Some States Are Not Using Their Foreclosure Settlement Funds to Help Homeowners

States recently received $2.5 billion from the major banks for foreclosure prevention and related help for homeowners.  But much of that is not being used for those purposes.

 

A relatively small part of the $25 billion settlement by the federal and state governments against the five major banks announced with big fanfare back in February involved actual money paid by the banks. (Most is in the form of credits the banks get for doing mortgage modifications and such.)

But one such direct payment is $2.5 billion from the banks straight to the 49 states that had joined in the settlement (all except Oklahoma). So what is supposed to happen to that money?

The answer to that should be found in the Consent Judgment, the document signed by all 49 states, the federal government and the banks, AND by the federal judge approving the settlement. Actually there are five consent judgments, one for each of the banks, but all containing identical language for our purposes. This language says:

"To the extent practicable, such funds shall be used for purposes intended to avoid preventable foreclosures, to ameliorate the effects of the foreclosure crisis, to enhance law enforcement efforts to prevent and prosecute financial fraud, or unfair or deceptive acts or practices and to compensate the States for costs resulting from the alleged unlawful conduct of the Defendants. Such permissible purposes for allocation of the funds include, but are not limited to, supplementing the amounts paid to state homeowners under the Borrower Payment Fund, funding for housing counselors, state and local foreclosure assistance hotlines, state and local foreclosure mediation programs, legal assistance, housing remediation and anti-blight projects, funding for training and staffing of financial fraud or consumer protection enforcement efforts, and civil penalties."

(See pp. B-2 and B-3 of Exhibit B of the Consent Judgment.)

But the money is not being used for these purposes in many states, according to two different sources.  

A report by Enterprise Community Partners called $2.5 Billion: Understanding How States are Spending their Share of the National Mortgage Settlement says that “despite the language contained in the settlement, a number of states have diverted the settlement funds away from housing and foreclosure prevention activities.”

A more recent article by ProPublica, the independent investigative organization, is titled “Billion Dollar Bait & Switch: States Divert Foreclosure Deal Funds.” Its analysis concludes that “[s]tates have diverted $974 million from this year’s landmark mortgage settlement to pay down budget deficits or fund programs unrelated to the foreclosure crisis... . That’s nearly forty percent of the $2.5 billion in penalties paid to the states under the agreement.” This interactive map and table shows each state’s use of the funds.

AARP Report Says More Older Americans Now Still Have Morgage Debt, Larger Mortgages, and So--Surprise--More Foreclosures

Not only is the foreclosure rate climbing for older mortgage holders, it is climbing faster than it is for younger ones.

 

The last blog described two very significant changes in home mortgages among older Americans in the period from 1989 to 2010: a much larger percentage of them have mortgages on their homes, and these mortgages are much larger. Now almost twice as many 65 to 74 year olds continue to have a mortgage to pay, and nearly three times as many 75+ year olds do so. And the median amount of mortgage debt has nearly tripled in this time period for 55 to 64 year olds, while the amount has increased about four and a half times for 65+ year olds. These are the results of a report released earlier this month from the AARP Public Policy Institute.

This report also showed that, although the foreclosure rate for older American mortgage holders is consistently less than for younger ones, the older mortgage holders’ foreclosure rate is climbing faster. Take a look at this data tabulated in the report:

Foreclosure Rates by Age	2007	2008	2009	2010	2011	% Change 2007–2011
<50	0.42%	0.97%	1.84%	2.83%	3.48%	729%
50+	0.30%	0.66%	1.32%	2.27%	2.92%	873%

Notice that in every single year, the foreclosure rate was lower for those 50 years old or older than for those under 50. But also notice that the increase in the foreclosure rate was greater for the older Americans.

It makes sense that older homeowners would have a fewer foreclosures as a group. On average they’ve presumably owed their homes longer, bought them when prices were lower, and have had more time to pay down or pay off their mortgages. They would tend to have more income stability, and have had more time to accumulate savings and other resources with which to make mortgage payments if their income was reduced. And more of them would have sold their homes before the bubble burst when they cashed in their home equity for more modest homes.

As for why the foreclosure rate has increased more for older Americans, this flows directly from the two main conclusions of the last blog: because they are much more likely now to be carrying a mortgage at all, and because those mortgages are larger. Instead of no longer having a mortgage from having paid it off, or instead of owing a small balance in the final years of a mortgage with a modest payment, more are stuck with a sizeable obligation into the future.

So, older Americans are vulnerable month-to-month because of higher monthly mortgage obligations. And they are vulnerable long-term because they have less equity in their homes or none at all.  They are in the period of their lives when it’s more difficult to get hired or re-trained, when they are more likely to have health issues, and when they are on fixed incomes while expenses continue to rise. So it’s not surprising that more of the current AARP generation is ending up in foreclosure.

 

Chapter 13 Should Not (Sometimes) Be Used to Save Your House

Although Chapter 13 is often the go-to prescription for hanging onto a home in financial distress, like most strong medicine it comes with side-effects. The simpler Chapter 7 “straight bankruptcy” may be the better solution for both short-term relief and long-term financial health.

 

Chapter 13, the three-to-five year version of consumer bankruptcy, arms you with a remarkable set of tools for dealing with your mortgage lender and with other creditors related to your home. I’ll talk about them in upcoming blogs.

But you should absolutely not enter into a Chapter 13 case without understanding it thoroughly and considering it very practically. The fact is that a large percentage of them do not make it all the way to completion, often wasting the debtors’ money and delaying for years their final relief from creditors. Chapter 13 is awesome medicine, but only for the right patients in the right circumstances.

So in what circumstances should you very seriously consider Chapter 7 instead of Chapter 13?

