Defaulting on the Dream
States Respond to America’s Foreclosure Crisis

Dear reader:

Is the American Dream slipping away? One in 33 current U.S. homeowners may be headed toward foreclosure in the coming years because of subprime loans, according to our new report, Defaulting on the Dream. In some states, the crisis is particularly acute—in Arizona, for instance, one in every 18 homeowners could lose their home; in Nevada, the ratio is one in 11.

The problem hardly stops there. Because of foreclosures in their communities, an additional 40 million homeowners may see their property values and their municipalities’ tax bases drop by as much as $356 billion in the next two years. Nearly every state is affected: in 47 states and Washington, D.C. the number of mortgage loans entering foreclosure as of December 2007 had increased by at least 20 percent since December 2006. Ten states alone could lose a total of $6.6 billion in tax revenue in 2008, according to a recent analysis by the firm Global Insight.

The stakes are incredibly high. Homeownership is the primary vehicle through which American families build financial security. It also is an essential building block of state and local economies.

Defaulting on the Dream: States Respond to America’s Foreclosure Crisis is the first-ever comprehensive look at what states have been doing to tackle this critical issue. It showcases approaches in two principal areas: (1) helping borrowers avoid foreclosure and keep their homes; and (2) preventing problematic loans from being made in the first place. This report recognizes that while some states moved quickly to respond, their approaches are not yet proven.

At this writing, federal lawmakers are deliberating important proposals to try to address the crisis. Among other measures, Congress is considering federal funds to expand counseling programs for homeowners at risk of foreclosure, tax-exempt bonds for localities to refinance subprime loans and a hefty increase in federally insured mortgages. It also is debating the need to strengthen underwriting standards.

While policy makers and the media have focused on the immediate foreclosure crisis, Pew, together with our partners, continues to call for more action to strengthen standards to prevent more troubling loans from being made in the future. While the causes of the current crisis are multifaceted, had these basic consumer protection safeguards been in place, we may have curtailed this current calamity. The need is particularly acute as Congress considers ways to rewrite loans for those borrowers currently facing foreclosure. In this arena, many states have taken the lead, requiring lenders to verify a borrower’s income and ability to repay at the fully indexed interest rate and not just at the low initial “teaser” rate, requiring the escrow of taxes and insurance payments and documenting the value of the property being financed.

Most experts agree this is a national crisis that warrants a national response, with the federal government providing both leadership and funding. But Congress should take into account what some states already have put in motion to try to stem the foreclosure tide and prevent the crisis from happening again. In the absence of federal leadership, states have been experimenting with homeowner counseling, refinance programs, stronger regulation of lending practices and other actions. As it deliberates, Congress should be aware of how its decisions will impact states’ efforts already underway—building on, rather than pre-empting, the strongest state statutes, and ensuring that states retain the flexibility to respond to local conditions and needs.

Defaulting on the Dream was researched and written by The Pew Charitable Trusts’ Center on the States (PCS), in collaboration with Pew’s Health and Human Services (HHS) program. PCS identifies and encourages effective policy approaches to critical issues facing states. HHS’ Family Financial Security portfolio seeks to advance common-sense solutions to help Americans save for tomorrow and manage debt today. The Center for Responsible Lending, one of the portfolio’s partners and a key source of data and analysis for this publication, focuses on expanding homeownership by curbing abusive lending practices.

We hope this report informs Congress’ important deliberations and helps ensure that federal and state policy makers work closely together to address America’s foreclosure crisis.

Sincerely,

Sue Urahn              
Managing Director
Pew Center on the States

Shelley Hearne
Managing Director
Health and Human Services