Banks Thrive, While Homeowners Still Suffer
Published in Reuters.
A year ago the federal government and 49 states completed a $25 billion agreement with the nation’s largest mortgage servicers to settle claims of “robo-signing” and unlawful foreclosure practices. President Barack Obama announced the creation of the federal-state mortgage securities working group in his 2012 State of the Union address. The nation seemed on the verge of transforming the way banks treat struggling homeowners ‑ particularly those with “underwater” mortgages, in which a homeowner owes more than the house is worth.
These promises, however, have yet to be fulfilled. The latest interim report on the national mortgage settlement is due out this week, and banks will likely again declare that it offers proof that they are fulfilling their obligations. But the communities hit hardest by the foreclosure crisis have yet to see any meaningful relief.
Time is running out to ensure that these communities receive their fair share under the settlement. But it is not too late to provide meaningful assistance. The settlement monitors need to demand greater transparency from banks, and they need to see that banks comply with the fair-lending requirements set out in the agreement. They also need to aggressively police the servicing reforms to ensure that all homeowners get a fair opportunity to save their homes.
This settlement was designed to begin a new chapter in the resolution of the nation’s foreclosure crisis. It provided much-needed funding for legal aid, housing counselors and other foreclosure prevention services. It also committed the banks to billions of dollars in consumer relief to help keep struggling families in their homes. Critics recognized that the settlement size was far too small to solve the entire housing crisis, but they hoped it could change the way banks deal with foreclosures.
Unfortunately, there is little transparency about how the banks are using this money. They have not provided any loan-level data to show which borrowers are receiving assistance.
Moreover, mortgage servicers have complete discretion over who receives help. Advocates fear the banks have been cherry-picking expensive loans that are deeply underwater to meet their settlement obligations quickly. This provides an important service for the borrowers in that category but little systematic relief for low- and moderate-income communities suffering the most from the foreclosure crisis.
The lack of loan transparency and the discretion vested in the banks also make it hard to ensure that settlement relief is keeping families in their homes. The last monitor’s report showed that more than half the “relief” cited by the banks came through roughly $13 billion worth of short-sale agreements ‑ in which a borrower sells his or her home for less than the value of the mortgage.
Short sales help borrowers resolve a foreclosure. But they do not keep families in their homes. The lender also profits more from a short sale than a foreclosure – hardly the kind of penalty commensurate with the settling of billions of dollars in legal claims.
Worse, there are anecdotal reports that banks are writing off worthless second liens without helping homeowners out of foreclosure with their primary lenders. The banks are taking credit for writing down billions of dollars in worthless second mortgages. But these write-offs won’t save a family’s home ‑ unless the primary loan is modified at the same time.
We need to do a better job of ensuring that future settlements ‑ and there are plenty of continuing investigations into the mortgage mess ‑ direct relief to the hardest-hit communities. Bank regulators at the Federal Reserve and the Office of the Comptroller of the Currency have announced billion-dollar settlements to replace the botched Independent Foreclosure Review. They must pledge to do more to ensure consumer relief before letting lenders off the hook for improper foreclosures. Homeowner advocacy organizations like the Campaign for a Fair Settlement are pressing for such solutions.
Obama must also provide leadership. Last year he told the Democratic National Convention, “When a family can no longer be tricked into signing a mortgage they can’t afford, that family is protected, but so is the value of other people’s homes ‑ and so is the entire economy.”
He was right. Ending predatory lending, and lifting the hardest-hit communities up out of the foreclosure crisis, will help the entire nation.
It is time to fulfill that promise.