Servicers Extinguishing Liens DOES Help Homeowners, NOT Erasing Debt That Isn’t there
A little over a week ago, I saw a headline that Iâm sure most everyone interested in the foreclosure crisis did as well.Â It ran in the New York Times, and it read, âHow to Erase a Debt That Isnât There.â Â It was written by Gretchen Morgenson, one of my favorite columnists on the planet.
The story was about JPMorgan Chase and Bank of America, and it had to do with the National Mortgage Settlement, a topic on which Iâd spent a good portion of my time lately, what with the deadline for servicer compliance with the settlement agreementâs new servicing standards having recently come and gone.
Because it was Gretchen writing the article, the story was very quickly picked up by numerous other prominent bloggers including Mish Shedlock, who ran the story under the headline, âJPMorgan, Bank of America Forgive Debts that No Longer Exist; Wonderful News!Â But For Whom?â
Max Kaiserâs âKaiser Reportâ kicked off this weekâs RT News broadcast with his own version, âDebt Erasers.âÂ For the record, Max won the funniest phrase competition, describing the nine scariest words in the English language as being, âIâm from JPMorgan and Iâm here to help.â
BeforeItsNews.com got more serious, describing the situation as, âBanks Forgiving Phantom Debts for Bankrupt Homeowners.âÂ And then Dave Dayen got into the mix on Firedog Lake, titling his take, âAnother Foreclosure Fraud Settlement Scam: Banks Trying to Get Credit for Already Discharged Debt.â
Interest.com ran with, âWhy are banks forgiving debt that no longer exists?âÂ And then a blog Iâm not familiar with ran their own vitriolic version, âJPMorgan Forgives Debt the Bankruptcy Court Already Discharged, Defrauding US Government and Putting Millions into an IRS Tax Liability.”
In a matter of hours we saw the exact same story be transformed from the benign and inquisitive, as in âHow to Erase a Debt That Isnât There,â to the entirely untrue, âDefrauding the Government and Putting Millions Into an IRS Tax Liability.â
WowâŚ so which is it?Â Did Gretchen understate the severity of the story, or did the down-line blogger grossly exaggerate it?
So, click after click I read the story and as it spread through the Web, becoming more acrimonious almost by the minute.Â And the thing wasâŚ besides its apparent metamorphosis into something I thought Gretchen might not even recognize, something about the storyâs facts was making me uncomfortable, and yet no one writing about it was mentioning it.
Gretchenâs story focused on two homeowners.Â Â One homeowner that received a letter from JPMorgan, and another homeowner in Virginia received a similar letter from Bank of America.Â Both letters offered to extinguish each homeownerâs second lien.
Chase was offering to erase $190,065, and Bank of America, $231,767âŚ neither an insignificant sum to my way of thinking.Â The odd part, at least at first blush, was that the debts of both homeowners had already been discharged in their respective bankruptcies, and thatâs what all the headline outrage was referencing.
It occurred to me, however, that when you file a Chapter 7 bankruptcy and such a debt is discharged, while itâs true that you as an individual no longer owe it, I was pretty sure that the lien would remain on your property.Â And should you ever sell your house, any proceeds from the sale in excess of the amount of your first mortgage, would go to satisfying that second lien.Â Thatâs what I thought would happen anyway, and Gretchen’s article said as much, “Releasing the liens provides a benefit to borrowers when they go to sell their homes…”
However, since Iâm not a bankruptcy expert, but do happen to be good friends with the countryâs top bankruptcy attorney, Max Gardner, I figured Iâd take the question straight to the top.Â So I sent Max an email asking about the erasing-the-second situation.Â Max wrote back in a flash, sayingâŚ
âChapter 7 will cancel the personal debt on the note but not the lien on the real estate.Â In a Chapter 13, we cannot modify a first mortgage on the primary residence but can strip away the 2nd if there is no equity above the first mortgage.Â However, the holder and owner of the 2nd is under no legal duty to cancel the 2nd mortgage of ârecordâ until the debtor completes the plan and secures the discharge. So, do these acts of simply canceling the 2nd help, even in bankruptcy, yes.â
Thatâs exactly what I had thought, and it seemed everyone agreed. Â Forgiveness of a lienâŚ even one already discharged in bankruptcyâŚ would be a benefit to the borrower, at least in most cases.