1. If you are behind on your mortgage payments, but could realistically catch up on that arrearage within about a year—after writing off the rest of your debts in Chapter 7, and being very disciplined during that one year:  Depending on your lender, your payment history, and similar factors, most mortgage lenders will allow you to enter into a “forbearance agreement” after you file a Chapter 7 case. That agreement allows you to stay in your home and to catch up on your mortgage arrearage by paying a certain amount extra per month. Given the cost savings of a Chapter 7 over a 13, and the benefit of getting to your fresh start in a year instead of three to five years, you should very seriously consider with your attorney whether that one year of extra effort would 1) be doable, and 2) be worth the effort and risk.

2. If your chances of keeping your house through a Chapter 13 case are unrealistic: As powerful as Chapter 13 is, it certainly has its limitations. Think long and hard about whether you will be able to consistently meet the terms of your proposed payment plan. Consider your deeper motivations and fears, and you may find better ways of meeting your and your family's true needs. With the helpf of your attorney try to ground yourself with brutal honesty about what is realistic in the short term and also two or three years out. Although “desperate times call for desperate measures,” a desperate mind doesn’t tend to make wise choices. Chapter 13 should almost never be a “Hail Mary pass,” a last-ditch long-shot. Be very clear about the consequences of that long-shot not panning out, and you may well realize it’s not worth it.  

So, aim towards a Chapter 7 instead of a Chapter 13 case if you really don’t need the extra length of time and other benefits that Chapter 13 provides. And the same thing if you are trying to hang onto a house that you very likely can’t hang on to even with all the help that Chapter 13 provides.

Irony by Perjury Adds Insult to Injury: from Lender Robo-signing to Foreclosed Homeowners Begging for Scraps from the National Mortgage Fraud Settlement

Homeowners who lost their homes to foreclosure may need to commit perjury to get restitution payments though the settlement.  That would be the deepest kind of insult on injury.

In the last blog, I explained what a homeowner who lost a home to foreclosure (from 2008 through 2011) will have to assert to get his or her small share of that $1.5 billion pot of money:

1. “Borrower lost the home to foreclosure while attempting to save the home through a loan modification or other loss mitigation effort.”

2. “Servicer errors or misconduct in the loss mitigation or foreclosure processes affected the borrower’s ability to save the home.”

While these may seem superficially sensible, in practice they are very troublesome, especially because the statements must be made under penalty of perjury.

As to the first statement, what “other loss mitigation effort” “to save the home” will be considered sufficient to be able to make that statement? Must that effort have continued right up to the foreclosure date to be considered to have “lost the home to foreclosure while attempting to save the home”?  How is the former homeowner to know whether he or she can make this statement truthfully?

The second statement is even more of a problem. How can the former homeowner know whether “servicer errors or misconduct in the loss mitigation or foreclosure processes affected the borrower’s ability to save the home”? The robo-signing of foreclosure documents—mortgage servicers’ false assertions made under oath by the thousands—were only discovered through borrowers’ attorneys’  aggressive discovery efforts during litigation. In this nationwide settlement, the five banks are not admitting ANY wrongdoing or liability. (For example, see the non-admission clause in the Federal Release, Exhibit F in the Wells Fargo settlement documents, paragraph F on page F-11, which is page 232 of the 315 pages of those documents.) Presumably the banks are not now going to start admitting wrongdoing on a case-by-case basis so that borrowers can answer this statement accurately.

So to receive the restitution payment a former homeowner will have to sign a statement under penalty of perjury affirming the truthfulness of one statement that is so vague as to be in many situations meaningless, and the truthfulness of a second statement the accuracy of which is unknowable.

There may yet be a partial solution, to at least the first required statement about the extent of borrowers’ efforts to save the home. The claim form to be sent out to the borrowers’ by the yet-undesignated Settlement Administrator may give enough guidance about this. A tentative 3-page claim form has been prepared by the Monitoring Committee for possible use by the Settlement Administrator. It may create a bright line between qualifying and non-qualifying borrower efforts. We don’t know yet because although this tentative claim form is being made available for companies applying to become the Settlement Administrator (the application deadline is April 30, 2012), it is not being released to anyone else.

But even so, I see no conceivable way that the second statement about “servicer error or misconduct” can be made known to the borrowers in order for them to be able to assert that under penalty of perjury. The banks are not going to admit to wrongdoing as to two million or so homeowners in direct contradiction of their non-liability assertion in the settlement documents.

So here’s the moral irony:

1. The banks were accused by the federal government and 49 states of a long list of allegations of serious wrongdoing which take 10 pages to detail (see pages F-2 through F-11 of the Federal Release in the settlement documents referred to above). These allegations include fraud and misrepresentations of numerous kinds, including in the form of many thousands of perjured documents submitted to courts over an extended period of time. The banks do not admit to any of these allegations or to any resulting liability.

2. Now the banks have negotiated with the governmental entities to pay restitution for their extensive alleged wrongdoing, and in particular to homeowners who’ve already lost their homes to foreclosure. But as a precondition to receiving that restitution, these former homeowners will in many cases be faced with a moral dilemma: can they sign a statement under penalty of perjury asserting that their “ability to save the home” was affected by “servicer errors or misconduct” when they do not know whether such errors or misconduct happened as to their mortgage, and if so whether it had any effect on their “ability to save the home.”

3. Because the “Monitoring Committee” has made clear that the “Settlement Administrator” will not be required to get documentation from borrowers about their statements on the claim forms, borrowers are seemingly being encouraged to make statements that will in many cases be vague and factually unverifiable, while asserting the truthfulness and accuracy of those statements under penalty of perjury.

