Reviewing the Foreclosure Fraud Settlement

When the news broke about the settlement with the large mortgage servicing banks, led by the National Association of Attorneys General in cooperation with about a dozen federal agencies, I was happy and hopeful that the long months of work to get this done had come to a fruition about which I could be proud.  I knew it was possible, however, that the banks, partly through dragging their feet and partly through lobbying efforts, had gotten their way and avoided penalties for their despicable role in creating the housing bubble and unconscionably pushing foreclosures through without documentation or serious efforts to modify mortgages.

Probably both situations are partly true.  The reviews of the settlement by colleagues I have worked with in this effort have not been very favorable.  Today I will look at the criticisms from Dean Baker of the Center for Economic and Policy Research in light of the goals I previously highlighted in a July 2011 posting.  There I wrote the following.

Among the key items of our agenda are:

• broad availability of principal reductions to reset the housing market and remove the risk of more foreclosures;
• remedies for all who have been harmed by fraud or other criminal acts, whether they have already suffered foreclosure, are in process, or are facing impending foreclosure;
• the end of dual tracking, with simultaneous loan modification discussions and foreclosure procedures;
• all possible efforts for loan modifications and other non-foreclosure procedures should precede the initiation of foreclosure procedures;
• criminal prosecutions for criminal acts; and
• regulatory regimes to keep this kind of mortgage fraud from being repeated.

Baker's criticisms, which he calls the "big three" among many others that can be made, address a number of the points above.

He says first that it is not clear which loan modifications, principal reductions, and short sales will count toward the $17 billion amount the banks agreed to.  Will cases already completed or in progress count?  If so, then what does the dollar number mean about what banks will be expected to do now that the settlement has been agreed.  This raises the question whether there is "broad availability" of solutions, especially principal reductions, for homeowners.  If they can count what they have already done, and this pitifully small number has been set aside for the banks' total requirement, then most families facing foreclosure will not find any help in this settlement.

Second, Baker says, the banks may count loans they "service," not only loans they own.  So any principal write-downs or short sales in cases of serviced mortgages will not come out of the banks' own money.  They will be taking the money from owners of mortgage-backed securities or other purchasers of mortgages.  Obviously, it will be in their interest to use this legal caveat to avoid charging themselves any financial cost for their role in this crisis affecting so many homeowners.  In that sense, the agreement does not penalize the banks.  It allows them to use court authority to penalize investors.

Baker's third criticism addresses the last four of my points in the list above.  He says that thus far there is little evidence that the abuses that have led to and perpetuated this crisis have stopped.  He cites a case in San Francisco County, CA, in which an audit in the past month revealed a steady pattern of continued incomplete, falsified, and otherwise illegal documentation in foreclosure filings.  Fully 84% of the hundreds of filings had at least one violation of the law.  This matter of changing the way things are done is why North Carolina United Power continues its organizing strategy to audit county records to look for cases of foreclosure fraud.  Citizens, and public officials who will rise to their calling as public servants, must continue to gather data and press the case for changing the way of doing business when it comes to banking, mortgage, and foreclosure.

Defending Our Homes and Communities from NC UnitedPower on Vimeo.

The Long, Drawn Out Fight Against Foreclosure Fraud

In December 2010, I was part of a national gathering of citizens' groups who met with Iowa Attorney General Tom Miller in Des Moines.  We announced and discussed with him our agenda to push for a just and broad-ranging settlement between the fifty states' Attorneys General, various key federal agencies, and the large banks who had committed fraud in their dealings with homeowners on mortgages and foreclosures.  Miller was the lead AG in the negotiations, and he was talking tough at our gathering.  At that time, we were hopeful for a settlement in the next six months.

During the ensuing months, NC leaders met twice with NC Attorney General and his staff to discuss progress and emphasize the need for justice for homeowners.  We continued to hope there would be a resolution in the near future.

