Signing deadline looms for bill mandating foreclosure mediation
By Lorraine Blasor
For News is my Business
A bill establishing mandatory mediation in foreclosures of a primary residence seemed a shoe-in for the governor’s signature, but now the anticipated outcome is not so certain.
Intense lobbying by the Puerto Rico Bankers Association could derail a two-year effort by the Puerto Rico Chapter of the American Association of Retired Persons (AARP) to win passage of Senate Bill 1434, which follows similar laws in nine mainland states, including New Hampshire, New York, New Jersey, Washington, and Maryland.
Gov. Luis Fortuño has until Aug. 20 — next Monday — to sign or veto the bill.
As the deadline approaches, supporters and opponents of the measure are mounting an aggressive lobbying effort to influence the governor’s office at Fortaleza in a confrontation that pits local consumers versus the powerful banking and mortgage sectors. A legislative source close to the bill said she thought the law’s passage was a done deal but “now I am not so sure.”
According to AARP, the law is needed because too many people are losing their homes, a situation that is creating a severe social crisis in Puerto Rico reflected in broken marriages, adult children moving back in with parents, and real estate values dropping due to foreclosures in the community.
“We’re very hopeful that the governor will sign the bill,” said José Acarón, AARP state director for Puerto Rico.
AARP e-lobbying efforts
In an e-mail urging its 100,000 Puerto Rico members to call Fortaleza, AARP said 12,000 families have lost their homes in the past three years due to the island’s economic crisis and more than 70,000 people are at risk of losing their primary residence as a result of foreclosure proceedings against them.
“This measure gives consumers protection by creating a balance between bank and homeowners at risk of losing their home…it ensures justice so that families can have a voice in the process and safeguard their homes despite economic problems,” said the e-mail.
But Bankers Association Executive Vice President Arturo L. Carrión countered that the bill creates false expectations, could have a deleterious impact on the secondary mortgage market which props up home financing in Puerto Rico, will delay the foreclosure process and boost costs for banks and homeowners alike since the cost of mediation must be shared by both sides.
“The bill is not necessary,” he said, pointing to the “mitigation plans” that banks have already put in place to help homebuyers in default to refinance or restructure a problem loan.
P.R. foreclosure process more lenient
The foreclosure process, which usually takes two years, kicks in 120 days after them mortgage falls in arrears while in the U.S. foreclosure proceedings begin 30 days after default and “you get foreclosed at 90 days,” according to Carrión.
“There (in the states) it is practically a summary process,” he added.
Between 2008 and 2011, banks approved some 26,000 mitigation plans that Carrion said enabled homeowners in default to restructure or refinance a mortgage so they could keep their homes, even as banks lost money on these arrangements. An additional 30,000 loans were reinstated or paid off, he said.
Acarón acknowledged that mitigation processes to help people retain their home “have improved. But it is not enough.”
Besides, the process is unilateral and leaves the consumer at the mercy of the bank, he said, adding that having a mediator as an impartial third party will lend greater fairness to the process.
“Losing your home is a issue that affects a family in every way, the children as well as the adults as the home is their primary asset at retirement time,” Acarón said.
‘Wrong premise’ builds expectations
Carrión argued that the measure builds false expectations and might lead some homeowners to think they can hold on to a home even when they can’t afford to.
“The premise of the bill is wrong since those who are unable to pay a mortgage will not be able to hold on to their residence, with or without a mediator,” he said.
Still, foreclosure is an option the banks would rather avoid and figures provided by Carrión show that while the number of mortgages 120 days or more in arrears rose to 8.5 percent of outstanding portfolio in 2011, up from 6.2 percent in 2008, the number of foreclosures has remained stable. The 3,188 foreclosures executed in 2011 represented 0.71 percent or less than one percent of the island’s outstanding portfolio of 447,089 mortgages (with a value of $45.7 billion), Carrión said.
The danger, he went on, is that 60 percent to 70 percent of mortgages originated in Puerto Rico are resold on the U.S. secondary mortgage market, though loan servicing remains here. Passage of the law could have a negative impact, he cautioned.
“I think we are playing with fire,” Carrión said, warning that stateside investors could get jittery and decide to pull out. “There is always the probability or the possibility, whatever you want to call it, that investors realize we are dealing in a different way from how it is done in the U.S. and decide not to invest.”
If signed by the governor, the “Law for Compulsory Mediation and the Preservation of the Home in Foreclosure Proceedings of a Primary Residence” will become effective in July 2013.
The Bankers Association intends to continue its fight.
For his part, Acarón said the one-year delay in the law becoming effective was a last-minute amendment at the behest of bankers and AARP can live with it.
“It is better to have an approved law than to have to start all over again,” he said.