4. The banks, having admitted to no fault, having paid their modest penalty, and having foisted this moral conundrum onto the foreclosed borrowers, can now wash their hands entirely of the matter. They no longer care how each borrower handles the matter since the pot of money does not change. The money just shifts out of the hands of the perhaps more carefully honest borrowers who disqualify themselves by admitting that they cannot swear to the fact that they lost the property because of lender wrongdoing.

5. Thus this settlement process has lowered borrowers—through circumstances almost entirely outside their control—to the moral level of the original robo-signers: “just sign here and don’t worry what the statements say or what they mean.”

Is the Home Affordable Refinance Program (HARP) 2.0 New and Improved Enough to Help YOU?

Under new rules coming on line, HARP is now available for refinances no matter how far your home is underwater. The 125% loan-to-value cap is no more.

The purpose of the Home Affordable Refinance Program has been to enable homeowners who could not otherwise qualify for a refinance do so, thereby getting a lower interest rate and lower monthly payment, making more likely that they could afford to stay in their homes. 

Until this revamped version of HARP, homeowners could not qualify if their existing mortgage was more than 125% of the value of their home. In the new improved version announced way back in October, this condition was eliminated. But it has taken until a few weeks ago for Fannie Mae and Freddie Mac to release their formal guidelines, update their approval software, and start getting lenders on board.

In this blog I will give you a short list of the main conditions for HARP 2.0 eligibility, and then provide a few good sources for more detailed information.  

Eligibility

1. Your mortgage loan must be owned or guaranteed by Fannie Mae or Freddie Mac. Why? Because these entities were effectively taken over by the government near the beginning of the real estate market crash, and so the federal government can require them to follow new refinancing rules. HARP operates through Fannie and Freddie, and so loans owned by private lenders aren’t in the program. However, a large majority of home mortgages are held by Fannie or Freddie, so there’s a good chance yours is as well. You can find out by checking these two websites: www.fanniemae.com/loanlookup  or www.freddiemac.com/mymortgage. (If you instead you have a VA, FHA, or USDA home loan, they each have their own refinancing programs.)

2. Your loan must have been sold to Fannie or Freddie on or before May 31, 2009.

3. Your loan was not refinanced through HARP previously. No second bites at this apple. One small exception—if you happened to refinance your Fannie Mae mortgage from March through May of 2009. Also, prior non-HARP refinances are not a problem.

4. Your current loan-to-value must be greater than 80%. Although HARP is not limited to underwater loans, you can’t have more than 20% equity. Presumably, homes with an equity cushion are either more likely to be refinanced on the private market, and any event their owners will be motivated to preserve their equity. The point of HARP is to enable refinances which could not otherwise happen, and to give help and motivation to homeowners who have little or no equity.

5. Must be current on the mortgage—no late payments in the last 6 months, maximum of 1 in the last 12 months. Given that this program will leave the homeowner with a loan with little or no equity, and often with serious negative equity, the borrower must show a very clean recent payment history. However, many other requirements have been loosened, for example automated appraisals will be permitted instead of needing on-site ones (since the home value is not important here), and income verification will be less often required, making self-employed people more likely eligible.

CAUTION: Lenders have a fair amount of discretion to alter these rules, so refer to your lender for the details, and it may well be worth shopping for eligibility and better refinance terms.

Resources for More Information

1.  A good general new story about the HARP changes, from the website edition of the Philadelphia Inquirer.

2. The best detailed description I could find of the new program, in a website called bills.com.

3. Some experts’ opinions about the impact of HARP 2.0 in a Wall Street Journal blog.

4. A HARP 2.0 eligibility calculator on Zillow.com.

Ten Terrific Tools for Saving Your Home through Chapter 13--Part 2

Here are the other 5 powerful home-saving tools. Chapter 13 isn’t for everyone. But these tools, especially in combination, can often give you what you need to tackle and defeat your mortgage and other home-debt problems.

In my last blog I gave you the first five of ten distinct and significant ways that Chapter 13 can save your home. I’ll summarize those here briefly, and then give you the other five in more detail.

Chapter 13 enables you:

1.... to stretch out the amount of time you are given to catch up on missed mortgage payments, giving you as long as 5 years to do so.

2. ... to slash your other debt obligations so that you can afford your mortgage payments.

3.... to permanently prevent income tax liens, child and spousal support liens, and judgment liens from attaching to your home.

4.... to have the time you need to pay debts that cannot be discharged (legally written off) in bankruptcy, all the while being protected from those creditors messing with your home.

5.... to discharge debts owed to creditors which could have otherwise put liens on your home.

6.... to get out of paying all or some of your 2nd or 3rd mortgage ever again—IF the value of your home is no more than the balance of your 1st mortgage. This “stripping of junior mortgages” under Chapter 13 continues being used more and more as home property values continue to head downward in so many parts of the country.

7.... to take extra time to pay back property taxes, while protecting the home from tax and mortgage foreclosure. This is particularly important if you have a mortgage on your home. That’s because virtually all mortgages require you to keep current on the property taxes. So not only does Chapter 13 protect you from the property tax authority itself, more importantly it prevents your mortgage lender from using your property tax arrearage as a justification for foreclosing on your home.

8.... to favor many home-related debts—such as property taxes, support liens, utility and construction liens-- that you probably want to pay. You generally can’t get rid of these special kinds of liens on your home, but Chapter 13 allows—indeed requires—you to pay them in full before you pay anything to your other creditors. So in many situations your regular creditors’ loss is your home creditors’ gain, and thus your gain, too.

9.... to get rid of judgment liens in many situations, so that they no longer attach to your home. Although this can also be done in Chapter 7, it’s often all the more helpful in a Chapter 13 when used in combination with these other tools.

