How Ohio Is Tackling the Foreclosure Crisis

Ohio Attorney General Marc Dann

While the federal government has so far resisted large-scale efforts to prevent home foreclosures, several states have jumped headlong into the crisis. Among the most ambitious efforts is taking place in Ohio, where foreclosure filings climbed about 30 percent from 2005 to 2007. Under the recently launched initiative, the state has enlisted more than 1,300 lawyers—from state agencies and the private sector—to help struggling homeowners avoid foreclosure by reaching agreements with lenders or, if need be, through litigation. Ohio Attorney General Marc Dann, one of the architects of the plan, spoke with U.S. News. Excerpts:

How significant is the foreclosure problem in Ohio?
It's immense. One in 58 households [is] facing foreclosure. That's one per neighborhood.

Why did you decide to address the mortgage problem by creating this team of lawyers?
The first thing we talked about was whether we could create mediation programs in the courts by asking the judges to encourage or force the servicers to at least sit down and talk to borrowers about an arrangement. But what we concluded was that there is a real inequality, because to file a mortgage foreclosure you have to be a lawyer. And homeowners—particularly those that are in default on their mortgage note—don't have lawyers. They are at a real disadvantage in negotiating. So it was not good enough just to have mediation, but both parties in the mediation need to be represented by lawyers.

What will the lawyers do?
The lawyers will work with the borrowers to see if there are defenses to the actual foreclosure, whether there was fraud or unsuitability in the creation of the mortgage to begin with, and then to assist in two other ways: either to help litigate the case or to help structure a settlement.

What legal footing might you have to mount defenses against foreclosures?
With these complex mortgage products—the adjustable rates, the no-document loans that were out there—there are all types of things in the generation of loans that give rise to defenses. And with the fact that these loans then started to become sold seven, eight, nine, 10 times in the process, there are even legitimate legal issues as to whether or not the person filing the foreclosure has the legal right to file a foreclosure because they don't have ownership of the mortgage note.

In Ohio, documents related to real estate have to be in writing; it's called the statute of fraud. We just convinced a court of appeals—the 10th District Court of Appeals in Franklin County, Ohio—to find that you can't bring a foreclosure action if you don't have paper that proves that you own the house.

What percentage of struggling Ohio homeowners could mount a credible defense against foreclosure?
I think in probably 25 percent to 50 percent of the cases. If you look at the foreclosures, I use the following rules of thumb. About half of them are related to some form of financial catastrophe—a medical problem, loss of a job. Of the remaining half, about 25 percent are mortgages that involved outright fraud, where the buyer, the seller, the appraiser—everybody was cut in. So it's that last 25 percent where people got in over their heads through buying a house that they simply couldn't afford, or they got loans that they didn't understand the terms of.

What percentage of home foreclosures do you think you might be able to prevent?
I think the vast majority of them. It would be in the best interest of the servicer and the borrower to try to find some accommodation.

But these contracts are between the borrower and the lender. Why should the government of Ohio be legally challenging them?
The fact is that the evidence is mounting that these wholesalers—and mortgage brokers who supplied them—targeted working-class, middle-class, unsophisticated consumers for generating these loans. So the fact is that there was a conscious effort to find people who wouldn't be able to negotiate the contract at arm's length. If a mortgage professional says, "Look, your payment is $500. I know this says it goes up in a year—don't worry, we'll come back and refinance you," I think it's very reasonable to think that it is not entirely the homeowner's fault that the mortgage goes into default.

What do you think of the federal government's response to the housing crisis?
The federal government has made about nine or 10 false starts. And most of the products and things that they have come up with are things that just weren't very meaningful, particularly to working-class, middle-class homeowners. And so we had to do something unique, and I think this is an unprecedented mobilization of lawyers.

How has progress been so far?
It's been actually kind of rewarding. My uncle is a retired transactional lawyer, and he said, "I've been negotiating with banks my whole life. I am so excited about getting to do this." So he signed up, went to the training. My aunt is happy because it gets him out of the house. Here is a guy that was representing big Fortune 500 companies negotiating with their banks. All of a sudden, that playing field is about to get leveled.