Formal mediation was compulsory for farm foreclosures in the 1980s, but the new project is voluntary, Miller said.  “This time, it’s not so much formal mediation as facilitation or negotiation to reach a result that works for all.  It’s an intermediary role.”

“The foreclosure project will work through the maze, figure out who needs to be connecting, and see if a loan modification can be found that works for all,” Miller said.  Most of the work will be by telephone, since few subprime loans are owned by local financial institutions.

An example of how the foreclosure-prevention project might work: 

Many Iowa homeowners may be in a “2/28 hybrid ARM” or adjustable-rate mortgage originated a few years ago by a mortgage broker.  That means a fixed, low ‘teaser’ rate was applied for two years – but then, for the 28 years remaining on the loan, rates could adjust upward as quickly as every six months.  In reality, loan rates almost always adjust upward, leading to ‘payment shock’ for the borrower as monthly payments increase rapidly.  A loan that was fixed for two years at, say, 6% might rapidly adjust up to 10%.

In this example, the Mortgage Foreclosure Hotline Project might locate and call the “servicer” (since the loan likely is owned by secondary-market investors) and work to modify the loan from an adjustable rate at 10%-and-rising to a fixed mortgage at, say, 7%.  That would enable the borrower to afford the payments, enable the lender to continue receiving payments, and avoid costly, time-consuming and expensive foreclosure that benefits no one.

The Mortgage Foreclosure Hotline Project

The Foreclosure Hotline is a pilot project at this point, Miller said.  “We will see if Iowans use it and if it works, and if it does we will expand it as needed,” he said.  The Attorney General’s Office already has succeeded in helping borrowers and lenders find mutually-beneficial loan modifications, he said.  “It can work for all.”

Miller said his office is providing $4,500 for Iowa Mediation Service to ‘gear-up’ the Foreclosure Hotline Project.  The $4,500 is from payments made to Iowa by Ameriquest Mortgage Company in a settlement of a national consumer fraud case led by Miller alleging that Ameriquest engaged in various unlawful mortgage lending practices.  “The goal is just to find common ground between borrowers and lenders,” he said.  Lenders would agree to modify their loans, but they would do far better than if they had to proceed to foreclosure.  Borrowers would continue to make payments.

Miller said borrowers typically are faced with foreclosure as a result of one or more of three situations:  fraud, such as deception, appraisal fraud or “bait-and-switch” tactics; “unsuitable” loans that were never right for the borrower; or a “life-event,” such as loss of job or sickness that makes borrowers unable to pay.

The foreclosure project will work with any borrowers and lenders, regardless of the cause, Miller said.  “We’ll be in the business of finding solutions, but if we run into evidence of fraud, we’ll try to tackle that, too, of course.” Miller said another crucial motivation for the project is that foreclosures harm everyone, not just the immediate borrower and lender.  “Studies show that, for every foreclosure, the value of other homes on the same block goes down by about one percent,” he said.  “Multiple foreclosures can devastate a street and undermine whole neighborhoods and communities.”

National efforts:

Miller also has organized a ten-state task force to meet with mortgage servicing companies and investors to find ways for them to modify more troubled subprime loans instead of foreclosing.  He said the national effort paralleled the Iowa project because it is driven by the principle that borrowers, lenders, investors, and mortgage servicing companies all have an interest in avoiding foreclosure.  “We are appealing to everyone’s enlightened self-interest,” Miller said.

Attention:  State laws can change frequently.  Make sure you check for updates with your state or professional legal counsel.