Mediation Nightmares

U.S. Treasury Secretary Timothy Geithner, speaking about the Home Affordable Modification Program

A few days back, on her popular Real Estate Wonk blog, Baltimore Sun housing commentator Jamie Smith Hopkins provides an excerpt from a letter, written by Baltimore resident Michael F. Malloy, that describes a frustrating mortgage mediation experience.  Molloy posits that “nothing has changed,” as banks continue to take advantage of home owners with predatory loan products and exorbitant fees.  Here, one of our Foreclosure Prevention Counselors, Bryan Sheldon, has put forth a response to Mr. Molloy’s letter. –Harsha Sekar

Michael F. Molloy’s letter does a fine job of illustrating issues faced by homeowners who are in default or who are struggling to make their mortgage payments.  It’s not that there aren’t programs available to assist most homeowners.  The problem is that servicers and investors have no real need to follow program guidelines or assist borrowers in default.  The primary program available to the average homeowner is the Home Affordable Modification Program, or “HAMP.”

Assuming that the letter writer’s relative is still employed, requested assistance in a timely manner, and has a mortgage serviced by a company who is participating in HAMP, the mediation session probably shouldn’t have even occurred.  Even though the Home Affordable Modification Program has helped over 600,000 Americans receive permanent modifications to their mortgages, many more may have been helped if mortgage servicers did not routinely and blatantly ignore HAMP guidelines.  For one thing, no foreclosure action is supposed to be commenced while a borrower is in review for HAMP or alternative assistance.

If someone is in the process of applying for a modification and their servicer asks for a document that seems irrelevant or ridiculous, it probably is.  Bank of America routinely asks for utility bills.  Wells Fargo requires borrowers to submit a separate hardship letter and financial worksheet, despite the fact that both are included on the required Request for Modification and Affidavit (RMA).  Chase asks borrowers to provide a written statement that they do not have to pay Homeowner’s Association fees.  This is despite the fact that the borrower must list any Homeowner’s Association fees that they may have on the RMA or risk perjury.  Mortgage servicers have institutionalized dilatory and onerous documentation requirements despite the fact they directly contradict HAMP guidelines.

The basic problem with the available government programs is that they have been implemented in the grossly deficient regulatory system which contributed to the foreclosure crisis in the first place.  Fannie Mae is the HAMP program administrator, and Freddie Mac is the compliance officer.  Mortgage servicers can “shop around” between other regulatory bodies such as the Office of Thrift Supervision and the Office of the Comptroller of the Currency, and the tangled web of oversight authority produces an environment in which no one really has the capability to reign in a still largely out of control industry.

Mortgage servicers are businesses like any other.  The bottom line is their primary concern, and it often does cost servicers more money to modify mortgages than to foreclose, write off their losses, and see if they’ll be sued by investors or the government later.  The regulatory system needs to be overhauled so that mortgage servicers face substantial risk if they refuse to comply with program guidelines.  Until the financial incentive to modify a non-performing mortgage into a successful transaction for both the consumer and the servicer is greater than the servicer’s incentive to foreclose and cut its losses, I believe we will continue to hear stories similar to this one.

To see a copy of the regulations that mortgage servicers are supposed to be following, click here.

Bryan Sheldon
Foreclosure Prevention Counselor
St. Ambrose Housing Aid Center, Inc.
Baltimore, MD

Will Proposed Reforms in Lending Work?

New Yorker Cartoon Satirizing Wall Street’s Opaque Securitization Chain

Over the last few weeks, considerable reforms have been proposed in the world of mortgage financing.  The most salient has been Iowa Attorney General Tom Miller’s proposal that would, among other things, require banks to terminate foreclosure proceedings while borrowers are actively pursuing a modification.  While Miller’s ideas seem both necessary and commonsensical on the surface, they have run into criticism from all ends of the political and economic spectrum.  The critics, from various vantage points, ultimately posit the same inquiry: will the reforms work?

On one hand, critics from the left argue that the reforms do not go far enough. In a staff editorial a few days back, the New York Times vigorously puts forth this contention, expressing concern that the terms of the reform will provide the banks leeway to avoid the kinds of strong penalties they deserve.  In particular, the Times cites the fact that the proposal does not proffer a way to implement reforms.  Moreover, Miller and his fellow attorneys generals have discussed the possibility of a settlement over the banks illegal practices, like the infamous robo-signing scams and systemic predatory lending—which may function as a prosecutorial shield.