That six months passed.  Then in July 2011, I joined another group of leaders in Chicago at the meeting of the National Association of Attorneys General, where outgoing president of the group, NC AG Roy Cooper, presided.  We had conversations with various AGs and their staff, capping off our visit with a face-to-face meeting with four of the state AGs:  Cooper of NC, Miller of Iowa, Lisa Madigan of Illinois, and George Jepsen of Connecticut.  We came away from the meeting encouraged that our allies were continuing to fight, but discouraged that the final agreement remained elusive.  Hopes for a large fine to create a fund to assist homeowners were diminishing, with the figure $20 billion circulating widely (compared to the $700 billion bailout received by the banks).

Some state AGs threatened to pull out of the negotiations, frustrated over the compromises being forced by other state AGs, who were taking sides with the banks.  These compromises would gut their efforts for justice and leave citizens, municipalities, pension funds, and homeowners high and dry with no recourse.  Soon the California and New York AGs did withdraw from the negotiations.  Miller's reports to the public seemed to predict limited settlements that would let the banks off the hook.  The delays favored the banks, who continued to make large profits, pay out large bonuses, and foreclose on the little people, homeowners and the unemployed, who have no cash reserves to endure a prolonged battle.  News in the fall and winter showed little progress.

The Occupy Wall Street movement and its many sibling Occupy movements raised hopes.  Their agenda, as a mass movement, was less focused than our organizing had been.  However, they had similar concerns about big banks, the failed bailouts, people losing their homes, and an economy that serves only the elite 1%.  "We are the 99%" is a powerful cry of defiance.  I suspect that this movement played a part in building pressure on the state AGs to stand more firmly with the people suffering rather than with the banks stonewalling.

In part because of some organizing around foreclosure fraud in January, President Obama responded in the State of the Union Address that he had directed AG Holder to intensify his efforts on the foreclosure fraud issue, creating an office focused on bringing these negotiations to completion.  He then announced revisions in the HAMP program which would make unspent funds available to a larger range of homeowners.  He further changed the existing programs to bring Fannie Mae and Freddy Mac mortgages into eligibility for assistance.  So the end of January offered portents that change might be coming.

So I rejoiced to read the news this week that there are signs of progress toward a better settlement than had previously been intimated.  The fine paid by the banks will likely be larger than expected, even if still only around $25 billion.  The question of whether banks will be immune to further lawsuits seems to be shifting toward allowing homeowners, mortgage-based security buyers, and other interested parties the right to sue for damages.  This means that city, state, and private pension funds who were enticed into purchasing investments that were hiding toxic assets will have recourse to recover losses.  This could mean good news for so many people whose retirement savings were set back dramatically by the recent crash.

Keep watching for news that this drawn-out battle will end soon.  It's about time for justice.

Foreclosure Fraud Day of Action

I've finally finished breaking down the proposals in the "Homeowner's Bottom Line."  In the meantime, the campaign has continued to progress.

Around the country, citizens groups met with their state Attorney General during the past week to discuss the ideas in the "Homeowner's Bottom Line."  On Thursday and Friday, from Massachusetts to California, they pressed the agenda to be included in the potential settlement between the state Attorneys General, the thirteen federal agencies with a horse in the foreclosure derby, and the powerful banking interests.  In North Carolina, fourteen leaders,  representing six broad-based organizations with over 250 congregations, institutions, and community groups, met with the NC Attorney General's senior staff.  We came from Charlotte, Davidson County, Winston-Salem, Guilford County, Orange County, Durham, and Raleigh, and our constituents stretch across most of the state.  We are blacks, whites, and Latinos seeking the common good.

Attorney General Roy Cooper currently serves as the President of the National Association of Attorneys General.  In that office, he has played an important role in pressing for a fifty-state investigation into foreclosure fraud.  We were pleased to find that a new staff member who oversees the Consumer Protection Division is now devoting much of his time to this foreclosure fraud investigation.  The AG's staff were well-informed on our proposals and demonstrated a commitment to pursue an agenda very similar to ours.  Since AG Cooper was one of the instigators in bringing about this investigation, we were not surprised to find that to a great extent, our leaders and his staff were on the same page.  Good exchanges of information and assistance were followed by agreements for continued cooperation.

We have a follow-up meeting with AG Cooper himself scheduled for April.  The investigation on foreclosure fraud is apparently moving very fast, and it could be that significant announcements will appear within the next month.  When I hear reports from other states, I will post again about this Day of Action.

