Iowa Correspondent

DES MOINES, Iowa — Iowa Attorney General Tom Miller recently launched a pilot project created to help stem the tide of subprime mortgage foreclosures by Iowa farmers, which he said was reminiscent of the farm crisis in the early 1980s.

“We are convinced it makes sense for everyone to try,” Miller said. “It won’t work in every case, but when it works, it’s a win for all.” Launched on Sept. 11, the Foreclosure Hotline Project would provide a financial safety net to Iowa farmers by allowing both borrowers and lenders to modify loan terms. “Payments continue to lenders,” Miller said. “Borrowers remain in their homes.

Neighborhoods stay much stronger. We all benefit.” In partnership with Iowa Mediation Service (IMS), Miller said Iowans facing a mortgage foreclosure would be directed to IMS, which will take information from borrowers and then “explore if a loan modification might work for both the borrower and lender.”

Miller said during the farm crisis of the 1980s, thousands of farm foreclosures were averted due primarily to mediation, with IMS conducting hundreds of successful interventions at that time.

“That experience sparked the idea for this project,” he said. “The bottom line is that everyone benefits when they avoid foreclosure.” Miller said formal mediation was compulsory for farm foreclosures in the 1980s, but the new project is voluntary. “This time, it’s not so much formal mediation as facilitation or negotiation to reach a result that works for all,” he said. “It’s an intermediary role.”

Currently, Iowa’s subprime foreclosure rate is over 8.6 percent, the fourth highest in the United States. A new report from the Mortgage Bankers Assoc. (MBA) indicated that the state’s rate of foreclosures ranks ninth in the nation, with the percentage of loans in foreclosure in Iowa climbing from 1.62 percent to 1.65 percent for the second quarter. In the United States, foreclosures hit 1.4 percent from 1.28 percent in the first quarter.

According to data released Sept. 6 for the quarter ending June 30, of the 30,616 subprime loans serviced, more than 2,600 loans were in foreclosure, with about 11.8 percent of the borrowers seriously behind on payments and 14.5 percent past due. Miller said the foreclosure crisis would get worse before it gets better, especially since millions of adjustable-rate mortgages would adjust upward this year, through 2008.

“Borrowers suffer ‘payment shock’ when their monthly payments shoot up hundreds of dollars and just keep climbing,” he said. “They can’t make the payments and they face foreclosure. “We are especially motivated to help borrowers because there has been a lot of misconduct by some in the subprime industry.”

Many borrowers also face problem loans, Miller added, because of fraud or deception. “And most subprime loans were refinancing loans to existing homeowners,” he said. “Now, people who owned their homes for years are losing them because someone put them into a bad loan.”

IMS Director Mike Thompson and Miller urge Iowans to contact their offices if they are in default or foreclosure, or if they think they can’t afford new higher payments when an adjustable rate rises.

“As soon as you take it to foreclosure, you reduce the value of that collateral,” Thompson said, “and that’s not going to help the lending community. So, if we can find a way to keep everybody’s interest above board, I think we can find a way to make this work.”

However, Miller said, statistics show that about half the people facing foreclosure never contact their lender.

“We hope people feel more comfortable contacting a third party, the Mediation Service, to see if anything can be done,” he said. “The Mediation Service will definitely work with borrowers if it looks like there’s a way to avoid foreclosure that works for everyone.”

To help IMS jumpstart the Foreclosure Hotline Project, the Iowa Attorney General’s Office is providing $4,500 for IMS, from payments made to Iowa by Ameriquest Mortgage Co. in a settlement of a national consumer fraud case which Miller led, in which he alleged that Ameriquest engaged in various unlawful mortgage lending practices.

“The goal is just to find common ground between borrowers and lenders,” Miller 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 face 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.

Recently, Miller spearheaded a 10-state task force to meet with mortgage servicing companies and investors to find ways for them to modify more troubled subprime loans that would help avoid foreclosure.

Miller added his office has already succeeded in helping borrowers and lenders find mutually-beneficial loan modifications. “We will see if Iowans use it and if it works, and if it does, we will expand it as needed,” he said. “It can work for all.”