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 5: Help for All Who Have Been Harmed

The relentlessness of the current foreclosure crisis can push one to despair.  There is endless talk about solutions, but too many people get their hopes up only to see nothing change.  Many striving for some way to keep their homes wait and wait until the time and opportunities run out and their homes are taken. 

There have been many stories of improper foreclosure proceedings through which people who had not missed any house payments found their homes sold at auction.  They were told that since it was a legal sale, they could do nothing about it.  Even more people, guided through a loan modification process and assured by a bank that the modification is forthcoming, have awoken one day to discover that their homes will be sold at auction anyway.  This does not even take into account the foreclosures completed by banks and servicers who have not produced any proof of their right to foreclose on the home.

In the meantime, millions more homeowners are facing foreclosure in the coming year.  A loan modification solution needs to be available soon so that these foreclosures will not continue to drive people from their homes and further undermine and harm the housing market.  Yet fairness requires that those whose homes have been fraudulently foreclosed have recourse to recover their home and investment.  A just solution must take all of this into account.

Problem: Because of entrenched problems and long-standing fraudulent practices, many families who should have received a loan modification have already been harmed, including the loss of their homes.

There are two basic categories of homeowners who have been harmed by servicers' malfeasance: (1) those who have lost their homes; and (2) those who are still in their homes, but have been denied a loan modification, pushed into default, or merely had improper fees tacked onto their account.

Solution:

• Remedies for Those Still in Process

For homeowners who have not yet lost their home in a foreclosure sale, servicers should institute a supervised, full review of every file marked in default. This review must include a review of the payment history, including the timing and application of payments and the validity of fees charged.

1. Homeowners found not to be in default should be removed from foreclosure, corrections of credit reporting status must be provided to the credit bureaus, and accounts should be fully corrected.
2. All pending foreclosures should be halted while this review takes place, and dual track processing must be stopped on all loans so that the modification review can be completed.
3. Fees should be rolled back and limited to reasonable and necessary ones.
4. Recalculation of principal balances should be done to account for improperly assessed fees or overcharged interest.

• Remedies for Those Whose Foreclosures Have Been Completed

The servicers should also be required to undertake a review of all completed foreclosures to identify any cases where the foreclosure was executed on the wrong home, where the homeowner was not in default, and where the foreclosure was completed without completing the loan modification review process, providing a written denial to the homeowner, or failing to offer a qualifying homeowner an appropriate modification.

1. If the home has not yet been sold to bona fide third party, the servicer should offer to restore the mortgage, with a reduction of the principal balance to account for all assessed foreclosure fees, as well as any improper fees.  If the homeowner cannot afford the current mortgage payments, they should be assessed properly for a loan modification under the procedures established above.  Servicers must further provide corrected credit reporting to the credit bureaus to mitigate the negative credit reporting.  A restitution fund should be established, funded by the servicers, to provide damages to this class of injured party.  

2. If the home has already been sold to a third party or if the homeowner no longer wishes to retain the home, the servicer should be required to refund to the homeowner all foreclosure fees assessed against the homeowner's account, plus the amount by which the valuation the servicer relied on exceeds the foreclosure sale price.  Servicers must also take steps to repair the homeowner's credit in these situations.  A restitution fund should be established, funded by the servicers, to provide damages to this class of injured
   party.  

3. If the homeowner who was subject to a wrongful foreclosure cannot be located, the servicer should be required to deposit the money that would otherwise be paid to the homeowner into the fund for legal services and housing counselors.

The last post in this series will cover a few final concerns, including the criminality of foreclosure fraud.

Foreclosure Fraud 4: Reigning in the Imbalance of Power

Anyone who has negotiated a price for a car knows what happens next.  Having agreed upon a price, the salesperson or clerk starts filling out an invoice and adding more fees, charges, and items over and above the agreement.  A whole new round of negotiations starts, and unless the buyer is willing to walk away from the car, she or he may be stuck with paying these "mandatory" fees.

Banks and other lenders have taken a page from the car dealer's book, and they must have entire departments devoted to thinking up charges and fees with fancy and official-sounding names.  With the passage of reforms for the credit card business and other consumer credit, these fee inventors have redoubled their efforts to replace outlaws charges with new ones.

If there is any fairness in the consumer credit industry, then this ability to arbitrarily and independently add fees and charges has to be reigned in.  Borrowers need to be able to enter discussions on modifications with at least the presumption that the process has their interest as a concern along with the lender's interest.  We want the attorneys general to enforce procedures which help maintain a balance of power in the loan modification and foreclosure process.

Problem: Servicers take unfair advantage of borrowers in default by charging multiple fees, sometimes for services that are unnecessary, and sometimes for costs that are disproportionate to the service being performed (in some cases by affiliated companies).

Solution:

All Fees Must Be Reasonable and Transparent

All servicer fees must be bona fide and reasonable and fully disclosed to the borrower.  Lender attorneys fees charged to borrowers may not exceed bona fide and reasonable fees for work.  Fees may only be collected for services actually rendered or for work actually performed.

