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Banks Slow To Implement Key Debt Relief Provision Of Mortgage Settlement

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Eugenia Emerson with the Richmond, Calif. chapter of the Alliance of Californians for Community Empowerment (ACCE) looks out the window of a bus at a foreclosed home during a July 13 bus tour of foreclosed and blighted properties.
Eugenia Emerson with the Richmond, Calif. chapter of the Alliance of Californians for Community Empowerment (ACCE) looks out the window of a bus at a foreclosed home during a July 13 bus tour of foreclosed and blighted properties.

The five major banks that signed a landmark national mortgage settlement in March have been slow to deliver $10 billion in promised debt relief, according to data submitted recently by the banks to the independent monitor overseeing the landmark agreement.

So far, the banks have written off about $750 million in debt owed on first mortgages, assistance that went to just 7,093 borrowers. Bank of America, which has the biggest obligations under the deal to provide principal forgiveness, had not completed any modifications with principal reduction as of the end of June, according to a report released Wednesday by Joseph Smith, a former North Carolina banking commissioner.

Bank of America did not immediately return a request for comment. In an interview with The Huffington Post, Smith noted that modifications with debt relief, or principal forgiveness, typically take at least three months to complete. The financial institutions -- including Bank of America -- reported that another 28,047 trials were in progress that if completed will forgive $3 billion in principal, including $800 million in relief provided by Bank of America.

The banks have three years to distribute the aid to homeowners, though they receive financial incentives if they roll it all out in the first year.

The settlement came on the heels of an investigation by attorneys general from 49 states into widespread reports that banks were filing falsely-signed documentation in court in order to speed as many foreclosures through as possible. The investigation was expanded to include complaints by homeowners and their advocates of wrongful foreclosures and a host of other mortgage nightmares caused by the failure of the institutions to properly manage the accounts of struggling borrowers.

The framers of the settlement, including U.S. Department of Housing and Urban Development Secretary Shaun Donovan, said that the deal ultimately reached with state and federal officials would help 1 million struggling borrowers.

But critics, especially within the housing community, assailed the agreement as insufficient to address a housing crisis that has 11 million borrowers trapped underwater. They also expressed disappointment that Fannie Mae and Freddie Mac, which own or guarantee more than half of all home loans in the country, were not on board, meaning that their loans won't qualify for debt forgiveness. Just 10 percent or so of all outstanding loans -- those that the banks themselves hold on their own books -- could potentially qualify.

Homeowners and their advocates have also expressed skepticism that the banks would comply with the other major feature of the settlement -- more than 300 new required reforms meant to cut down on bank errors and wrongful foreclosures, and to generally make life easier for struggling borrowers who often describe their experience of trying to obtain a mortgage modification or other assistance as a complete nightmare.

How do the banks say they are doing? All told, the banks reported to Smith that they provided $10.56 billion in consumer relief to 137,846 borrowers in the first four months after the settlement was signed. Most of this, $8.7 billion, is mortgage debt that the banks have essentially written off through a process known as a short sale -- typically, a bank sells a borrower's home at a price less than what is owed but agrees not to pursue the former homeowner for the difference.

Four of the banks reported that they have implemented more than half of the new mortgage management standards required by the settlement -- reforms such as establishing a single point of contact at the institution for each homeowner at risk of default, adequately tracking the information that borrowers send as part of loan modification efforts, and maintaining foreclosed properties. But this information, along with the financial assistance data, comes with a big asterisk.

Smith has not yet performed an audit on the information provided by the banks, nor has his office yet applied the complicated formulas to determine how much of that $10 billion the banks can count against their obligations under the settlement.

In short, Smith said in an interview with The Huffington Post, "it is just too early to tell" whether the banks are doing what they said they would do. The banks have until Oct. 2 to implement all of the new "servicing" requirements, and Smith's first report to the federal court overseeing the settlement won't come until April of 2013.

In the meantime, Smith said, he hopes that this first report -- which includes a synthesis of the new standards the banks must follow and a timeline -- will provide a roadmap for others in the housing and borrower communities to follow. He said he wants to hear from those who deal directly with the banks about whether they are living up to the standards.

"If I have information from the field that suggests something is wrong I will use it," Smith said.

As The Huffington Post recently reported, banks that signed the settlement are still bungling the management of some home loans, and housing counselors who work with borrowers have complained that few of their clients have been offered principal forgiveness. Several housing counselors and lawyers who represent homeowners reached on Wednesday said that the banks' apparent compliance with the new rules is mixed, at best.

Larry Glinzman, a spokesman at Community Legal Services of Mid-Florida, said that his housing attorneys say that mortgage servicers still take too long to consider short sales and other homeowner relief, and that blighted abandoned homes still litter communities in his part of the Sunshine State.

Glinzman said that he has seen, however, a big increase in loan modification and principal reduction offers from Bank of America, with many offers coming to people who had previously been rejected five or six times.

Joseph Sant, an attorney on New York's Staten Island, reported less positive results. One of his clients, Jihyun Lyo, has tried for three years to finalize a trial loan modification under the federal Home Affordable Modification Program.

"Her single point of contact has been particularly unhelpful," Sant said in an email. Sant noted that simply establishing a single individual to handle a borrower's file doesn't ensure good service.

"What Ms. Lyo has seen, instead, is that her single point of contact is just a focal point for the same illogical, arbitrary servicing behavior we have seen for years. While the contact on her case has a professional attitude, Bank of America gives the contact so little information, access, and discretion that is impossible for him to be helpful," he said.

"Her case is not isolated and illustrates Bank of America's lack of progress in implementing the settlement."

UPDATE: Bank of America spokesman Dan Frahm told The Huffington Post that of Aug. 21 the bank had forgiven $596 million in debt for 3,823 borrowers. Another 15,878 borrowers are currently in a trial period, which if they complete will wipe out $2.5 billion in debt.

"The agreement term is 36 months, yet within the first year, we believe we will reach or exceed all program targets under the agreement," he said in an email. "To date we have extended more than $11 billion in relief to homeowners through the agreement programs. We continue working to reach eligible borrowers with these programs to prevent foreclosure, help our customers save money and support the recovery of the housing market."

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