The Times’ also cites a review of the proposal by their staff writer, Gretchen Morgenson.  In addition to outlining the overhaul’s lack of sufficient legal remedies for borrowers, Morgenson also points out what in her estimation appears to be yet another substantive flaw:

the terms severely disappoint in their treatment of second liens, a major sticking point in many loan modifications. The proposal would treat first and subsequent mortgages equally, turning upside down centuries-old law requiring creditors at the head of the line to be paid before i.o.u.’s signed later.

Treating holders of first and second liens alike is a boon to the banks, since so many second mortgages are owned by the nation’s largest institutions; many of the firsts are held by investors in mortgage-backed securities. The banks want the first mortgages to take the hit, leaving the seconds intact. Or at least for them both to share the pain equally.

To some degree, the document presented by Mr. Miller raises more questions than it answers.

As news of the proposal’s substance continues to rapidly unravel, a few thoughts come to mind.  While the proposal is a much needed step in the right direction, it does not seem to address the institutional nature of predatory lending.  We now know that the aggressive marketing of bad loans to uninformed consumers morphed into a systemic problem largely as a result of a perverse incentive structure.  As we’ve outlined in many previous posts, main street banks often possessed an incentive to dole out non-prime loans because of a pervasive securitization chain that linked borrowers, lenders, investment banks, and investors.

While consumer protection reforms are needed, no doubt, attorneys general would fundamentally benefit from a regulatory infrastructure at the federal level that addresses the securities market.  The Frank-Dodd Bill is a start, but as John Cassidy recently pointed out in his much talked about New Yorker article a few months back, asset-backed securities have become the heart of the financial industry, implicating average Joes and Wall Street investors alike.  Without financial regulation that adequately integrates consumer protection measures, Miller and the rest of the state’s attorneys will not gain the legal leverage they need to stymie the broken lending processes that have afflicted far too many of their constituents and thus may be forced to make concessions.

Talk to St. Ambrose Review of Charles Ferguson and Audrey Marrs’s Inside Job

The Film’s Official Poster

Two weeks ago, nearly 38 million Americans tuned in to watch ABC’s coverage of the eighty-third annual Academy Awards ceremony.  While this year’s Oscars delivered the usual Hollywood dose of glitz and glamour, this post highlights merely one slice of the 2011 Oscars: the award-winner for Best Documentary Feature, Inside Job, directed by Charles Ferguson and Audrey Marrs.

Inside Job is relevant to St. Ambrose because it focuses on the origins and implications of the financial crisis, which, of course, are extensively tied to the housing and real estate markets.  Moreover, low and middle-income people have taken a particularly hard hit, as many have lost substantial equity in their homes—and by extension savings for college tuition, healthcare, and retirement—or have undergone foreclosure.

The film, however, doesn’t focus too heavily on everyday folks but instead provides a thorough, didactic chronicle of the public policy and irresponsible financial practices that led to the crisis.  Divided into five parts, Ferguson and Marrs begin their documentary by portraying the situation in Iceland, which, staggeringly, possessed a yearly GDP of $13 billion but found itself $100 billion in debt during the crisis.  Iceland’s troubles culminated in the sort of brutal unemployment with which we in the rest of the Western world are now familiar.  The filmmakers attribute this flabbergasting statistic to the fact that Iceland, in addition to privatizing it’s three largest banks, systematically unraveled its robust regulatory state, as it too was swept by the deregulation fervor that infected most other industrialized nations.  This allowed Icelandic banks to make highly leveraged investments—as in using more borrowed than in-hand capital—that, of course, failed miserably.

From this vantage point, the film explores how domestic deregulatory policy also facilitated U.S. bankers’ identical mistakes. Ferguson and Marrs graphically convey two of the most talked-about yet enigmatic securities that were apparently responsible for bringing down the economy, Synthetic Collateralized Debt Obligations and Credit Default Swaps.  The former refers to the process of banks’ securitizing bundled mortgages, repackaging them and selling them to investors at an inflated price.  The pervasiveness of these kinds of securities created a perverse incentive structure whereby local lenders were under pressure to sell as many loans as possible, even “junk” ones, since they knew that these loans would be purchased, regardless of their quality.  This then led to massive predatory lending.  The latter kind of “security,” if one can even call it that, are the notorious insurance policies that enabled investors to make bets on whether the borrower would sink or swim, get foreclosed or pay off the loan.

