Virginia law aims to help people on the verge of losing homes

Some Virginia homeowners who have fallen behind in their mortgage payments may soon get a letter offering help. It won't be a ruse or a scam.

A change in state law Tuesday requires that lenders and mortgage-servicing companies send delinquent borrowers with high-interest loans the names of housing counselors who can provide foreclosure-prevention guidance.

The new law requires that lenders and companies that collect mortgage payments make available a 30-day grace period to borrowers who ask for help.

By slowing down the foreclosure process, the new regulations could buy time for homeowners seeking to work out arrangements with their lenders.

Virginia's relief effort comes at a time when the number of Hampton Roads homeowners at risk of losing their homes is climbing. After a decline in April, the number of homeowners in some stage of foreclosure jumped 34 percent during May to 399, according to

RealtyTrac Inc., a company that monitors foreclosures nationwide. That number was up 131 percent from the region's total for May 2007, RealtyTrac said.

The change in Virginia's mortgage-lending law is part of a broader effort by government agencies, lenders and consumer groups to provide counseling for homeowners who are struggling.

In June, a statewide foreclosure-prevention task force conducted five day-long clinics around Virginia. More than 600 people, including 95 who attended a clinic in Virginia Beach, talked with housing counselors about their situations, an existing mortgage for a less costly one.

That sort of downward spiral in home values already has occurred in some Northern Virginia localities and could threaten sections of Norfolk and Virginia Beach that have had an abundance of foreclosures, said Barry Merchant, senior policy analyst with the Virginia Housing Development Authority in Richmond.

In contrast to homeowners who can wait for conditions to improve before they sell, lenders that have taken back homes through foreclosure tend to set the prices of these properties at the current market level. If buyers fail to materialize, lenders steadily cut the prices, said James Moore, a Newport News real estate agent who markets lender-owned properties in Hampton Roads. Because of the cost of holding onto a foreclosed property, lenders "can't allow vacant property to sit there month after month," he said.

However, more rigorous lending standards and fears of a further decline in Hampton Roads' home values have kept many prospective buyers, including investors, on the sidelines, Moore said.

"Most of the seasoned investors are more cautious, and I don't think anybody has a good sense of whether the market has bottomed out yet," he said.

Consumer advocacy groups have lauded the resources that Virginia and other states are devoting to counseling for homeowners in trouble. Delinquent borrowers often lose their homes through foreclosure because they are too frightened or suspicious to contact their lenders, said Austin King, director of the financial justice center at consumer-advocacy group Association of Community Organizations for Reform Now, or ACORN, in New Orleans.

"Many people are making an irrational decision and walking away from their homes" because they aren't aware of ways to prevent foreclosure, King said. Still, guidance from housing counselors won't be enough to curb the rise in foreclosures, he and other consumer advocates say.

"Counseling is helpful, but things aren't happening quickly enough" to help the rising number of delinquent borrowers, said Sharon Reuss, a spokeswoman for the Center for Responsible Lending, a consumer advocacy group in Durham, N.C.

The center has campaigned for allowing bankruptcy judges to modify the terms of troubled borrowers' mortgages. Federal bankruptcy law, Reuss noted, already allows courts to modify debtors' loans for second homes and yachts.

Last year, a coalition of large mortgage lenders, mortgage-servicing companies, investors and consumer organizations came together to address the torrent of foreclosures.

The Hope Now coalition was endorsed by the Bush administration but attacked by some consumer advocacy groups for moving too slowly. Lenders and mortgage servicers in the coalition initially concentrated on having delinquent borrowers reschedule their payments. But many borrowers, especially those with costly subprime loans, stand little chance of avoiding foreclosure without a reduction in their monthly payments, according to the Center for Responsible Lending.

Since the beginning of the year, lenders and servicers in the Hope Now coalition have done much more to modify the terms of mortgages for delinquent borrowers.

Several states, including Virginia, decided not to wait for action at the national level and embarked on their own preventive measures.

The new Virginia law, a product of the statewide foreclosure-prevention task force, concentrates on delinquent borrowers who have subprime loans, the high-interest loans that routinely were made to borrowers with tarnished credit. These loans have much higher rates of default and foreclosure than conventional, fixed-rate mortgage loans.

One weakness in the new law, said ACORN's King, is the narrow definition of a high-risk loan. By defining a risky loan as one with a high interest rate or with high fees, the law doesn't help borrowers with other types of high-risk loans that often lead to foreclosure, he said. These include interest-only loans, option adjustable-rate mortgages that allowed a borrower to choose the size of the monthly payment, and Alternative-A loans that required little or no documentation of a borrower's income.

Another weakness is the law's lack of teeth. A lender or mortgage-servicing company that inadvertently fails to provide a 30-day grace period to a delinquent borrower seeking one won't be penalized.

Tom Shean, (757) 446-2379, tom.shean@pilotonline.com