10.... to sell your house without the pressure of a foreclosure sale, either just a short time after filing the Chapter 13 case, or sometimes even three, four years later. You may need to or be willing to sell and downsize, but not until a kid finishes high school or you reach an anticipated retirement date. Chapter 13 may allow you to delay selling and curing part of your mortgage arrearage until then, allowing you to preserve your family home in the meantime.

 

Getting Just Enough Help for Your Home through Chapter 7

When does filing a Chapter 7 “straight bankruptcy” case help you enough so that you don’t need a 3-to-5-year Chapter 13 case?

If you are behind on your mortgage payments but want to keep your home, you have likely heard that a Chapter 13 “payment plan” is what you need. And that IS a powerful package, with an impressive set of tools to deal with a wide variety of home-related problems—everything from the mortgages themselves to property taxes, income tax liens, and judgment liens.

But what if you need to discharge other debts to get a fresh financial start, and have managed to fall only a couple of months behind on your mortgage? Or what if you are not keeping the house, but just need a little more time to find another place to live?

Then you may well not need a Chapter 13 case, and can maybe avoid the disadvantages it comes with—mostly, that it takes so much longer and generally costs lots more than Chapter 7. This extra time and cost can be well worthwhile when you need the great advantages of Chapter 13, but let’s look at ways that Chapter 7 can do enough for your home:

In a Chapter 7 case:

1. The “automatic stay”—the bankruptcy provision that stops virtually all actions by creditors against you or your property—applies to Chapter 7 just as it does to Chapter 13. So the filing of a Chapter 7 case STOPS a foreclosure in its tracks, just as quickly as a Chapter 13 filing. But if you are just trying to buy time to save money for a rental, the tough question is HOW LONG that break in the mortgage company’s foreclosure efforts will last, and how much extra time it’ll buy you. An aggressive creditor could quickly ask the court for “relief from the stay”—permission to resume the foreclosure process—thus potentially getting you only a few extra weeks. Or on the other extreme, a mortgage creditor could just do nothing for the 3 months or so until your Chapter 7 case runs its course and the “automatic stay” expires with the completion of your case. So, Chapter 7 often does not come with much predictability about how much time you’d gain. On the other hand, your bankruptcy attorney may well have experience in how fast certain mortgage lenders tend to ask for “relief from stay” under facts similar to yours.

2. Chapter 7 stops—at least briefly—not only mortgage foreclosures, but also prevents other potential liens from being placed against your house, including the IRS’s tax liens and judgment liens. But why would the few weeks or months that Chapter 7 gains make any difference with these kinds of creditors? In the right set of facts, it can make many thousands of dollars of difference.

• A timely filing of a Chapter 7 case can prevent you from having to pay a debt that would otherwise have become a lien against your house. For example, let’s say you have an older IRS debt that meets the necessary conditions for discharge, and you also have a little equity in your home but not more than your homestead exemption allows. If you waited until after the IRS recorded a tax lien for that debt against your house, that lien would continue being attached to your house even if you filed a bankruptcy and would eventually have to be paid. However, if your Chapter 7 filing happened before the IRS recorded a tax lien, the “automatic stay” would prevent that tax lien from being filed, the tax debt would be discharged forever, and your home’s equity would be preserved.

• Or if instead let’s say you have a debt that is NOT going to be discharged in bankruptcy—say a more recent tax debt—but you also had some assets that you were going to have to surrender to the Chapter 7 trustee, what we call an “asset case.” If again you filed the bankruptcy case before the recording of the tax lien, your Chapter 7 trustee could well pay those taxes as a “priority” debt in front of any of your other debts, potentially leaving you with no tax debt at the completion of your case.

3. Chapter 7 allows you to concentrate on your house payments by getting rid of your other debts. If you’ve managed to keep current on those mortgage payments, but don’t know how long you will be able to do so, the relief you get from discharging your other debts greatly improves your odds of staying current on your home long term. Or if you have missed only a few mortgage payments, AND can reliably make future ones, PLUS enough to catch up on your arrearage within year or less, then Chapter 7 would like very likely do enough for you. Most mortgage creditors will let you enter into an agreement –often called a “forbearance agreement”—to catch up the missed payments by paying a sufficient specific amount extra each month until you’re caught up, again, as long as that period of catch-up time is relatively short. Otherwise, you may well need a Chapter 13.

 

Short Sales: Seldom Easy and Often Not What You Expected

A short sale of your home is sometimes your best alternative. But short sales often do not successfully close, and even when they do you may get a rude surprise.

In a short sale, a house is sold by “shorting”—underpaying—one or more of the lienholders, because the value of the house, and thus the purchase price, is not enough to pay everyone in full. The liens can include not just voluntary ones such as the first and second mortgage, but also judgments, income taxes, support obligations, unpaid utilities, and property taxes. All lienholders must consent and release their liens, or the sale cannot occur. There may or may not be subsequent liability for the homeowners to those lienholders who were not paid in full.

The primary benefit of a short sale is that it avoids a foreclosure on the homeowner’s credit record—that is, it does so IF the short sale is successful. Even so, in the present economic climate there are some indications that there will be less credit record difference between a short sale and a foreclosure. So if you are using this credit record difference as the primary reason try to do a short sale, it may well not be your best course of action.

Short sales have two main problems.

