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Saturday, August 25, 2007

Ind. Law - Hoosier homeowners hit by perfect storm [Updated]

The property tax mess has many homeowners trying to sell their homes; they can no longer afford their ever-balloning tax bills.

Some other homeowners are directly impacted by the sub-prime mortgage scandal, with their monthly payments suddenly taking enormous jumps.

Some are directly hit by both.

The perfect storm comes from the fact that people can't get mortgages any more, often even traditional mortgages with good credit, because the sub-prime scandal has impacted the entire mortgage market.

Furthermore, rates are up and refinancing to adjust for your increased property tax bill is no longer the option it was three years ago with the first property tax "bump."

As a result, Hoosier home prices are rapidly spiraling downward. At the same time homes have been assessed based on sales from two years ago. So you are being required to pay taxes based on assessed values that you couldn't possibly sell your home for, even if the proposed buyer could get a mortgage.

And there is no solution in sight.

The Indianapolis Star has a story by Ted Evanoff this morning headlined "Subprime loan crisis threatens to broaden: Even homeowners, borrowers who have good credit may feel effects, experts say." Some quotes:

Now experts forecast a painful downturn in the housing market and a spate of home foreclosures and personal bankruptcies that will hammer many neighborhoods, including some in metropolitan Indianapolis, where families are already grappling with the prospect of rising property taxes.

Subprime loans were given to borrowers who don't qualify for conventional loans with low interest rates because of a poor credit history.

Even if you don't face foreclosure, an increase in foreclosures in your neighborhood could drive down your property values. Additionally, homeowners seeking to refinance could face tougher approval standards.

"We're in a vicious cycle of trying to rectify this, but it's going to be awhile before it is worked out," said Stephen Byers, managing attorney at Indiana Legal Services in Indianapolis.

The Star includes a useful side-bar to today's story. But it doesn't really give the over-arching picture; the story goes way beyond homeowners caught up in the sub-prime mortgage quagmire - the perfect storm will impact much of the state.

Yesterday the NY Times had a good article headlined "States Begin Action on Subprime Lending." It describes what other states are doing. Indiana is not mentioned. Some quotes:

Gov. Michael F. Easley of North Carolina signed legislation last week that would limit the ability of mortgage brokers to charge customers above-market rates and prepayment penalties and would protect subprime borrowers from highly risky adjustable-rate mortgages.

Calling the mortgage meltdown a “wake-up call,” Mr. Easley said, “If Washington isn’t going to act, the states are.”

But amid his call for action was regret that if only officials in his and other states had acted a couple of years sooner, some of the mortgage problems that have roiled the financial markets and hurt homeowners might have been avoided.

“I should have watched this closer; all of us should have on the state level,” he said in an interview after the signing ceremony in Raleigh. “We should have looked at our laws closer and made some changes.”

North Carolina is one of about a dozen states that are beginning to make legislative and regulatory changes to protect people who resort to subprime financing. But economists and housing specialists say the actions come too late to benefit most of those at risk of losing their houses.

With foreclosures expected to rise as adjustable-rate mortgages are reset and the borrowers face higher monthly payments, economists said the steps that states like North Carolina were taking would do more to protect future borrowers than help people already in trouble. * * *

State governments have ample legal powers over the subprime market, but governors, legislators and regulators have been reluctant to intervene. They have limited staffs and financial resources to regulate the large, fragmented market, and they fear doing more harm than good — like stamping down home-lending money for working-class people or moving it to other states.

In some states, officials were hesitant to help bail out people who had made bad decisions for fear this would only encourage more risky borrowing. “You know that people are not as financially literate as they ought to be,” Governor Easley said as he signed the new law.

State governments are beginning to take modest action in part because the federal response has been slow. * * *

Lawmakers in a handful of states — including Maine, Minnesota and Ohio — have passed measures to tighten restrictions on subprime lending. Illinois, New York and Massachusetts have formed task forces and held meetings involving members of the mortgage industry, lenders and consumer representatives to figure out ways to rework problem loans. Minnesota is acquiring some foreclosed properties to resell to low-income people.

Several states are considering laws and regulations to make mortgage brokers accountable for allowing borrowers to take on debts they cannot repay.

In all, legislators in more than 30 states have introduced close to 100 bills intended to stem deceptive-lending practices and foreclosure, some by stiffening criminal penalties.

Maryland, Massachusetts, New Jersey, New York, Ohio and Pennsylvania have rolled out mortgage programs intended to refinance loans by homeowners at risk, using the proceeds from state bond issues and money from federal lending agencies. Together, the programs amount to about $500 million but are expected to help a relatively small number of people. * * *

Ohio initially planned to sell $100 million in taxable municipal bonds in a mortgage-refinancing program intended to help property owners get fixed-rate mortgages on which they could make the payments. But the state cut the program back to $25 million because so many people were already in foreclosure or not eligible for the loans.

Mr. Kukla said Ohio had had a degree of success with a law passed last year requiring lenders in subprime deals to document and verify their borrowers’ ability to repay. But Ohio remains a subprime-mortgage disaster zone, with the country’s highest foreclosure rates after California and Florida. * * *

Economists and mortgage specialists say they think that states will take more action in the fall when legislators return to work, but they predict that progress will continue to be mixed.

“You have 50 state regulators, 50 state agencies, 50 state governors looking at a massive market and deciding to tweak it around the edges to make it more fair,” said Karl E. Case, a Wellesley College economist specializing in real estate. “That’s a very difficult task, particularly in a fragmented market.”

What has Indiana done? For background start with this lengthy ILB entry from March 7th, titled "Ind. Law - Fighting foreclosures and mortgage fraud," and this update from May 9th.

[More] See the Chicago Tribune story today headed "The next credit crunch? As home loan market tightens, mounting credit card debt could spur new crisis."

[Updated 9/26/07] The Sunday Fort Wayne Journal Gazette has this lengthy story by Sherry Slater headed "Mortgage meltdown: Subprime crisis fallout hitting wallets near, far."

Posted by Marcia Oddi on August 25, 2007 09:20 AM
Posted to Indiana Law