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Foreclosure as a Last Resort

October 21, 2010
Mortgage Lending

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States can stabilize the housing market by preventing unnecessary foreclosures.

With the foreclosure crisis in the headlines for over two years now, it is easy to assume that it must be nearing the end. Unfortunately, this crisis is far from over. To date, 2.5 million homeowners have already lost their homes and another 5.7 million are at imminent risk of foreclosure.[1] Looking ahead, independent analysts have projected that between 10 and 13 million foreclosures will have occurred by the time the crisis abates.[2]

The reality is that many of these foreclosures can and should be avoided. All too often, troubled mortgages are sent to foreclosure, driven by a system biased in favor of foreclosure sales over sustainable loan modifications, even when foreclosure is more costly.

While states have been hit hard by the current crisis as foreclosures drain resources from already-strapped budgets, states are in a strong position to stabilize local housing markets. By exercising their exclusive control over foreclosure laws, states can adapt an existing industry standard, "mandatory loss mitigation," to require that servicers assess whether foreclosure is in the financial interest of the investor before proceeding to foreclosure. Although mandatory loss mitigation standards exist in many parts of the market now, lack of enforcement has diminished their impact. When inserted directly into state foreclosure laws, a mandatory loss mitigation standard will function as a low-cost, high-impact foreclosure prevention tool that ensures foreclosure is a last resort.[3]

In this report, we highlight the unique opportunity for states to level the playing field by imposing common sense standards on all foreclosing parties.

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[1] Debbie Gruenstein Bocian, Wei Li, and Keith S. Ernst, Center for Responsible Lending, Foreclosures by Race and Ethnicity: The Demographics of a Crisis, at 3 (June 18, 2010), available at

[2] Hatzius, Jan & Marschoun, Michael A. Goldman Sachs Global ECS Research, Home Prices and Credit Losses: Projections and Policy Options (2009).

[3] U.S. Department of Housing and Urban Development, Mortgagee Letter 2010-04, Loss Mitigation for Imminent Default (January 22, 2010), available at ("Loss Mitigation is critical to both borrowers and FHA because it works to fulfill the goal of helping borrowers retain homeownership while protecting the FHA Insurance Fund from unnecessary losses. By establishing early contact with the borrower to discuss the reason for the default and the available reinstatement options, the servicer increases the likelihood that the default will be cured and the borrower will be able to retain homeownership.")