The long-anticipated foreclosure settlement announced last week by President Obama and the state attorneys general includes $5 billion that will flow to the states to support foreclosure prevention efforts, including the work of legal services and housing counseling providers. Given questions about whether the settlement will do enough for homeowners who are at risk of foreclosure, this funding for counseling and legal assistance is critical.
The track record of the five big banks at the heart of the settlement (Bank of America, JP Morgan Chase, Wells Fargo, Citigroup and Ally Financial) suggests they are unlikely to implement an effective and ambitious loan modification program without outside pressure and oversight. These loan servicers collect monthly mortgage payments when a loan is going well, and manage foreclosure proceedings and loan modification negotiations when a homeowner is struggling. But homeowners consistently complain that servicers lose documents, evade phone calls, and charge unwarranted fees. The shortcomings of the Obama Administration's HAMP program illustrate the dangers of relying on the banks' voluntary efforts to solve our foreclosure crisis.
Although the deal appoints an independent monitor to oversee implementation of the settlement, we need multiple watch dogs and facilitators. Legal advocates and counselors who meet with homeowners every day are well positioned to make sure people receive the relief they've been promised. The $5 billion allocated to the states should go to these programs and not be diverted.
For a second dispatch (see the first here), I spoke with Vicki Taitano of the Maryland Legal Aid Bureau. Vicki appears in the multimedia series, Fighting Foreclosure: Why Legal Assistance Matters, a joint project of the Brennan Center for Justice at NYU School of Law and the National Coalition for the Civil Right to Counsel, produced by Sarah Reynolds.
The series focuses on the perspectives of people who have experienced firsthand what happens when homeowners go up against banks and mortgage servicers without an advocate at their side. Now more than ever, these homeowners' stories are instructive: Whether this ambitious legal settlement is a substantial step toward solving our foreclosure crisis, or another missed opportunity, will depend in large part on whether struggling families have access to skilled legal assistance.
Dispatch #2: Vicki Taitano, Director, Maryland Legal Aid Bureau Foreclosure Legal Assistance Project
Vicki and her colleagues have assisted nearly 500 homeowners over the past two years. Louise Golden, a homeowner featured in today's video, was able to avoid foreclosure after Vicki got involved in her case.
What is one aspect of the foreclosure crisis that has been overlooked by the media?
The number of people who are just barely hanging on because of underwater mortgages and the refusal of banks to allow homeowners to refinance out of them. Homeowners are stuck paying high monthly mortgages on homes that are worth far less than the amount owed on them.
Many homebuyers did not realize how high the payments on their adjustable rate mortgages would go, and they were told at the time of purchase that they would be able to refinance before payments got too high. So there is a double whammy of high mortgage debt on houses that are now underwater, and monthly payments beyond their means. Millions of homeowners are stuck with homes that suck up all of their income and bring them no long-term financial security. They are glorified renters, who are responsible for taxes and insurance and upkeep of properties that are no longer assets. If they walk away, they are stuck with massive deficiency debt for which they will need to file bankruptcy to ever hope to recover.
From where you're sitting, what, in your view, is one of the main challenges facing homeowners in foreclosure?
Servicers, who are the middlemen in a foreclosure situation, are motivated financially as part of their own systems, to foreclose, and the legal system is unable and/or unwilling to intervene.
Despite the fact that banks have been bailed out, the government has not required them to modify loans when a modification makes economic sense. It is counterintuitive to think that they would not do this, but the servicer as middleman often results in a foreclosure when a less than drastic modification would have been financially better for both the investor and the homeowner. Servicers are set up to get the foreclosure rolling and get it completed.
For example, homeowners have difficulty getting information from servicers about steps they could take to help their situation. Servicers tell homeowners that their income is insufficient for a modification that may allow them to avoid a foreclosure sale. However, homeowners are often able and willing to rent out a room or work another part time job to increase their income and become eligible for a modification.
By some estimates, we are only halfway through our nation's foreclosure crisis. What is the biggest change we need to make in addressing this problem going forward?
Banks need to agree to lower the principal balances on underwater mortgages to reflect market value of the property. We need lenders and investors to recognize that prices are not going to return to the artificial heights caused by the housing bubble and that the idea of "moral hazard" on the part of homeowners ignores the role of the banks in putting homeowners in the situation they are in. When banks refuse to lower principal and instead foreclose, they end up selling the property below market value and incurring costs of foreclosure. This only reduces property values further. It makes no economic sense and is only done for fear of admitting their role in the mess.