Lenders contend that dual tracking simply protects their investment if the homeowner is unable to qualify for new loan terms. Mortgage servicers can lose money if they don't foreclose in a timely manner, and repossessions often are complicated and lengthy.
But regulators and consumer advocates say the practice lulls some homeowners into thinking they are no longer at risk of having their homes taken away. Regulators are now aiming to curtail the practice as part of an overhaul of the foreclosure system.
"We don't think that a homeowner who is making a good-faith effort to work through their troubled mortgage should have the roof ripped out from over them while they are negotiating, or trying to negotiate," said Geoff Greenwood, a spokesman for Iowa Atty. Gen. Tom Miller.
On Wednesday, federal banking regulators issued settlements with major banks and home-loan servicers that would, among the many provisions, stop foreclosure once a homeowner is approved for a temporary mortgage modification. In ordering the changes, the regulators said they found "critical weaknesses" in the way the lenders handled foreclosures.
The settlements drew immediate fire from activists who said they did not go far enough, particularly in addressing the two-track foreclosure process. A separate coalition of state attorneys general and federal agencies including the departments of Justice, Treasury and Housing and the Federal Trade Commission is still negotiating details of a foreclosure-system overhaul that could include a near-ban of the practice.
"The dual-tracking issue is of major concern," said Greenwood, whose boss is leading the negotiations for the attorneys general of all 50 states and federal agencies.
The state attorneys general have issued their demands in a detailed, 27-page term sheet. Banks have responded with their own proposals. Negotiations between the two groups continue.
The demands by the attorneys general would prohibit lenders from starting the foreclosure process on a home if a borrower has submitted an application for a loan modification. That is a significant step beyond what the federal regulators have ordered, according to consumer advocates, because often borrowers struggle even to get their loan modification packages reviewed.
"The settlement policy on dual tracking completely misses the point," said Alys Cohen, attorney for the National Consumer Law Center, referring to the deal cut Wednesday by banking regulators. "You have to obtain the loan modification before they stop the foreclosure."
Shirley Robertson of Oxnard has first hand experience with dual tracking.
Robertson learned last summer that her home was scheduled to be sold at a foreclosure auction, so she contacted her lender, JPMorgan Chase & Co. Robertson said she had fallen behind on mortgage payments for her home and a rental house because the economic downturn put her catering business in a tailspin.