North Carolina Foreclosure Law Would Harm, Not Help Military Families

A proposed North Carolina law meant to help military families stave off foreclosure may ultimately make it more difficult for service members across the state to purchase a home.

The state Senate approved a bill this week that would essentially slow down the foreclosure process against active-duty service members and require lenders to take those cases before a judge. The measure passed by a 47-0 vote and now heads to the North Carolina House.

Legislators, including the bill’s sponsor, Democratic Sen. Don Davis, lauded the passage. But the law has all the makings of a measure that is far better at generating sound bites than actually protecting military homeowners.

In fact, it has the potential to make things much worse.

Here’s why: Lenders are more likely to lose money on a loan when it’s difficult to foreclose. In order to compensate for an increase in losses, lenders will take steps to protect themselves — steps like adding costs and requiring higher credit scores and down payments from military buyers. In turn, higher costs and tighter restrictions would make it significantly tougher for military families across the state to qualify for a home loan.

In other words, a bill that aims to help military families might do the opposite.

The measure could also dilute the buying power of the VA Loan Guaranty program, a low-cost financing option that’s helped more than 18 million veterans become homeowners since World War II. VA loans require no down payment, a key feature that opens the door to homeownership to scores of service members who might otherwise struggle.

The Department of Veterans Affairs guaranteed almost 21,000 loans in North Carolina last year, the fourth-highest total nationwide. VA loans also have the lowest rate of foreclosure of any loan product on the market.

But more stringent requirements and added costs might even put VA loans out of reach for some military families in North Carolina.

Protecting military families against foreclosure is certainly an important and worthwhile endeavor. But forcing lenders to ratchet up their risk mitigation will only make things more difficult for the vast majority of borrowers, let alone those who still dream of becoming homeowners.

Their road might have just gotten significantly bumpier, or worse — come to a dead end.

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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.