First, they are generally much harder to pull off than expected, taking much longer, and often fail to close, putting the homeowners further behind, with dashed expectations. They usually don’t work because:

• Unhelpful and slow mortgage lenders: To accomplish a short sale, usually the first mortgage holder has to give up some money to a junior lienholder or two. The benefit to the first mortgage holder is that getting a little less out of the sale is better than incurring the delay and cost of foreclosure. But many mortgage companies are not well organized or staffed to handle such negotiations. You are often forced to work through a servicing company, whose financial incentives may well not encourage short sales. So they may drag their heels, and can even sabotage your efforts.
• Since all lienholders must agree, any one of them can kill the deal: Everybody wants their “fair share” of a pie that is too small to make everybody happy. Just when you think you have a deal among the main players , someone else crawls out of the woodwork demanding a payment and jeopardizing the closing. They all have a legal claim against the property, and can delay or undo the whole deal.
• The middlemen have the most to gain: Realtors and others in the real estate sales industry often benefit more from a short sale than you do. Realtors without enough homes to sell have to close sales to survive—even if they are paid less in a short sale than otherwise to help the deal happen. Some “short sale specialists” are indeed expert in this type of transaction, but if it is all that they do then you need to be concerned that they may be like the proverbial “person with a hammer to whom everything looks like a nail.” There are good reasons that unbiased observers—like bankruptcy judges—tend to take a dim view of short sales, seeing them as mostly a way for the middlemen to make money on you.

Second, short sales are dangerous:

• Potential liability from unpaid balances on the junior mortgages and liens: Although you may be told that you will not be liable, you need to be sure that the settlement documents and the applicable law in fact cut off any liability. Also be aware that sometimes in the midst of the negotiations, especially if a junior lienholder is playing tough, and the closing has been delayed for a long time, you may be feel forced to accept some liability in order for the closing to occur.
• Potential tax consequences: This issue deserves a whole blog by itself. The key principle is that debt forgiveness can be treated as income subject to taxation unless you fit within one of the exceptions. Make sure you talk with an appropriate tax specialist about this before investing any time or expectations in the short sale option.

Fannie Mae and Freddie Mac Now Say that Mortgage Principal Reductions are Good for BOTH Homeowners AND Taxpayers

Will Fannie and Freddie finally be making mortgage principal reductions now that their own analysis shows that doing so would benefit their own financial health—and make them better able to repay billions owed to U.S. taxpayers?

My last blog described Fannie and Freddie’s conflicting purposes: to make home ownership more accessible, but to do so profitably for themselves. And I showed how this inherent conflict has led to a political dispute between the Obama Administration on one side pushing for greater flexibility in helping distressed homeowners keep their homes—and specifically to allow principal reductions, while on the other side Edward DeMarco, the acting director of the Federal Housing Finance Agency (FHFA) and Fannie and Freddie’s overseer, disallowing principal reductions in order “to preserve and conserve [Fannie and Freddie’s] assets.”

Helping Homeowners Also Helps Taxpayers

But what if there is no conflict between these purposes? What if reducing mortgage balances would help hundreds of thousands of homeowners stay in their homes and at the same time would save money for Fannie and Freddie?  

That is the conclusion of a very recent not-yet public analysis by Fannie and Freddie presented to the FHFA, according to the ProPublica article: “Fannie and Freddie: Slashing Mortgages Is Good Business.”

The new analyses by Freddie and Fannie were done to assess the new financial incentives that the Obama administration announced in late January.  ... . The companies now find that reducing principal on troubled mortgages has a “positive net present value” — in other words, that doing it would bring in more money for the companies over the life of the loans than not doing it.

The two companies’ analyses showed that upwards of a quarter million borrowers who owe more on their mortgages than their homes are worth could benefit from principal reductions. The companies would take a loss upfront, but over the long run these mortgage modifications would save the companies money because they would lead to lower default rates.

FHFA’s Response

DeMarco is thinking about it. In a statement he said:

“As I have stated previously, FHFA is considering HAMP incentives for principal reduction and we have been having discussions with [Freddie and Fannie] and Treasury regarding our analysis.”

But he also stated:

“FHFA’s previously released analysis concluded that principal forgiveness did not provide benefits that were greater than principal forbearance as a loss mitigation tool. FHFA’s assessment of the investor incentives now being offered will follow the previous evaluation, including consideration of the eligible universe, operational costs to implement such changes, and potential borrower incentive effects.”

DeMarco seems to be saying that this new analysis may well not change their policy. Why not? After looking at all their options (“the eligible universe”), and considering how borrowers would react to principal reductions (“incentive effects”), it seems to come down to “operational costs”—changes to their accounting and computer systems—which could outweigh the other benefits. It just might be too hard to change Fannie and Freddie’s operations so that principal reductions would work for them.

The Bigger Picture      

So is the FHFA so institutionally ingrained with the short-term profit motive that it would reject Fannie and Freddie’s own conclusions about principal reductions being good for their long term financial health? Does it have SO little ability to adapt? Does the FHFA have such tunnel vision that it can’t give any consideration to the potential benefits to the national housing market, where home values STILL continue to slide? And where in DeMarco’s comments is there any hint whatsoever of compassion for the millions of Americans—about half of them under his control—at continued risk of losing their homes?

Fannie Mae and Freddie Mac Putting "Profits Before People"?

Now that Fannie and Freddie are essentially owned by the taxpayers, why aren’t these institutions doing more to help homeowners? Particularly, why are they so adamantly against allowing mortgage principal reductions?

These are questions that ProPublica, “an independent, non-profit newsroom that produces investigative journalism in the public interest,” has been following and reporting on in a recent series of articles. I’m highlighting two of those articles in this blog.

Inherently Conflicting Purposes

“Why Fannie and Freddie Are Hesitating to Help Homeowners” describes “Fannie and Freddie's role in the housing market, and why it seems as if their actions often go against the interests of homeowners.” At the heart of it, these two institutions operate within a conflict about their core purpose: they were set up to make home ownership more accessible, but they are also supposed to make a profit. This first purpose would encourage Fannie and Freddie to be as flexible as possible to allow distressed homeowners to keep their homes. But the profit-making purpose would seem to run counter to letting homeowners too easily get out of their mortgage commitments.

