A chief judge for the ninth circuit in Orange County, Florida -- an epicenter of the foreclosure crisis -- ruled Wednesday that mortgage providers must negotiate with borrowers before foreclosing on their homes. On the same day, Sen. Charles Schumer (D-N.Y.) told reporters that two-thirds of the nation's mortgage servicers -- the ones associated with major banks who have taken bailout funds -- have voluntarily agreed, during negotiations with Treasury officials, to work to refinance loans for borrowers who are under water. Schumer said that the agreement had not yet been made public.
The twin developments get at the mortgage crisis from both ends and give major momentum to the movement to refinance mortgages for troubled homeowners. The Florida judge's order was requested by Rep. Alan Grayson (D-Fla.).
Huffington Post citizen journalists have been chronicling the Florida movement.
Mortgage servicers -- the companies that collects your monthly payment -- have been reluctant to modify mortgages, even as the foreclosure crisis has spread. Servicers do not own the loans, and fear that the lender will sue them if they renegotiate a loan and give more favorable terms to a borrower. And servicers have had little incentive to enter into such negotiations, since they get paid a fee for the foreclosure process and aren't the ones who suffer the loss on the loan.
The federal, top-down approach encourages major banks to work with servicers and homeowners, while the approach from the ground requires servicers to do just that.
"That's something that's very significant," said Schumer of the deal with the major banks. Bush administration Treasury Secretary Henry "Paulson said, 'Servicers go ahead and do what you do,' but there was no guidance as to how to do it. Now there's a specific [guidance]. Banks got to get it down to 38 percent and the government and the banks split getting it down to 31 percent," Schumer said. He was referring to the portion of monthly income that borrowers would be required, after negotiations, to dedicate to their mortgage.
"They say to the servicer, 'Every regulatory agency is urging you to do it.' And they focus on the mortgages that are retrievable," said Schumer. With regulatory agencies urging servicers to renegotiate, they gain protection from lawsuits from lenders -- especially if those lenders have already agreed to work with borrowers.
"This should help millions of refinances. And if you do that, you're going to see a floor in the housing market that's going to help the whole financial industry," said Schumer.
While the federal government negotiates with major banks and considers foreclosure-relief legislation, the Florida judge's ruling is part of a ground-level movement responding to the surge of foreclosures.
Chief Judge Belvin Perry Jr. ordered servicers carrying out foreclosures "to deliver at the time of service of process on Defendant-Debtor, a Notice to Homeowners of contact information including phone numbers and addresses to their loan workout department and notice of homeowners' right to mediation." (Read his order here.)
Requiring mediation shifts power from the lenders to the borrowers.
"Thank God!" Grayson said in response to the ruling. "The American dream is to own a home. The American nightmare is to lose one. I am glad I could help keep families in their homes."
The letter from Grayson to the judge, sent two days ago, notes that in the last year, "one out of every seventeen households in Orange County received a default notice, an auction-sale notice or a bank-repossession notice."