Foreclosure Fraud 6: Appeals, Resetting the Market, and Criminal Charges

The "Homeowner's Bottom Line" concludes by addressing a few additional concerns.  The issue of appeals echos earlier concerns with transparency.  This process cannot be left to autocratic decisions by banks and mortgage servicers.  The formulas they are using, the comparisons they are making, the documents they are relying on--all of these need to be available for examination by homeowners and their advocates.  Moreover, if a decision seems unfair to the homeowner, there must be an appeals process for reexamining the decision to foreclose.

Second, the insistence on loan modifications and principle reduction should not become a point of contention between homeowners facing foreclosure and other homeowners who have been able to continue paying their mortgages.  This crisis, and the lending feeding frenzy that led up to it, has harmed the entire economy.  Speculative, inflated prices of real estate harm entire neighborhoods, not only the homeowners facing foreclosure.  If houses in a neighborhood face sharp devaluation, underwater mortgages, and foreclosure, it hurts everyone there.  Neighborhood devaluations spread to entire municipalities as housing values drop.  People who bought homes during the housing bubble may have payed inflated prices and interest rates.  To get the housing and mortgage market back to a rational level of valuation, we recommend loan modifications be made available to all homeowners.  Mortgage principle and mortgage interest rates should be reset at the current market levels for all borrowers who want loan modifications, whether or not they are facing foreclosure.

Finally, the reckless, devious, and unscrupulous actions of some mortgage brokers, bankers, and other financial executives betrayed their primary fiduciary responsibilities to homeowners, workers, investors, and the common good.  Some have committed criminal acts.  As in the investigation of the savings and loan scandal, appropriate authorities at state and federal levels should bring criminal charges against any and all persons responsible for contributing to this crisis of credit, unemployment, foreclosure, and economic collapse.

Problem: Under the current system, borrowers who are denied for loan modifications do not have access to any kind of appeals or escalation process to have the decision reviewed for accuracy.

Solution:

Every borrower must have the right to appeal to an independent third party-a court, mediator or public agency-that can review the servicer's loss mitigation effort.  Foreclosure must be stayed during the appeal.

Problem: Mortgage fraud has caused a ripple effect of negative consequences for families, communities and government, including reduced property values, negative equity for millions of American homeowners, widespread job loss, and massive state revenue shortfalls.

Solution:

Allow homeowners to refinance at current interest rates and market values.

Problem: Throughout the entire mortgage process, from origination to servicing and modification, banks and bank executives have consistently broken the law.  Bank executives knowingly made and purchased deceptive and predatory mortgage loans; fraudulently packaged those risky loans as AAA high quality investments; ignored the securitization rules they themselves wrote; and systematically falsified loan documents in a rush to foreclose on families.  But so far, not a single bank or bank executive has had to face justice or pay for their crimes.

Solution:

As the top law enforcement officials in our states, Attorneys General must seek criminal penalties as they discover bankers and servicers who broke the law.  Banks and bank executives are not above the law and should not escape the consequences for their illegal actions.

 

Foreclosure Fraud 2: Loan Modifications First

The agenda for stopping foreclosure fraud has to address many aspects of the process.  One of the first problems is convincing banks to see that their best interest, rather than robotically following a set of foreclosure procedures, is often to renegotiate mortgages with homeowners.  The following is an excerpt from our detailed proposals to the Attorneys General.

TO:  Attorney General Tom Miller

FROM:  PICO, NPA, SElU, AJS, ACCE, SE IAF

RE:  Problems in U.S. Mortgage Servicing & Needed Solutions

DATE:  February 9,2011 (REVISED)

CC:  Other 49 State Attorneys General

Problem: Servicers are not making affordable loan modifications that benefit both homeowners and the housing market, even when modification would provide a greater return to investors than a foreclosure.

Mandatory Loan Modification

When a loan becomes delinquent or when a borrower provides their servicer with notice that default is imminent, the servicer must review the mortgage loan to see if an affordable loan modification can be made. If a loan modification is in the best interest of the homeowner and investor, then the servicer is compelled to offer a modification.