Tax-Payer Takeover Only Complicated the Conflict

Now that taxpayers stand to gain or lose many billions of dollars depending on the profitability of Freddie and Fannie, that would seem to put more emphasis on profit-making and less on homeowner relief. On the other hand, providing significantly more help for distressed homeowners would arguably help stabilize home prices and improve the economy to everyone’s benefit.

As the ProPublica article states:

The two aims of Fannie and Freddie are continually at odds — policies encouraging refinancing and forgiveness for more mortgage holders can increase costs to the taxpayer-owned companies. While the administration has made relief for homeowners their priority, [Edward] DeMarco [the acting head of the Federal Housing Finance Agency (FHFA), which oversees Fannie and Freddie] says his agency's priority is to protect Fannie and Freddie's profits, aka taxpayers' assets. Of course, many of those taxpayers are struggling homeowners, and that is at the heart of the dilemma over Fannie and Freddie's future.

Mortgage Principal Reduction Caught between the Conflicting Purposes

A second ProPublica article addresses whether Fannie and Freddie will allow some homeowners to reduce their mortgage principal balances. That decision hangs in the political balance because of this same conflict between profitability and helping homeowners:

The Obama administration has repeatedly tried to push principal reduction — reducing the size of a borrower's mortgage — as a way to help homeowners, especially those with homes worth less than their mortgages. But... time and again, Fannie and Freddie wouldn't participate: a crippling problem, since the two companies own or guarantee about half of the country's mortgages.

[Edward] DeMarco [the interim head of the Federal Housing Finance Agency (FHFA), says principal reduction could cost taxpayers $100 billion. Some economists counter that while principal reductions might lead to a short-term hit for Fannie and Freddie, it would ultimately result in fewer underwater mortgages, fewer foreclosures and a healthier housing market — all good for Fannie and Freddie's bottom line.

To give DeMarco the last word, until my next blog:

DeMarco has... [told] Congress many times that "as conservator, FHFA has a statutory responsibility to preserve and conserve the enterprises' assets." In plainer terms, he [states] that his role is to "make sure Fannie Mae and Freddie Mac undertake activities that don't cause further losses for the American taxpayers."

DeMarco has strongly asserted his independence insisting that he is promoting needed fiscal discipline.

The Bankruptcy Consequences of the National Mortgage Settlement

The bankruptcy world played a quiet but significant role in bringing about this controversial $26 billion settlement. So, fittingly, the settlement terms require the banks to make significant changes in their behavior in bankruptcy court.

Before leaving my current series of blogs on this mortgage settlement, I had to tell you about its bankruptcy angles.

The bankruptcy courts are where some of the earliest signs of bank misconduct appeared. For many years before the “robo-signing” scandal broke in the fall of 20010, mortgage lenders had been making a bad name for themselves in bankruptcy court with shoddy accounting and loose paperwork. Unlike most foreclosures—judicial or non-judicial—in which homeowners do not have attorneys representing them, the majority of homeowners in bankruptcy do have attorneys. So when, for example, mortgage lenders try to get “relief from stay”--permission to foreclose on a home under bankruptcy protection—the homeowner has both a convenient forum—the bankruptcy court—and an advocate who can point out to the court that the lender has not credited all the payments, that it has misplaced payments in some “suspense account,” and/or that it hasn’t even provided its own attorney with accurate accounting information or documentation.  

The bankruptcy system also had another player with a major role, as U.S. Attorney General Eric Holder highlighted when he announced the settlement last month:

The U.S. Trustees Program, which serves as the watchdog of all bankruptcy court operations, was one of the first federal agencies to investigate mortgage servicer abuse of homeowners in financial distress.  As part of their investigation, Trustees reviewed more than 37,000 documents filed by major mortgage servicers in federal bankruptcy court – and took discovery in more than 175 cases across the country. 

Accordingly, the Complaint filed against the banks as part of this settlement documentation includes a major section on “The Banks’ Bankruptcy-Related Misconduct,” listing 15 distinct types of misconduct. (See pages 34-38 of the Complaint.)

And each bank’s Consent Judgment contains a series of requirements related to their bankruptcy procedures. (See the Ally Financial/GMAC Mortgage/Residential Capital ”Consent Judgment” here, along with its exhibits, totaling more than 300 pages. The other banks’ Consent Judgments can be found here.)

Here is an example of some of the requirements, as applicable to the banks’ filing of proofs of claim (“POC”) in bankruptcy court, which they file to establish the nature and amount of a debt:

The lender “shall ensure that each POC is documented by attaching:

a. The original or a duplicate of the note, including all indorsements; a copy of any mortgage or deed of trust securing the notes (including, if applicable, evidence of recordation in the applicable land records); and copies of any assignments of mortgage or deed of trust required to demonstrate the right to foreclose on the borrower’s note under applicable state law  ... .

....

f. The POC shall be signed (either by hand or by appropriate electronic signature) by the responsible person under penalty of perjury after reasonable investigation, stating that the information set forth in the POC is true and correct to the best of such responsible person’s knowledge, information, and reasonable belief, and clearly identify the responsible person’s employer and position or title with the employer.”

These requirements strike at the rampant problems with insufficient documentation and authorization, including assignments and recordings.  There are similar rules applicable to motions for relief from stay, about fees charged by lenders during Chapter 13 cases, and their loss mitigation behavior during bankruptcy.

