The largest mortgage settlement in U.S. history was pitched by its creators as a deal that would offer quick aid to 1 million people in danger of losing their homes to foreclosure. But according to a report released Thursday by the court-appointed monitor of the settlement, in the first nine months after the $25 billion deal was struck, fewer than 50,000 people received the most coveted form of relief: reduction of principal owed on a first mortgage.
Meanwhile, more than three times as many borrowers -- 169,000 -- agreed to a short sale, which requires they leave the property, according to the report.
Banks still have time to meet their obligations under the settlement, which requires that 30 percent of total relief come in the form of first mortgage principal reduction. But housing advocates say the limited progress so far -- just 14 percent of aid has gone to write down loan balances -- suggests that banks are avoiding, or at least delaying, their obligation to provide meaningful relief as they promised under the deal.
"The numbers are hugely out of whack," said Dan Petegorsky, a spokesman for a group called Campaign for a Fair Settlement. "In some cases banks are five or six times as likely to kick someone out of their house than they are to forgive their debt."
The fear, said Petegorsky and other advocates, is that with each passing month, more homeowners who could have been helped will fall into foreclosure. More than 4 million families have lost their homes since 2007, when the subprime housing market collapsed.
Under the mortgage settlement, reached last March with state and federal authorities, the five settling banks -- JPMorgan Chase, Bank of America, Wells Fargo, Citigroup and Ally Financial -- agreed to resolve widespread mortgage fraud and mismanagement allegations. The deal also sought to close the book on the "robo-signing" scandal, in which bank representatives allegedly forged documents and signatures in order to speed foreclosures through the pipeline. (The deal is separate from an $8.5 billion legal agreement reached in January between 11 mortgage companies and two federal bank regulators over similar "servicing" abuse claims.)
The court appointed Joseph Smith, a former North Carolina banking commissioner, to oversee the $25 billion settlement. His report is based on data reported from the banks. Smith has not yet confirmed the data, he said.
Even so, his report offers a detailed state-by-state look at where the banks are directing the relief, and what options they are choosing to do so. All told, 550,000 people have received some sort of assistance valued at $45 billion, according to the report. (Because banks can claim different dollar credits for different activities, that figure does not mean they have exceeded what they promised under the settlement.)
In an interview, Smith said that while the banks are clearly favoring short sales over other forms of relief, he thinks they will ultimately forgive enough first mortgage principal debt to meet their obligations. As an example, he cited Ally Financial, the smallest of the settling institutions, which he certified had met its targets.
Smith said he believed that the "vast majority" of relief offered so far, which includes aid like interest reductions and forbearance agreements as well as principal reductions and short sales, has helped homeowners.
He said the banks still have work to do to meet the other major goal of the agreement: reforming how they manage the accounts of troubled borrowers. As of Oct 2., banks were supposed to have met 304 different standards or face financial penalties for failing to do so. Although he declined to discuss how widespread persistent problems might be, Smith noted in his report that his office had received 5,700 complaints from consumers in all states, along with 600 submissions from professionals. Complaints are on the rise, he said, though it isn't clear whether the jump is the result of the increased visibility of his office.
The Department of Housing and Urban Development and the Office of the New York Attorney General, which had key roles in shaping the mortgage settlement, did not return requests for comment. In a statement, HUD Secretary Shaun Donovan said the report "marks a major milestone in our efforts to assist struggling homeowners."
“We have already surpassed our initial expectations and the settlement is testament to the fact that large-scale principal reduction can be used an important tool in our efforts to prevent foreclosures without incurring negative results," he said.
Under the deal, banks typically get more credit for meeting their obligations for offering principal reduction than they do for other types of aid, such as interest rate reductions or short sales. But in banking circles, principal reduction has remained the most controversial option. Both Fannie Mae and Freddie Mac, under orders from Federal Housing Finance Administration acting director Edward DeMarco, have refused to permit principal reduction in most instances on their loans. Banks then can only offer these kinds of write-downs on the relatively small pool of loans they own themselves, or convince investors who bought shares of loan pools in the years before or after the housing collapse to go along. This difficulty could explain why banks appear to be lagging on principal-reduction offers.
Another possible explanation: not every borrower wants, nor would qualify for, a reduction in principal. For some, short sales are the best option. Under these agreements, the bank sells the house but doesn't hold the borrower financially accountable for the difference between the sale price and what is owed.
Even so, principal forgiveness on a first mortgage is clearly the most desirable option for most borrowers, said Elizabeth Lynch, an attorney at MFY Legal Services, which offers free legal aid in New York City. "It's the modification of the first loan that saves the home," she said.
According to Lynch, that isn't happening often enough. Instead, when banks do offer principal reduction, it most often comes on a second mortgage, also sometimes called a home equity loan, according to Smith's report. Bank of America, for example, reported it had extinguished -- forgiven the entire principal amount -- of 141,000 second mortgages, compared to just 21,000 first mortgages.
Lynch recently argued in a New York Times op-ed that eliminating a small second mortgage, though sometimes helpful, doesn't help the vast majority of borrowers struggling to avoid foreclosure and stay in their homes.
Bank of America, which has a financial obligation under the settlement roughly equal to that of the four other banks combined, said in a statement that by forgiving a second mortgage, "a reasonable payment through modification may be more attainable." Even so, the bank acknowledged, "foreclosure activities likely would have continued" in instances where a foreclosure proceeding on the first mortgage was already underway. In other words, the bank acknowledged that it can claim credit for meeting obligations under the mortgage settlement for forgiving a loan that likely never would have been paid off anyway, and in instances that do not help homeowners avoid foreclosure.
Homeowner advocates said the report also indicates that the five settling banks are targeting the most valuable loans for principal reduction, rather than those in low-income communities. The average amount of first mortgage principal reduction granted was nearly $130,000 -- just $40,000 or so less than the median home sale price for January in the U.S.
At Bank of America, first-lien forgiveness averaged $160,000 of first mortgage principal reduction per loan. Does that large figure mean that the bank has favored borrowers in high-cost areas like Southern California or New York? Does it suggest that the bank is more likely to forgive the debt on an expensive home than on one in a downtrodden area like Detroit or Cleveland, where home prices often don't climb above $50,000?
Smith said he hasn't vetted the data yet, but for homeowner advocates, not knowing the answer to those questions is the biggest frustration.
"We want greater transparency on these numbers," Lynch said. "We don't know what they are doing."
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