Mortgage crisis relief bill.

One of the most important things we approved at the State Capitol this year was sweeping legislation to address the mortgage crisis, help thousands of Connecticut families weather the economic crisis that is still unfolding and guard against abusive sub-prime mortgage practices.

In addition to placing a priority on helping families to avoid losing their homes, this legislation makes good economic sense. When the mortgage crisis sends large numbers of homes into foreclosure and abandonment, it means the quality of life of whole neighborhoods would be at risk. And the mortgage crisis, itself, hurting the economy and costing jobs.

Action is needed and both the federal and state level. And the State of Connecticut is taking action.

Here is a summary of the legislation prepared by the House Democrats office:

AN ACT CONCERNING RESPONSIBLE LENDING AND ECONOMIC SECURITY

With the number of foreclosures on the rise in Connecticut, the General Assembly has taken action to protect homeowner’s rights and keep families in their homes without having a chilling effect on responsible lending.

HB 5577 includes a comprehensive set of reforms that (1) will provide mediation and financial assistance to individuals and families whose homes are at risk of foreclosure, (2) reform the practices of lenders and mortgage brokers, and (3) make sure that nothing is done that will negatively impact the availability of lending for prospective homeowners.

This legislation represents a months-long collaboration between both chambers, both sides of the aisle, the Department of Banking, the banking industry and consumer advocates.

MORTGAGE PROGRAMS

HB 5577 establishes a $140 million multi-tiered mortgage assistance program. The bill specifically authorizes the Connecticut Housing Finance Authority (CHFA) to (1) continue the CT FAMILIES refinancing program and (2) implement mortgage refinancing and emergency mortgage assistance programs. These programs will be funded without requiring any new revenue. Eligibility requirements vary from program to program.

Low and moderate income borrowers may be eligible for the CT FAMILIES refinancing program if they took a sub-prime loan and are no longer able to make their monthly payments.

HERO loans are meant to address the situation where homeowners owe more on their homes than the house’s appraised value. CHFA will purchase mortgages directly from lenders and restructure the mortgage to the satisfaction of lenders and borrowers. Eligibility criteria include the ability to pay back the HERO loan and a proven effort to have made good on financial obligations in the past. Property taxes and insurance will be included in the borrower’s monthly payment amount.

Generally, homeowners may apply for EMAP (1) if they have fallen behind in mortgage payments because of hardships like unemployment, illness, and divorce and (2) if they are likely to be able to resume payments within years. EMAP requires participating homeowners to pay 5% of their income to CHFA. CHFA will make the full mortgage payment.

FORECLOSURE MEDIATION

By July 1, 008, the Judicial Branch must establish a foreclosure mediation program in each Judicial District. Two million dollars is appropriated to the Judicial Department from the State Banking Fund for FY 09.

The goal here is simple: identify homeowners whose homes are at risk and try to point them in the direction of appropriate community-based resources and/or governmental relief programs including, but not limited to, the programs in this legislation.

When the commissioner commences foreclosure proceedings, the lender must notify the borrower about the availability of the mediation program and must send the mortgagor a mediation request application.

The Judicial Branch believes that this program will be up and running by July 1, 2008.

MORTGAGE REGULATION

When lenders issue non-prime loans, the bill prohibits lenders from engaging in misleading, deceptive, or untruthful practices and imposes a duty of good faith on lenders and brokers. Lenders must now, among other things (1) reasonably believe that borrowers will be able to repay the loan; (2) refrain from making non-prime refinance loans unless the loan provides a tangible net benefit to the borrower; (3) collect monthly escrow for property taxes and homeowner’s insurance; and (4) disclose by letter the terms of the loan and provide notice of subsequent material changes for first mortgage (non-prime) loans.

Like lenders, mortgage brokers now cannot offer a non-prime home loan that refinances any mortgage unless the loan provides a tangible net benefit to the borrower. Brokers must also examine the level of credit worthiness of a borrower before securing a loan for that borrower.

HB 5577 establishes a private right of action for violations of the bill’s loan provisions. The borrower may sue in court within three years of the mortgage closing (1) for the greater of actual damages or $1,000 and (2) for attorney’s fees. For a six year period, the bill also allows the borrower to raise as a defense, in any foreclosure action, that the lender has violated provisions of the bill.

Finally, the commissioner may use his existing statutory powers to (1) seek a court order for injunctive relief, (2) seek restitution for the borrower, (3) impose a civil penalty of up to $100,000 per violation, or (4) issue a cease and desist order to punish those who violate provisions of this bill.

House Bill 5577 (Approved by both the House of Representatives and the Senate.)

Of course, it will be important for the legislature to monitor how all of the parts of this legislation are working to see if there are changes that are needed so make sure this it works well in helping people. But it is my hope that this legislation will help many Connecticut families keep their American dream of homeownership alive. And I hope it will help our state as a whole avoid, as much as possible, the full effects to of the deepening economic problems.