Forced-place Insurance Severely Limited

The use afforce-placed insurance must be limited to reasonable application, affordable payments and only after other options, including borrower's option to purchase on open market, have been exhausted.

Problem: For any requirements (including those already in place), adequate enforcement provisions and staff must be put in place so servicers are not able to ignore the requirements with impunity.

Solution:

• Each settlement should contain the creation of an ombuds-office under the AG that will investigate violations of the agreement. Fines should be imposed for violations of the agreement if servicer refuses to cure. Also, the AGs should have the right to issue a "cease and desist" letter to halt foreclosure activity during the investigation.
• A portion of any monetary funds from the settlement should be directed to legal aid and housing counseling groups to assist with modifications and enforcement of agreement including foreclosure prevention litigation.
• In addition to assigning each borrower a single case manager, a single team should be created in house at each servicer as part of the settlement to oversee loan modification activity under the settlement.

The next post will deal with which people should have relief and recourse in dealing with foreclosure fairness and foreclosure fraud.

Foreclosure Fraud 3: Clear and Unequivocal Communication

When a bank working on a possible mortgage modification tells a borrower to stop making payments in order to allow the modification to proceed, usually in another office of the bank a red flag flies up to say that the foreclosure clock must start ticking.  One mouth says stop making payments and become delinquent in order to get paperwork moving.  Another says don't stop payments unless you want another set of paperwork to start moving.  Case after case in the past year has found homeowners receiving notification of a modification offer almost simultaneously with notification of a foreclosure sale.  By now you are all thinking about an old saying having to do with a left hand and a right hand.

This kind of carelessness and lack of concern for customers has characterized the current foreclosure crisis.  Admittedly, banks do not traditionally have enough staff to handle the current volume of potential loan modifications or the current volume of potential foreclosures.  In trying to ramp up while also keeping staffing numbers down, the result has been libraries of lost paperwork, constant restarting of the process, and a different answer from the servicer every time a homeowner makes contact.  Getting the banks to clean this up would seem to be in their interest, but when banks are as large as Wells Fargo and Bank of America, there is also a kind of internal struggle over which departments get to do what they should and which ones just do what they can.  We think that it is more than reasonable for homeowners to expect better.  What follows is a second part of what we are asking the Attorneys General to do.

Problem: Servicers proceed with the foreclosure process at the same time as they are conducting a loss mitigation process. This leads to borrower confusion and further complicates the process and the communication between borrower and servicer. It also leads to unjust foreclosures before due diligence is completed in the loan modification process.

Solution:

Mandatory and Standard Loan Modification Review

Foreclosures should not be initiated until the servicer does a complete review of a borrower's file. If the borrower is already in foreclosure when he or she requests a review, the foreclosure process (and not just the final sale) must be suspended until the review is completed.

a. This review must include the complete payment history; the contact log; and any other relevant information to determine whether the borrower is actually in arrears.

b. This review must include a determination that all loss mitigation requirements (as set out by HAMP, investors, FHA, GSE's, etc.) have been met, and the servicer must disclose to the customer all inputs and calculations done to establish qualification for a loan modification (see NPV transparency above).

c. Servicers must develop a protocol for evaluating Pooling and Servicing Agreements for investor restrictions and must seek a waiver if necessary.

Written Confirmation of Review to Borrower

If a borrower is not offered a loan modification, the servicer must provide a sworn affidavit to the borrower, disclosing the reasons for denial, including

a. any calculations done to determine loan modification eligibility; and

b. if the denial is due to investor-imposed restrictions, the specific language in the PSA prohibiting the modification, instructions on how the borrower can view the full PSA, and a written log of the servicer's efforts to obtain a waiver of this restriction.

Borrower Appeals Process

The denial letter must provide the borrower with an opportunity to appeal this determination to a neutral party. Foreclosure can only be resumed after written denial has been provided and time for an appeal has passed. If an appeal is pending, no foreclosure can be resumed.

No Legal Foreclosure Without Proof of Due Diligence

Servicers should be required to file a certification of loan modification procedures as a precondition to a foreclosure sale. In the case of a non-judicial foreclosure, the government official responsible for recording deeds and other transfers of property in the jurisdiction in which the property is located shall not permit the recordation of a deed transferring title after a foreclosure without certifying that the party conducting the sale has demonstrated that the requirements of this section have been met. A sale of property in violation of this subsection is void.

Consistent Communication with Consistent Staff

Upon contacting the servicer, the borrower must be assigned a case manager that will remain with that borrower throughout their loss mitigation experience. This case manager will have decision-making authority and access to the highest levels of management in the company. It is permissible for additional line staff to assist the case manager, as long as the case manager is always accessible to the borrower.  If a servicer is temporarily incapable of providing this adequate staffing level, the servicer must refer to a licensed special servicer until adequate staffing levels are reached.

The next post will deal with the imbalance of power that leads banks to multiply additional fees and get by with ignoring the law.

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.