisance abatement funds
• Gain control of properties
• Conduct land banking
• Use public resources effectively to achieve
  strategic neighborhood stabilization goals

11
Stabilize neighborhoods

• Target public resources to strategic neighborhood
  stabilization
• Recognize that neighborhood destabilization is a
  moving target
• Adopt market-sensitive strategies
• Leverage public and private resources
• Link NSP to other stabilization and market
  recovery activities.

12
Prevent a future recurrence of the crisis

• Establish strict standards for the mortgage
  brokerage industry net worth and surety bond
  standards
• Ban inappropriate and abusive lending practices

13
Set strict standards for the mortgage industry

• Scope of licensure
• Education and experience
• Examination
• Fitness
• Offices
• Financial resources and accountability
• Records and reporting

14
Bar inappropriate or abusive lending practices

• Improper underwriting practices
• Best available product
• Ability to pay
• Net tangible benefit
• Inappropriate loan provisions
• Other lending practices, such as yield spread
  premiums.

15
Frame rational home ownership policies

• Recognize constraints as well as benefits of
  lower income home ownership
• Create realistic, workable mortgage products
• Build a support system for lower income home
  ownership
• Use shared-equity home ownership models to
  preserve community value.

16
Thank you

• Alan Mallach
• PO Box 623
• Roosevelt NJ 08555
• 609.448.5614
• amallach_at_comcast.net