Remember that this national mortgage settlement does NOT settle or waive any “claims and defenses asserted by third parties, including individual mortgage loan borrowers on an individual or class basis.” (See the Federal Release, Exhibit F, p. 42, and the State Release, Exhibit G, p. 10, in the Ally Financial “Consent Judgment,” by way of example.) In effect that means that debtors in bankruptcy are not limited by the settlement from pursuing mortgage lenders for their violations of bankruptcy law, including those laws referred to in this settlement. These lenders simply also have their feet to the fire for the next three and a half years while the settlement is in effect and they are being monitored for compliance with its requirements.

National Mortgage Settlement to Hand Out Cash to Foreclosed-Out Homeowners

Most of the $26 billion or so in this national settlement is designed to help current homeowners keep their homes. But $1.5 billion of it will go to about 750,000 who have already lost their homes to foreclosure. That’s about $2,000 each.

Who’s included?

• The entire settlement—including this foreclosure cash restitution payment—applies only to mortgages held by the five biggest home mortgage holders and their subsidiaries: Bank of America, Wells Fargo, J.P. Morgan Chase, Ally Financial/GMAC and Citi. To contact these banks to find out if your mortgage is included, go to the special website for this settlement for their toll-free phone numbers and websites. (See the right column, under “Settlement Parties.”)
• Your home must have been “finally sold or taken in foreclosure between and including January 1, 2008 and December 31, 2011.”
• One state–Oklahoma—did not join in this settlement, so foreclosed homeowners in Oklahoma are not eligible for this payment.

 What are the conditions for receiving the money?

• Although one section of the settlement website states that there’s “no requirement to prove financial harm,” the Executive Summary on the same website adds that eligible borrowers are those “who were not properly offered loss mitigation or who were otherwise improperly foreclosed on.” Sounds like some showing of improper servicing or foreclosure behavior by the bank will be required, without a need to prove that this behavior necessarily caused you financial harm. But exactly what information or evidence will be required is not clear yet.  
• What is clear is that former homeowners will not need to release any potential claims against their mortgage holder in order to receive the money. The payment received would, however, be credited as an offset against any such other claim against the bank.

What’s the procedure and timetable?

• Within about 90 days, a Settlement Administrator will be selected “to administer the distribution of cash to individual borrowers.”
• Over the following six to nine months, that Administrator will work with the banks to identify the eligible former homeowners, and send out letters to them to apply for the payment.
• If you are concerned about the Administrator having your current address, you should contact your Attorney General’s Office to have it send your address to the Administrator.
• The amount to be distributed to each foreclosed homeowner will depend on how many people qualify and apply. And since the $1.5 billion or so pool of money paid by the banks towards these for payments also pays for “all the costs and expenses of the Administrator,” that reduces what will be available for the homeowners. (The actual amount of the pool, by the way, is actually exactly $1,489,813,925.00—I do not know the reason for that odd amount!).

The National Mortgage Settlement's Actual Terms Finally Released

The settlement documents of the deal that was announced more than a month ago were finally completed and filed at court on Monday, March 12. They catalog page after page of serious wrongdoing by the banks in their servicing of mortgages and processing of foreclosures.

In my last blog I said that the settlement would be finalized and made public “any day now.” It actually happened only hours later.

The settlement documents consist of hundreds of pages, but I’ll make it easy for you.

One document talks about the past, the wrongdoing by the banks. That’s the Complaint. The plaintiffs are the United States, 49 of the 50 states (all except Oklahoma), and the District of Columbia; the defendants are five of the biggest banks—Bank of America, JPMorgan Chase, Wells Fargo, Citi, and Ally/GMAC, and their subsidiaries, totaling 18 named defendants. This 99-page Complaint is the subject of today’s blog.

The rest of the documents—one Consent Judgment for each of the five banks—talk about the agreed penalties for the banks’ past wrongdoing, but mostly focus on the future: 1) where the money from those penalties is going to be spent; and 2) the new standards by which these banks are now required to service mortgages and process foreclosures.  In my next blog I’ll talk about these penalties, and how they are supposed to help homeowners who have been hurt by the banks.

To say that the Complaint is 99 pages long is misleading, because it actually ends on page 48, followed by signature pages for each of the 51 plaintiffs. And In fact the document doesn’t really get to the point until the Factual Allegation starting on page 21. The detailed litany of bank misconduct goes on relentlessly for the following 16 pages, totaling 55 paragraphs of allegations, some including many subparagraphs of even more detailed allegations. It’s difficult to do justice to all this in one blog. To try to show both the breadth and depth of the alleged misconduct, I’ll give you most of the Complaint’s outline of the types of wrongdoing, and one or two examples quoted under each one:

A. The Banks’ Servicing Misconduct

            1. The Banks’ Unfair, Deceptive, and Unlawful Servicing Processes

Failing to timely and accurately apply payments made by borrowers and failing to maintain accurate account statements; imposing force-placed insurance without properly notifying the borrowers and when borrowers already had adequate coverage.

             2. The Banks’ Unfair, Deceptive, and Unlawful Loan Modification and Loss       Mitigation Processes

Providing false or misleading information to consumers while initiating foreclosures where the borrower was in good faith actively pursuing a loss mitigation alternative offered by the Bank; miscalculating borrowers’ eligibility for loan modification programs and improperly denying loan modification relief to eligible borrowers.

   3. Wrongful Conduct Related to Foreclosures

Preparing, executing, notarizing or presenting false and misleading documents, filing false and misleading documents with courts and government agencies, or otherwise using false or misleading documents as part of the foreclosure process (including, but not limited to affidavits, declarations, certifications, substitutions of trustees, and assignments).

 B. The Banks’ Origination Misconduct

   1. Unfair and Deceptive Origination Practices

In the course of their origination of mortgage loans in the Plaintiff States, the Banks have engaged in a pattern of unfair and deceptive practices. Among other consequences, these practices caused borrowers in the Plaintiff States to enter into unaffordable mortgage loans that led to increased foreclosures in the States.

