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Cascade: No. 56, Winter 2004

Pennsylvania Launches Broad-Based Response to Foreclosure Problem

Six state departments and agencies in Pennsylvania are investigating a high rate of foreclosure filings in fast-growing Monroe County and are searching for long-term remedies in light of a statewide increase in foreclosures.

In the fall of 2003, Pennsylvania Governor Edward G. Rendell established a Monroe County task force with representatives from the Office of the Governor, Office of the Attorney General, Pennsylvania Department of Banking (DOB), Pennsylvania Department of Community and Economic Development, Pennsylvania Department of State, Pennsylvania Housing Finance Agency (PHFA), and the U.S. Department of Housing and Urban Development. The DOB is taking the lead on the task force.

At the request of the DOB and PHFA, The Reinvestment Fund (TRF), based in Philadelphia, prepared a study analyzing foreclosures in Monroe County. The two agencies have also commissioned TRF to prepare a report on statewide foreclosures that is expected at the end of 2004.

The TRF study examined initial foreclosure filings in Monroe and seven other counties. Monroe County foreclosure filings were analyzed using transaction histories of properties, applications made under PHFA’s Homeowners Emergency Mortgage Assistance Program (HEMAP), HUD-1 settlement sheets, and appraisals where available.

In Monroe County from 1990 to 2000, the population increased 45 percent, to 138,687 residents, the number of housing units increased 23 percent, to 67,581, and the unemployment rate increased from 5.6 percent to 6.6 percent, according to the study. Of the people who moved into Monroe County from 1995 to 2000, 54 percent came from Pennsylvania, 19 percent from New York, 16 percent from New Jersey, and 11 percent from other states, the study shows.

The study found that 6,129 mortgage foreclosures were filed in Monroe County from 1995 to 2003. The annual number of foreclosure filings increased in all but two of the years in that nine-year period, rising from 388 in 1995 to 940 in 2003. The filings were concentrated in five townships and 12 subdivisions.

The study added: "Loans on the Monroe County Prothonotary's foreclosure filing list from 2000 through 2003 more likely involved an inflated sale price than those not in foreclosure, are disproportionately subprime and went into foreclosure faster than other Pennsylvania counties for which comparable data was available."

The study reported that from 2000 to 2003 the time between origination and foreclosure averaged 2.8 years. Approximately 64 percent of foreclosed loans were for home purchase, while the balance were for home equity or refinance.

The study focuses on foreclosure filings, not actual foreclosures, and does not pinpoint the causes for the large number of foreclosures in Monroe County. Ira Goldstein, TRF's director of public policy and program assessment, explained that it proved difficult to obtain data on different facets of the home-buying process, including appraisals, and that TRF had limited access to loan files of borrowers who lost their houses in Monroe County. Compounding the problem, many of the borrowers could not be located, he said.

In one of the state government's responses to Monroe County foreclosures, the Office of the Attorney General has filed three lawsuits seeking $21.4 million in restitution, penalties, and the Commonwealth's costs from 46 builders/developers, mortgage brokers, and appraisers in connection with the complaints of 278 consumers.

In October, DOB and PHFA caseworkers were working with more than 250 homeowners and the lenders who hold the owners' mortgages to try to voluntarily restructure loans and resolve disputes. If those voluntary discussions are unsuccessful, a formal panel with representatives from the DOB, PHFA, Attorney General's Office, and the Pennsylvania Department of State is expected to review some of the complaints.

A. William Schenck III, Pennsylvania's secretary of banking, said that the DOB would increase its staff 30 percent, to 154 employees, by June 2005 in order better to enforce the state's consumer protection laws. The agency will strengthen its examination capability, conduct extensive background checks on applicants for licenses, increase to seven its consumer assistance staff, track consumer complaints by type and geography, and add a specialist in financial fraud, he said.

Secretary Schenck said he hopes to find a way to include an independent third party such as a credit counselor to help review documents and terms with consumers before they close on subprime home purchase or refinance loans.

He noted that subprime and conventional lenders who hold foreclosed mortgage loans in Monroe County have been "cooperative" in trying to find work-out solutions.

Brian Hudson, executive director of PHFA, said that PHFA had established a network of four nonprofits to provide housing and credit counseling to Monroe County homeowners and had provided funding and staff training. Also, PHFA and DOB have conducted a total of eight seminars in Monroe County to enable homeowners to share their experiences with state-agency representatives, he said.

Hudson explained that PHFA's HEMAP program has not been applicable to most of the Monroe County homeowners because the appraised value of their homes is typically well below the mortgage amount. The program was established, he said, for situations of temporary unemployment or illness with the likelihood that homebuyers could resume regular mortgage payments.

Meanwhile, the Pennsylvania Department of State permanently removed three appraisers' rights to practice and has taken disciplinary action against several other appraisers, while other state officials have enlisted eight appraisers in Monroe and adjacent counties to provide reduced-cost appraisals for consumers in workout situations.

The state is also preparing to implement a uniform construction code in light of the fact that inspections were not conducted on many newly constructed Monroe County properties, which had serious defects and later went into foreclosure.

In another action, Fannie Mae has agreed to purchase $1 million of restructured loans of Monroe County borrowers who had good credit before they encountered problems on their current mortgages.

Goldstein and DOB officials said the experience of consumers in Monroe County underscored the importance of education, especially for first-time buyers, in the home-buying process. The state's office of financial education, which is located within the DOB, is working with Monroe County school districts to include financial education in their curricula.

The TRF report and a letter from Secretary Schenck to lenders and brokers may be viewed at www.banking.state.pa.us/banking/site/default.asp. For information on state responses in Monroe County, contact Lydia Hernández-Vélez, deputy secretary of the DOB, at lehernande@state.pa.us, or Brian Hudson, executive director of PHFA, at bhudson@phfa.org. For information on the TRF study, contact Margaret Berger Bradley, TRF's director of strategic planning, at margaret.bradley@trfund.com.