Legal Aid Collaborative Addresses Foreclosure Crisis

By Evelyn Pursley

Though there may still be debate as to the exact scale and timing of the Great Recession, most would agree with the International Monetary Fund assessment that, in terms of overall impact, it was the worst global recession since World War II.¹ Seismic shifts occurred in professions, cultural groups, companies, state and local governments, neighborhoods, and for individuals. And, though many sectors were affected, it has been called the worst housing recession anyone but survivors of the Great Depression can remember.² For the first time in more than four decades of record keeping, home prices posted consecutive annual declines. A staggering $4 trillion in home equity was wiped out, and millions of Americans lost their homes through foreclosure.³

Furthermore, the problem of foreclosures doesn’t only affect individuals, it elicits a cost from cities and communities. It has been found that homes in foreclosure that become vacant provide sites for crime or other neighborhood problems. One foreclosure can impose up to $34,000 in direct costs on local government agencies.⁴ In addition to the families directly hurt, tens of millions of neighboring families see the value of their homes fall hundreds of billions of dollars just because they live near foreclosed properties. One foreclosure can result in as much as an additional $220,000 in reduced property value and home equity for nearby homes.⁵

As Jim Barrett, director of Pisgah Legal Services in Asheville, saw, “The effects of so many foreclosures on millions of people are deeply adverse and widespread. Families who had worked for years to become homeowners found themselves ‘under water’ or forced to sell their homes at prices that caused them to lose potential equity. Children had to change schools mid-year, causing them to lose an average of four months’ progress in school per change. It would be difficult to overstate the upheaval to households that were foreclosed upon—the financial distress as well as the emotional distress.”

From September 2008 to September 2012, there were approximately 4 million completed foreclosures in the US.⁶ And, while the volume and pace have decreased, foreclosures are still a real problem.

Legal Aid Responds with Home Defense Project

In North Carolina, a collaborative group of our legal aid programs has been working on saving family homes with government and nonprofit partners supported by a variety of funding sources specifically directed towards the foreclosure problem throughout the crisis. The project still serves thousands of clients each year, but directed funding for 2015 and the future is either diminishing or speculative.

Legal aid programs began seeing an influx of clients with problematic home loans as early as 2002, even before the fallout from adjustable rate mortgages and other exotic loan products had become apparent. “In December 2004, our advocates told the Legal Aid of NC Board of Directors that we thought our clients were the canary in the proverbial coal mine, and we were only seeing the tip of the iceberg in regards to foreclosures. Unfortunately, we were right,” says Hazel Mack, director of the Mortgage Foreclosure Prevention Project at Legal Aid of North Carolina.

For example, Legal Services of Southern Piedmont (LSSP) assisted a couple who were both disabled. They had a pre-fab home built to their special needs, on property given to them by the husband’s family. They were sold an adjustable rate mortgage at the time the home was constructed—a product inappropriate for the couple who were receiving social security disability and, therefore, were on fixed incomes. When the first increase to their mortgage placed them behind in payments, LSSP assisted them in using the Home Affordable Modification Program to modify the monthly mortgage obligation to an amount they can afford on their fixed incomes.

After 2008, the number of foreclosure cases exploded. And, by 2009, the country’s growing unemployment was overtaking subprime mortgages as the main driver of foreclosures, according to bankers and economists, sending even higher the number of borrowers who would lose their homes and making the foreclosure crisis far more complicated to unwind.⁷ The unemployment rate peaked at 10% (in October 2009). Compared with previous recessions, the higher proportion of long-term unemployed (those unemployed for 27 weeks or longer) is also notable.⁸8 And a new job often comes with lower pay, making it more difficult for struggling homeowners to catch up.⁹

Pisgah Legal Services assisted a couple in danger of losing their house where they were raising their three children when the paint-contracting business they had built from the ground up failed. Pisgah Legal Services stopped the foreclosure action and secured a loan modification. In the meantime, the father went to AB-Tech’s culinary school and now works as a cook at a child care center.

Initially, as the need for foreclosure defense increased, a request was made to the Z. Smith Reynolds Foundation to fund robust representation to save homes. The foundation has been making grants to a collaborative of legal aid programs doing foreclosure work known as the Home Defense Project (HDP) since 2004. The HDP is a collaboration of seven nonprofit organizations: Legal Aid of North Carolina (LANC), the NC Justice Center, Legal Services of Southern Piedmont, Pisgah Legal Services, the Land Loss Prevention Project, the Financial Protection Law Center, and the NC Housing Coalition.

Legal aid partners in the HDP use their legal skills and resources to seek reasonable loan modifications and provide high-quality foreclosure defense work in every county of North Carolina. In addition, the NC Justice Center and the Financial Protection Law Center provide litigation support and analysis on impact cases. The Justice Center also assists with training and the implementation of best practices, tactics and strategies for individual cases. Using advice and brief services, loan modifications, litigation in multiple jurisdictions, class actions, and bankruptcies, the project has an enviable track record of saving homes.

The NC Housing Coalition designs and coordinates outreach and education in support of the project by holding community forums to educate consumers, link them with legal advocates, and engage community members in articulating policy solutions.

State Home Foreclosure Prevention Project

Beginning in late 2008, the State Home Foreclosure Prevention Project (SHFPP), a partnership led by the North Carolina Office of the Commissioner of Banks, was established by the General Assembly to combat the problem. The Office of the Commissioner of Banks reviewed sub-prime loans closed from 2005 to 2007. And, foreclosures registered in the State Home Foreclosure Prevention Program database by the loan servicer could get a one-time 30 day extension, which could be used to negotiate with the homeowner and mortgage holder to establish a more affordable loan interest rate and payments. The goal of the program was to help bring borrowers and lenders together so that the family gets to keep their home and the bank does not lose money on the loan.