In addition to demonstrating the proliferation of both securities, the film, I think, works to dispel a few equally pervasive myths: these securities are complex, sophisticated products that the average Joe couldn’t possibly comprehend, and that the high fallutin’ investment bankers on Wall Street had everyone’s best interest in mind. On the contrary, Ferguson and Marrs show that CDOs and Credit Default Swaps amount to little more than the repackaging of other people’s debt, and rather than rigorously examining the loans that comprise their products, these bankers possessed a lazy tendency to put them on the market with little analysis.  (The directors contrast the financial services industry with the IT sector, for which one actually “needs an education”). They further point out that the perverse incentive structure extended to our three major credit rating agencies, which, having been commissioned by the banks themselves, systematically bestowed upon the banks’ junk loans the same AAA ratings that they gave U.S. Treasury bills.

What the film does best is cohesively weave together this unfortunate maelstrom of events, illustrating the ties between borrowers, lenders, banks, and their investors in a cogent and clear fashion that is lacking in the media.  The filmmakers expose how these ties emphatically reveal a truth recently reiterated by the Financial Crisis Inquiry Commission’s Report, that the catastrophe was avoidable.  To be sure, Inside Job has some setbacks: the directors could have done a better job conveying the human affect of the bankers’ practices.  They could have also further developed some important themes that they mentioned briefly, like the rising cost of college tuition relative to the rate of inflation, which is functioning to preclude more and more middle class kids from college.  Nevertheless, in an hour and twenty minutes, Inside Job manages to be informative, entertaining, and important, and we at Talk to St. Ambrose would welcome any thoughts or comments about the film.

Attorneys General Present Demands for Overhaul of Foreclosure Processes

Elizabeth Warren, Head of the New Consumer Financial Protection Bureau, Which will Administer Overhaul of Foreclosure Processes (Image Source: New York Times)

As a follow up to our last post about the state of New York’s new proposal to provide counsel to all residents undergoing foreclosure, today, we present another innovative new proposal that could further bolster the position of homeowners during this critical time.  The New York Times recently reported that many state attorneys generals have presented a list of demands calling for new regulation that would prohibit banks from beginning the foreclosure process while the borrower is simultaneously working out a mortgage modification.

The term “mortgage modification” appears to be one of art.  Since the article is unclear, I suppose this could include anything from taking out a second mortgage to pay for college tuition or a healthcare expense to proactively seeking a large-scale overhaul intended to stave off foreclosure.  In either case, it seems unfair, on its face, for banks to initiate foreclosures while a modification is actively underway, as this not only stymies the modification process but also creates confusion about the bank’s ultimate aim—to foreclose or to work with the borrower?

The demands take place in a highly politicized context, as housing advocates continue to express dismay over the “robo-signing” scandals, where, in an attempt to ensure that the foreclosure process was moving forward without delays, lawyers and other banks signed thousands of documents without thoroughly reviewing them, leading to embarrassing mistakes.

The demands also mark an expansion of power for the government’s newly created Consumer Financial Protection Bureau (which would administer the changes), headed by prominent Harvard law professor and securities industry expert, Elizabeth Warren.  While Warren is yet to gain any kind of (usually requisite) congressional confirmation, she has already received notoriety, as banks regard her as a tough, no-nonsense regulator eager to re-stack the cards against them.  The government, along with consumers, has expressed considerable confidence in her ability to be a strictly enforce the law and therefore provide a divergence from the past.  This package, with Warren as its public image, has backing from the Departments of Treasury, Justice, HUD, and the Federal Trade Commission.

While the proposal marks a shift from ongoing practices, the economic effects are unclear.  Banks argue that the package serves as a merely a “band-aid,” since in the long term, many of these borrowers cannot afford their homes, period.  Moreover, the package may enable many of the more than 2 million delinquent properties to reenter the market, which would further depress home values and, by extension, private wealth and equity.

From our perspective, while the foreclosure crisis has resulted in economic pain for many, our low-income clients have shouldered perhaps the greatest burden.  In addition to the broad economic effects, our clients have had to face the human consequences of having to move out of their homes and onto the streets. Delaying foreclosure proceedings would provide many of our clients  the possibility of turning over their homes to the market and making a capital gain, perhaps even  retaining some equity.  Furthermore, it would provide a means for low-income citizens to wait out the recession until the job market revives and affordable housing becomes a palpable reality.

