Two consumer advocacy groups have outlined how state lawmakers can bolster safeguards to prevent unnecessary foreclosures.  The Center for Responsible Lending (CRL) and Consumers Union (CU) said in their report, Closing the Gap:  What States Should Do to Protect Homeowners from Foreclosure that, while the foreclosure crisis was caused in large part by unscrupulous lending practices that went unregulated, servicing abuses - including the failure to engage in good faith loss mitigation before beginning the foreclosure process - have exacerbated the problem.

While there have been recent advancements including the National Mortgage Settlement (NMS), the California Homeowner Bill of Rights (HBOR), and new mortgage servicing rules from the Consumer Financial Protection Bureau (CFPB) that go into effect in January 2014, millions of families remain poised to lose their homes and communities remain at risk for the spillover effects of foreclosures.  The two organizations said there is room for states to build on the above reforms and help avoid unnecessary foreclosures. 

The paper goes into considerable detail pointing to areas where, for example, the HBOR offers protections not available in the CFPB rules and some shortcomings of those rules.  Most importantly, its says, states should add private enforcement that gives homeowners a means to pause the foreclosure process while the servicer corrects violations of the law and encourages servicers to consider loss mitigation alternatives. Although the CFPB rules will be applicable in all states, homeowners will not have the right to prevent unlawful foreclosure sales while servicers correct legal violations, unless states adopt stronger private enforcement provisions.

Over the last several years, some of the most significant problems have included the failure to review homeowners for a loan modification and foreclosing on borrowers even as the servicer is considering an application for a modification (commonly referred to as "dual tracking").

By adopting a Homeowner Bill of Rights to help reduce as many foreclosures as possible, states would stabilize local housing markets and protect homeowners. In the report, CRL and CU urge state lawmakers to:'

• Require servicers to adopt and engage in loss mitigation practices.  There should be an explicit duty to engage in loss mitigation analysis before the foreclosure process is commenced.  Loss mitigation benefits both the homeowner and the mortgage holder by seeking solutions that would allow homeowners to remain in their homes and providing mortgage holders with a means to mitigate their own losses.  Because HAMP is due to expire at the end of 2013 it is even more imperative that servicers be required to engage in a loss mitigation assessment.

• Restrict lenders/servicers from dual tracking at both the pre-foreclosure and post-foreclosure referral stages, while providing homeowners with reasonable deadlines and a right to appeal.  The CFPB rule that prohibits a foreclosure start before the 120th day of delinquency or while a loss mitigation application is pending should be universal.  Homeowners should also have the right to appeal a loan modification denial when they have met dual track guidelines.

• Give homeowners the right to stop a foreclosure sale when the lender/servicer has violated the law.  RESPA does not allow homeowners to prevent a foreclosure sale when servicers violate the rules' requirements to policymakers should implement a strong enforceability measure that gives homeowners the right to suspend a foreclosure sale when a servicer has not complied with loss mitigation rules, and until it does so.

• Require servicers to establish procedures for homeowner outreach, detailed denial notices, and an affidavit requirement.

The report says that when servicers fail to employ viable loss mitigation tools, the foreclosure crisis is exacerbated,  "By ensuring that servicers examine all possible foreclosure alternatives and by promoting clarity, transparency, and accountability in the loss mitigation process, states will help more homeowners avoid unnecessary foreclosures and keep more people in their homes.  This, in turn, will benefit everyone by reducing the spillover impact of foreclosures and by helping to stabilize the state's economy and housing market.