 C. The Banks’ Bankruptcy-Related Misconduct

Making representations that were inaccurate, misleading, false, or for which the Banks, at the time, did not have a reasonable basis to make, including without limitation representations contained in proofs of claim under 11 U.S.C. § 501, motions for relief from the automatic stay under 11 U.S.C. § 362, or other documents.

 D. Violation of Servicemembers Civil Relief Act (SCRA)

The Banks foreclosed upon mortgages without required court orders on properties that were owned by service members who, at the time, were on military service or were otherwise protected by the SCRA.

 The 55 paragraphs of wrongdoing resulted in these five banks agreeing to pay about $26 billion in a combination of cash and other forms, to the states and to individual homeowners. As I said, I’ll tell you how this is supposed to be divvied up in my next blog.  

The Terms of the Month-Old $26 Billion National Mortgage Settlement Are, Still, . . . "Coming Soon"

The settlement announced on Feb. 9 has been publicly released so far only in a broad outline of its terms. Any day now the actual agreement will be finalized and filed at court. In the meantime here are some tantalizing tidbits.

More than a month has passed since the announcement of the long-awaited mortgage settlement by the state attorneys general and the federal government with the five largest mortgage loan servicers. A special website, set up by the Attorneys General on the Executive Committee that negotiated the settlement, provides a 4-page “Settlement Fact Sheet” and also a “Settlement Executive Summary” of similar length. This website also provides some other possibly helpful information like the phone numbers for the loan servicers involved and the address, phone number and website of each state’s attorney general. But none of that is going to get you very far in any practical way because in fact the details of the settlement are still being put into writing. The “National Mortgage Settlement” has in fact not quite been settled, at least not in detail. As the website says, it’s still “coming soon.”

It's worth reading the relatively short “Fact Sheet” and the “Executive Summary,” and to look through the rest of the website. Here are some aspects of the deal from those sources that may surprise you:

• Although 5 loan servicers are involved in this settlement, one stands out, Bank of America, because it is obligated to pay more than twice as much as any of the others. It’s expected to pay (through a combination of cash payments, mortgage write-downs, and refinances) about $12 billion. Much of B of A’s financial exposure comes from its ownership of a huge portfolio of former Countrywide mortgages.
• The largest portion of the settlement funds—about $10 billion—will go towards reducing the principal balance of mortgages. The banks have been extremely resistant to principal reductions, and this settlement requires the largest reductions ever. However, the amount is still very small compared to the total amount of negative equity among these banks’ homeowners.
• In an effort to beef up the enforcement side of the settlement, an independent Monitor has been named who will have what at least sounds like significant powers to enforce a detailed set of new mortgage servicing standards. Penalties for violations will be up to $1 million per violation, and up to $5 million for some repeat violations.
• The mortgage servicers will receive credit for different efforts they make to help their homeowners. The banks will get credit for mortgage write-downs, but also partial credit for write-downs by investors on mortgages that the banks do not own but merely service, as well as for helpful actions banks are already taking like approving short-sales. The compromise was to provide as much benefit as possible to homeowners while giving banks some flexibility in earning credit for their efforts.

The effectiveness of this settlement will depend on how strongly the written agreement is drafted. I’ll provide practical information about this written agreement just as soon as it is filed at court, so please check back here again.

Will You Benefit from the Just-Completed $26 Billion Home Mortgage and Foreclosure Settlement?

The long-awaited joint federal-state settlement with the major banks for their alleged fraudulent documentation and processing of mortgages and foreclosures was announced on Thursday, February 9. Will it help you, and if so, how?

I interrupt my ongoing series on small business bankruptcy to answer your most immediate questions about this huge settlement.

1. Who is included in this settlement?

• Only five big banks are currently signed on: Bank of America, Wells Fargo, J.P. Morgan Chase, Ally Financial and Citigroup.  Only mortgages owned and held by them are directly affected.  Negotiations continue with nine other mortgage servicers, which if successful could bring the total amount of money involved to $30 billion.
• 49 states joined in the settlement; only Oklahoma did not.
• Mortgages held by Fannie Mae and Freddie Mac—consisting of the majority of U.S. mortgages—are NOT covered.

2. What does this settlement resolve and what is open for further negotiation and litigation? In other words, what liabilities are the banks escaping from for their $26 billion?

• The claims against the banks that are released in this settlement are limited to mortgage servicing and foreclosure claims. Claims for a variety of other alleged wrongdoing are not covered and so remain open to being pursued by the federal and state regulators, investors, and homeowners. Claims that are NOT covered include those related to the securitization of mortgage-backed securities that were at the heart of the financial crisis, and those against or involving MERS (Mortgage Electronic Registration Systems).
• Individuals’ rights to bring their own lawsuits or to be part of a class action against any banks for any claims are not affected by this settlement.
• The settlement does not limit any potential criminal liability for any individuals or financial institutions; it provides no immunity from prosecution whatsoever.

3. How does the settlement help you if your mortgage is held by one of these five banks?

• If you need a mortgage loan modification, these servicers will (finally!) be required to offer principal reductions, for first and second mortgages, to a value of up to $17 billion. This is where the bulk of the settlement funds are earmarked.
• If you’re current on your mortgage but your home is worth less than the mortgage, $3 billion of the settlement is to provide refinancing relief.
• If your home has already been foreclosed, $1.5 billion will be paid out by the banks as a penalty against them--around  $2,000 per homeowner--without you needing to show any damages or releasing any claims against the bank.

4. Where do you go for more information and to find out whether you will be helped in any of these ways?

• Go to the new settlement website for current and upcoming information about it:

http://www.nationalmortgagesettlement.com