The project also coordinated HUD-approved housing counseling agencies, state and federal agencies, legal aid organizations, mortgage servicers, and community organizations to provide the resources needed to avoid foreclosure. North Carolina homeowners having trouble remaining current on their mortgages were able to call a toll-free number to begin the process of receiving assistance. Funding for the project came from fees assessed on foreclosure filings. The NC Housing Finance Agency assumed oversight responsibility for this funding in 2011.

Although the program has not been able to help everyone, Mark Pearce, then deputy commissioner of banks, noted that research shows that around two out of three homeowners can avoid foreclosure by seeking the advice of a counselor. By late 2009, officials found the State Home Foreclosure Prevention Project had helped prevent 2,040 foreclosures, and provided foreclosure prevention and budgeting advice to more than 6,000 homeowners. Officials estimated the impact of avoiding foreclosures on these homes prevented $175 million in declining neighboring property values and financial system losses.¹⁰ Chris Kukla, senior counsel for government affairs at the Center for Responsible Lending in Durham, called it “…one of the leading programs in the country dealing with this issue.”¹¹

National Settlement Funds Support Foreclosure Relief

In early 2012, after more than a year of negotiations, state and federal government officials announced a record settlement over foreclosure abuses—more than $26 billion—with five of the country’s biggest banks (Bank of America, J.P. Morgan Chase, Citigroup, Wells Fargo, and Ally Financial Inc., formerly known as GMAC). State attorneys general and federal officials challenged the banks over “robo-signing”—the practice of assigning bank employees to rapidly approve numerous foreclosures with only cursory glances at paperwork to determine if all the documents were in order. In the end, 49 states participated in the settlement.¹²

In addition to funds provided to borrowers for restitution, some funds went to the states to be used for their own mortgage assistance programs. In North Carolina, Attorney General Roy Cooper determined that legal aid should receive some of the funds (over $6 million) over a period of several years to work in collaboration with designated housing counseling agencies. All of these funds were to be administered by the NC Housing Finance Agency, which already was providing oversight on the foreclosure fees funding the State Home Foreclosure Prevention Project.

As funding from these sources decreases or comes to an end, we are pleased to learn that additional funds from a recently concluded national settlement will come to NC IOLTA specifically to support foreclosure work by legal aid organizations.

Funding for IOLTA programs was included in the settlement with Bank of America announced by the Department of Justice in August 2014. Of the $7 billion allocated to consumer relief, a minimum of $30 million is allocated to IOLTA programs across the country for the provision of foreclosure prevention and community redevelopment legal services. Each program will receive $200,000, and the remainder of the $30 million will be distributed based on poverty population. NC IOLTA has received $842,896.15 to support this work.

“We are very pleased to be asked to administer these funds that are designated to provide support for the foreclosure work of our legal aid programs,” said Evelyn Pursley, executive director of NC IOLTA, “especially since the funds are coming at a time when they can shore up these ongoing projects that are receiving decreasing funds from other sources.”

In addition, there are two other settlement provisions that have the potential to provide funding to IOLTA programs in the future:

• If by December 31, 2018, there are funds that have not been distributed from the consumer relief allocation, 75% of those “liquidated damages” will be distributed to IOLTA programs (based on poverty population and for the same purposes listed above).

• Another portion of the settlement sets aside over $400 million in a tax relief fund for those borrowers who have added tax liability due to their mortgage debt being eliminated. Whatever remains in this fund will be allocated 75% to IOLTAs (based on poverty population and for the same purposes listed above).

From 2004 through June 2014, the collaborative group of legal aid programs has saved over 2,300 homes from foreclosure, and well over $100 million has been achieved in cumulative monetary relief.

As noted in Legal Aid of North Carolina’s report on their foreclosure work, a home provides for some of a person’s most fundamental needs. While on the most basic level it provides shelter from the elements, emotionally it is the center of family life, and financially it is where the majority of a family’s wealth resides. For low-income people, foreclosures have a devastating effect on families that can be much more than an enormous financial loss. A foreclosure can damage a person’s credit rating and make renting a serious challenge. Homelessness or displacement, sometimes combined with job loss or insecurity, can inflict tremendous stress on the emotional health of a family, particularly children. North Carolina’s legal aid programs, therefore, will continue to work to keep families in their homes.

Evelyn Pursley has been the executive director of NC IOLTA since July 1997.

Endnotes

1. “What’s a Global Recession?” The Wall Street Journal, April 22, 2009.
2. Adrian Sainz, David Twiddy, Daniel Wagner, Alex Veiga, WRAL.com, August 1, 2009.
3. Ibid.
4. William C. Apgar, Mark Duda, and Rochelle Nawrocki Gorey, The Municipal Cost of Foreclosures: A Chicago Case Study, February 27, 2005, p. 2.
5. William C. Apgar and Mark Duda, Collateral Damage: The Municipal Impact of Today’s Mortgage Foreclosure Boom, May 11, 2005, p. 4.
6. CoreLogic Reports 57,000 Completed Foreclosures in September, corelogic.com/about-us/news/corelogic-reports-57,000-completed-foreclosures-in-september.aspx.
7. Renae Merle, “Unemployment Spike Compounds Foreclosure Crisis,” The Washington Post, August 18, 2009.
8. The Recession of 2007–2009, US Bureau of Labor Statistics, BLS Spotlight on Statistics, February 2012. 
9. Renae Merle, “Unemployment Spike Compounds Foreclosure Crisis,” The Washington Post, August 18, 2009.
10. Hundreds Helped by State Foreclosure-Prevention Program, wral.com/business/story/6153953.
11. Ibid.
12. Ronald D. Orol, Banks, States Reach $26 Billion Foreclosure Deal, marketwatch.com/story/banks-states-reach-26-billion-settlement-2012-02-09.