Innovative, New Public Policies that Work to Protect Homeowners

Map of Foreclosures in Baltimore, 2006-2007 (Source: NPR)

For low and middle-income Americans, the last few weeks have been gloomy, especially given that more states have jumped onto the anti-collective bargaining bandwagon initiated by Governor Scott Walker of Wisconsin, whose vision may preclude many from gaining access to affordable housing.  Amidst this climate, the foreclosure crisis continues to ravage communities, as thousands of vacant properties remain in Baltimore alone.

Here, however, we present two potentially innovative new policy proposals that have surfaced in recent weeks, both of which could indeed encourage access to affordable housing.  The first is the New York’s proposal to provide an attorney to each of the state’s 80,000 foreclosure victims.  While the right of a criminal defendant to retain a lawyer has remained an integral part of the American legal fabric for decades, The Empire State’s idea would (perhaps) mark the first time in history where defendants in civil matters can gain access to counsel, free of charge.

Interestingly, this idea didn’t originate from the state’s legislature; rather, New York’s Chief Judge, Jonathan Lippman, was behind the proposal.  To back up this idea, legally speaking, Judge Lippman cited the landmark 1963 Supreme Court decision, Gideon v. Wainwright, which held that states are obligated to provide counsel to all criminal defendants.  Lippman said that this was the right moment to extend this provision, reasoning that “today it is an equally obvious truth that people in civil cases dealing with the necessities of life can’t get a fair day in court without a lawyer.”

The proposal makes sense for a number of reasons.  For one, as the Times points out, because of the recent revelations that several of the country’s most prominent banks had used “improper” methods to accelerate the foreclosure process, the court have increasingly become a the pivotal battle field for the fight between victims and banks.  Access to counsel, even if it’s minimal, could make a tremendous difference for foreclosed families, as “simply responding to a foreclosure notice in court” could delay the process for months.  Furthermore, the idea would certainly enhance courtroom efficiency, as lawyers would be able to both advocate and settle on behalf of clients, making sure that cases move through the courts during this overburdened time.

The Times doesn’t mention the more far-reaching effects of this proposal.  By keeping families in their homes—potentially for years after the initial notice of foreclosure—they continue to pay their utilities bills, maintain their yards, make necessary fix-ups, and so forth.  This would increase property values throughout neighborhoods, delivering more wealth and spending power to nearby families, which would help strengthen the economy.  The idea, in this sense, serves to bolster the work of Max Rameau and Take Back the Land, the subject of our last post.  It would also facilitate Mayor Rawlings-Blake’s strategy “Code Enforcement” strategy to curtail blight, which was mentioned at the city’s recent Vacants to Values Summit.  (And by the way, it would also, I suppose, help alleviate the crumbling legal industry).

The idea is expensive: Judge Lippman has asked the legislature for (an additional) $100 million that could be distributed to legal aid groups and other non-profits, and in a political climate obsessed with savings, his request is no sure bet.  However, given the severe economic effects of letting vacant homes stand—something Baltimore, over the last several decades, has had to learn the hard way—that money should be perceived as an investment with the potential for enormous returns.

It should be noted that Maryland has already taken an important step in the right direction: Last Summer, Governor O’Malley signed the a promising foreclosure mediation bill, giving Maryland families the right to undergo mediation with lenders before they face eviction.  Hopefully, Maryland will follow in the footsteps of New York, by taking the additional measure of ensuring legal services.

Here at St. Ambrose, we take pride in the fact that we retain a skilled and dedicated group of legal services professionals, who have help countless Baltimore families stave off foreclosure and retain their homes.  I hope that other members of the judiciary, as well as legislators around the country, will follow Judge Lippman’s lead and adopt the notion that adequate housing is a “necessity of life,” and that indigent foreclosure victims deserve representation.

On Thursday, I will discuss the new mortgage modification demands sought by states attorneys general.

Foreclosure Q&A with Reece Dameron

Reece_DameronQ: The Baltimore Sun reported in August that “a record one in eight Marylanders [were] behind on their mortgages as of [last] spring.” Could you briefly describe the roots of this crisis?

A: In the past several years, many investors began to purchase mortgage backed securities. The subsequent increase in money for mortgages and demand for securities led lenders to relax their lending requirements. Lenders became more willing to make mortgage loans without first verifying the assets or even the income of the individuals to whom they were loaning money. Many of these risky subprime loans, often based on inflated property values, were nearly certain to fail from the moment the papers were signed. Lenders and loan originators were protected, however, because they were able to sell the mortgages to firms that bundled the loans into securities and then sold the securities to investors. When people began to default, the securities backed by subprime loans lost value. As a result, some banks and firms that owned those securities as assets failed. The bank failures impacted the rest of the economy and now, as people are losing their jobs or having their hours cut back, more people are beginning to miss payments.