Mandatory Principal Reduction
If the balance on a loan exceeds the current market value of the house the first step must be to reduce the principal to 100%. Recapture of forgiven amount may not exceed 50% of the increase in market value as determined by a third party appraisal.

Junior Liens Extinguished or Reduced
For any junior lien that is entirely underwater, even if it is not in default, the servicer must extinguish that lien according to the payoff schedule. For other junior liens, all liens must be reduced proportionately to meet the CLTV cap.

Transparent, Fair, Appealable Net Present Value (NPV) Calculation
Each servicer must provide public access to the NPV Test that it uses in making a loan modification determination. Inputs of general applicability (default rate for a community, locally specific appraisal, foreclosure costs, etc.) must also be made public. NPV calculation must be appealable by the homeowner for errors and misinformation.
     The servicer must disclose the property value of the home that it has used for purposes of determining the terms of the modification and the methodology used to determine the property value. If the homeowner disputes the property value and can give basis for the dispute and show that disputed difference is material, the servicer must conduct an independent appraisal of the property at servicer's expense.

Fair Application of Fees

All foreclosure and default related fees and costs must be waived in determining the new principal balance for the loan modification.

Reasonable Debt-to Income and Residual Income Calculations

Affordability should be based on a debt-to-income ratio range and a residual income test. The front-end debt-to-income ratio for modifications should be between 25-31%. The back end ratio, which should include all other secured and unsecured debts and medical expenses, should not exceed 46-60% based on circumstances. A residual income schedule that accounts for geographical differences in cost of living shall be set to ensure that borrowers have sufficient residual to pay other necessary living expenses regardless of front or back-end ratio calculations.

All Modifications Permanent

All modifications must be at a fixed interest rate for the life of the loan.

No Release of Liability

No modification can include a waiver of any legal claims of the homeowner.

Affirmative Outreach

Affirmative outreach provisions should be put in place requiring servicers to alert borrowers of the terms of the settlement, search for and reach out to eligible borrowers with proposed loan modifications, including door to door contact in heavily impacted census tracts.

The next post will deal with the conflicting internal operations of mortgage servicers and banks who simultaneously start foreclosure procedings and negotiate potential modifications with homeowners.

Foreclosure Fraud 1

A letter went out this week to Attorneys General of all fifty states:  it is time to get tough on the fraudulent, unjust practices of banks and other financial institutions foreclosing on the homes of hardworking people.  Already banks have had to admit they have not followed legal requirements in processing foreclosures.  What needs to be uncovered is the full extent of the carelessness, fraud, and predation by the financially powerful institutions who believe they can get by with it because they can afford the lawyers that most of us cannot.

But each state has an Attorney General who works for us.  They already have initiated action on foreclosure fraud.  The lead investigator, AG Tom Miller of Iowa, has agreed to work with us in pushing this agenda forward.  The letter below is the first page of our expanded agenda to deal with key aspects of the foreclosure crisis, "The Homeowner's Bottom Line."  The letter was cc'ed to AGs from all 50 states.

For more information and to find out how to get involved, check out Showdown in America.

A Prayer for the Foreclosure Crisis

I gave the invocation for a gathering of homeowners and organizers from fifteen states who met with Attorney General Tom Miller of Iowa.  Miller is leading a task force of the fifty state attorneys general who are investigating fraud and abuse in the foreclosure process.  Here is the prayer I offered.

God of all,

We come today with hearts that are heavy, yet hopeful.
Our hearts are heavy because
Your people cry out for the lack of justice.
Still, we come with hope because
We know the God who is a Waymaker.

Give us the clarity of your servant Isaiah
Who named the causes of economic collapse
Twenty-eight centuries ago--
The failed economy of Jerusalem caused by
The treachery of the powerful
Who had lavishly furnished their multiple homes
With the spoils of the poor.

May there be some like that prophet
Who will arise now,
Even from among this gathering,
To call on misleaders to repent
And do justice.

As you called Isaiah long ago,
We now listen to your calling:
"Come, let us argue it out," says the Lord.
Inspire our conversation,
And guide our feet.

Amen.

References:  Isaiah 3:14-15; Isaiah 5:8-9; Isaiah 1:16-18