Help on the Way for Some Underwater Homeowners
By Marcia Frellick
February 14, 2012
Some of the nation’s biggest banks will have to cough up $25 billion, thanks to last week’s mortgage fraud settlement — and more than a million homeowners could be getting a piece of that pie.
Yet some experts are concerned that the settlement might not be enough to fix all the problems caused by the foreclosure crisis.
State and federal officials announced Feb. 9 the settlement with five of the nation’s biggest banks (Bank of America, JPMorgan Chase, Wells Fargo, Citigroup and Ally Financial) after a 16-month investigation into allegations of fraudulent loan practices. Those questionable practices included “robo-signing” — bank employees signing thousands of foreclosure documents without taking the time to review them in detail.
If one of the above banks serviced your mortgage, you could be one of the estimated 1.8 million people who are expected to qualify for relief. You must also fall into one of these categories:
- Former borrowers who lost their home to foreclosure from 2008 through the end of 2011.
- Delinquent borrowers who are underwater, meaning they owe more than the house is worth.
- Borrowers who are current on payments, but are underwater.
Residents are potentially eligible in all states but Oklahoma, which made its own settlement.
The settlement is complicated and homeowners won’t see immediate relief. While there are incentives for mortgage servicers to get homeowners their money within 12 months, they have up to three years. After all, among other loose ends, the banks first have to find people who have left their homes. For the next six to nine months, the focus is on identifying who is eligible and sending them letters.
To find out whether you qualify and what you need to do next, visit the website the government has set up to walk you through the process. It lists contact information for each servicer.
Cheers, but hope for more
Mike Konczal, fellow with the Roosevelt Institute, a nonprofit think tank in New York City, says the settlement addresses several needed changes. Yet problems are likely to continue unless there’s a fundamental restructuring of the way mortgage process is designed. For one thing, Konczal says, the players in a mortgage contract have different incentives.
“It is either profitable [for lenders] or they are indifferent if a home goes into foreclosure,” he says. “But the investor, who they ultimately work for, often would prefer not to [have a home go into foreclosure],” he says.
Another problem is that getting a mortgage through a large national bank often works more like a national call center. That means there’s no personal interaction that accurately discerns the likelihood that a household can manage the loan over time, Konczal says. Mortgages managed on a local level have a better chance of success.
Other experts wonder if those who need the most help will get it. Among those who were hardest hit in the foreclosure crisis were people of color, according to Graciela Aponte, a senior legislative analyst at the National Council of La Raza. Aponte cites Center for Responsible Lending data showing that, in 2010, 17 percent of Latino homeowners were either in foreclosure or soon would be, compared with 11 percent of black homeowners and 7 percent of white ones.
The settlement includes some provisions that make owning a home easier, especially for underserved and minority populations, according to Aponte.
“We’re seeing it as a very important step — a very large piece of the puzzle,” she says.
For example, one provision will reduce the principal (the amount owed on the mortgage) for some struggling homeowners. Banks and servicers have committed at least $17 billion to reduce mortgage principals and otherwise modify mortgages for borrowers who either owe far more than their homes are worth or are behind on payments. This provision will be most welcome to the Hispanic community, according to Aponte, because some of the states where home values dropped most dramatically — Arizona, Nevada, California and Florida — also have high Latino populations.
Still, many won’t see any help. Loans owned or backed by the government’s Fannie Mae and Freddie Mac, which account for more than half of U.S. residential mortgages, aren’t eligible for relief.
“It’s the first principal reduction program that’s national, but without Fannie and Freddie, it’s not going to be as effective as it can be,” Aponte says.
California gets the biggest chunk
California foreclosure defense attorney Joseph Arthur Roberts in Newport Beach says the settlement isn’t big enough.
“You look at the tobacco settlement, which is $250 billion and this is one-tenth of that, but it involves trillions in property,” Roberts says. “In essence, you’re giving [banks] a pass for what they haven’t admitted is fraud.”
California is getting the majority of the settlement — an estimated $18 billion — because of the state’s size and the extent of damage. But the $280 million set aside for Californians whose homes have been wrongfully foreclosed on — $2,000 apiece — won’t cut it, Roberts says. For one thing, that amount will cover just 140,000 homes, even though there were likely more than 140,000 wrongful foreclosures. For another, the amount isn’t a big enough deterrent to stop future injustices.
More difficulties ahead
The legal nightmares aren’t completely over with the settlement. The agreement allows for future actions over fair-housing and fair-lending violations, as well as civil rights claims. Consumers can become part of class-action suits, and state and federal authorities can prosecute criminal cases as well.
Though the settlement assigns cash value to many complaints that have flooded attorney general offices, some costs are harder to pinpoint. One thing the settlement can’t fix, Konczal says, is the damage already done to communities because of foreclosures. Since 2007, more than 4 million borrowers have lost their homes to foreclosure, and that has resulted in huge costs to investors, to the communities and to the homeowners who have to move.
According to Konczal, there are some estimates that a foreclosed home that sits abandoned will cost a municipality about $30,000 because the government has to watch over it, property taxes aren’t being collected and the chance for crime and damage goes way up, he says.
“Even if that’s an exaggerated number, there’s still a cost to the community of having a foreclosed home on the block that won’t be recouped,” Konczal says.