Q: In March, the Obama Administration launched the $75 Billion Home Affordable Modification Program (HAMP). Could you briefly describe the program?

A: HAMP provides incentives to mortgage loan servicers who modify the terms of delinquent mortgages according to specific guidelines. If a borrower has suffered a hardship and their mortgage payment accounts for more than 31% of their gross monthly income, the servicer can modify the loan terms to reduce the payment to 31% by lowering the interest rate, extending the term of the mortgage, and in some circumstances forbearing principal. The program can be very helpful to borrowers in several ways, including sometimes significant reductions in their payments and helping to stop foreclosure sales. Additionally, the program will reduce the loan balance for borrowers who successfully make their payments over the long term.

Q: According to some, the program has gotten off to a slow start. Is this consistent with your experience-and has there been any change in the situation recently?

A: Yes, it does seem that the program has started slowly. It has taken some servicers a significant amount of time to adjust to the government guidelines and to increase their staff to serve everyone who needs help. However, just last week, the Treasury Department released new guidelines that should help to standardize and streamline the process.

Q: Commentators have described how the widespread mortgage defaults of subprime borrowers contributed to the banking crisis, which led to the recession, which in turn led to a second wave of foreclosures-this time including “prime borrowers,” or those who had good credit when they first got their mortgages. Have you seen more prime borrowers as clients as the crisis has continued?

A: We do seem to be seeing more prime loans, but I have not been tracking the numbers on a daily basis. Our first concern is to see if we can assist every homeowner who comes to us with a problem, regardless of where they started.

Q: What is it like for the average client seeking assistance with foreclosure prevention? How long is the average wait for modification?

A: There are several factors that can affect how long the process takes, and if everything goes right, it can still take three months or more. Some loan servicers are beginning to offer HAMP trial period plans based on financial information provided over the phone, but not everyone qualifies for a HAMP modification, and the trial period plan itself is not a permanent modification. Much of the process is dependent on the borrower. If a borrower has trouble controlling their spending, or did not keep track of their financial information very well, it can take longer. Of course, the servicers make mistakes as well and sometimes unnecessarily lengthen the process. Although being delinquent and facing possible foreclosure is understandably stressful, borrowers need to be patient during the process.

Q: The Congressional Oversight Panel recently issued a report stating that the Home Affordable Modification Program, “is targeted at the housing crisis as it existed six months ago, rather than as it exists right now,” and was not designed to deal with foreclosures caused by unemployment-a growing problem with the current economy. Panel Chairwoman Elizabeth Warren has expressed concern that the program is not doing enough and others have questioned whether the Administration will be able to reach its goal of preventing 3 or 4 million foreclosures. On the other hand, Federal Officials have reported this month that HAMP reached its initial goal of 500,000 trail mortgage modifications weeks ahead of schedule. Do you see things getting worse before they get better?

A: It’s difficult to say. The causes of the foreclosure crisis are changing, but it remains a story about how the economy writ large is affecting individuals and families. The economy is still not creating jobs and many people remain unemployed. People and families without sufficient income will be unable to make their mortgage payments. And the hard truth is that if a homeowner cannot pay their mortgage, they will eventually face foreclosure. Until the economy recovers, we can expect high rates of default, and we should ensure that there is assistance for homeowners that is tailored to the problems they are having. HAMP is certainly part of the solution, but other programs may be necessary as we go forward.

Q: What should someone do if they are facing foreclosure?

A: Since the process can be confusing and stressful, homeowners should immediately seek assistance if they have any questions or problems. Many people are afraid of working with their servicer or even admitting there is a problem, but they must know that the problem will not go away if they ignore it. More importantly, homeowners need to understand that the foreclosure process moves very quickly in Maryland and they should not wait until a foreclosure action is filed. Anyone who has already missed a payment or thinks they will be unable to make their next payment should consider themselves to be facing foreclosure. We can help homeowners, if they will let us.

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Interviewed by Will Flagle

Reece Dameron is a recent addition the Foreclosure Prevention staff here at St. Ambrose. He is a 2007 graduate of the University of Texas School of Law who has previously worked on election law issues and landlord/tenant law. At St. Ambrose, Reece is helping our housing counselors and homeowners to find alternatives to foreclosure. Reece hails from Missouri.