The Ohio House of Representatives’ Housing and Urban Revitalization Committee passed out of committee a bill to declare a six month moratorium on residential mortgage foreclosures. The bill was passed on party lines, with Democrats voting in favor of the bill and Republicans opposing the bill. The bill currently is scheduled for a vote before the full House on Wednesday May 20, 2009. If the bill passes the full House, the bill will go to the Republican controlled Senate.

    Before passing the bill the committee removed a provision giving judges discretion to modify loans subject to a foreclosure action by reducing the principal or interest if the judge determines that the modification is just and equitable and would benefit both parties. The provision was strongly opposed by the industry and subject to Constitutional challenge, as discussed in our Alert of March 31, 2009.

    The bill would substantially hinder the ability of lenders to collect mortgage loans and create an incentive for borrowers not to pay on their mortgage loans. As discussed in our Alert of April 9, 2009, requiring a bank to adhere to these and other foreclosure mitigation requirements will diminish the return on the bank’s mortgage loan portfolio. Foreclosure suspension increases the risk of default and raises the number of borrower delinquencies, which will require higher loan loss reserves and ultimately higher capital needs, thereby negatively affecting factors considered by bank regulators in assessing the financial health of a bank. Additionally, placing limits on a lender’s ability to manage defaults and recoveries as it deems necessary (such as by requiring any type of moratorium on foreclosures) restricts management’s ability to implement sound risk management programs.

    In addition to the foreclosure moratorium, the bill creates a State Foreclosure Prevention Project and a Residential Mortgage Services Registration Act.

    Please contact us if you would like a copy of the current version of the bill or other information.

    • Elizabeth Anstaett and Darrell Dreher