Gretchenâs article then went into describing what she thought might be happeningâŚ
âCast your mind back to February. Five of the nationâs big banks, including Chase and Bank of America, agreed to pay $25 billion to settle state and federal claims over questionable mortgage practices and promised to work harder to help borrowers who were in trouble. To prod the banks, the government said it would give them credits against the amounts they agreed to pay.
So, to the ire of customers who couldnât get banks to work with them before, banks are now forgiving debts that no longer exist.
âWhen I got this letter that said they were going to relieve our debt, I just about fell over,â Ms. Esposito said last week. âYou canât forgive a debt that youâre legally unable to collect.â
Okay, so that was her point.Â It was the credits servicers received for forgiving various debts required by the National Mortgage Settlement… thatâs what was bothering everyone. Â Servicers would apply their credits to their requited totals in the settlement agreement. Â Some saw this as paying them to do what they had to do anyway, while I suppose others would describe the credits as necessary incentives. Â I could argue either side, but I couldnât even think of a blogger or journalist who didnât want to throw up over Â the National Mortgage Settlement for one reason or another, so it wasnât a surprise.
One blogger I know said that heâd heard the banks were getting 125% of the amounts forgiven, but that made no sense whatsoever, as that would constitute a bail out of irresponsible homeowners and no way that was happening as long as Tim Geithner was still Treasury Secretary or Larry Summers was still alive, I wasnât entirely sure which. Â So, as much as I hated to do it, I pulled up my copy of the settlement agreement in order to find out just how much in âcreditsâ the banks would be receiving in exchange for wiping out those second liens in their entirety.
It wasnât easy to find in the 304-page settlement agreement, and if I remember correctly I found the answer on page 186, but regardless, the amount of âcreditâ banks would receive when extinguishing a second lien depended on how many days delinquent each lien was, but it topped out at 180 days. Â So, for wiping out all second liens over 180 days delinquent servicersÂ would receive credits of âŚ 10 cents on the dollar.Â Thatâs it and thatâs all.
Bank of America and JPMorgan Chase could only hope to receive credits equal to 10 percent of the amounts forgiven, and that assumed Joseph A. Smith, the monitor for the National Mortgage Settlement, approved the transaction.Â So, in exchange for erasing $231,000, Bank of America would be looking at $23,100 in credits that would go towards their total, which was something like $9 billion.
I hated to say it, but it wasnât exactly the sort of pay back that would motivate me personally to forgive a debt of $231,000, but thenâŚ Iâm not a bank, so what do I know.
The article went on to focus only on the Chase customer, Jackie Esposito of Guilford, Connecticut..
Gretchen said that she contacted both banks, and had found their answers âless than satisfying.âÂ And she posed the question: How could they forgive debts that no longer existed?
But I was kind of satisfiedâŚ it was the liens against the properties that were being extinguished by the banks and to me that didnât seem to be nothing. Â So, I called Bank of America to ask a few questions of my own, and after pulling the appropriate records, my contact at the bank filled me in on the numbers involved.
The Bank of America borrower from Virginia had a first mortgage of $324,000, and of course the aforementioned second lien of $231,000âŚ for a total of $555,000 in debt secured by the property.
The bankâs appraisal showed the homeâs current value to be $416,000, so the homeowner was $138,000 underwaterâŚ until receiving and accepting the bankâs offer to extinguish the $231,000 second lien. Â After that, Bank of Americaâs Virginia homeowner had instantaneous equity of $92,000!Â And that had to be better than a poke in the eye with a sharp stick, as my Mom used to say.
Receiving such a letter from the bank had transformed a borrower from being underwaterâŚ to being one with a significant amount of equity once again.Â Thatâs was not nothingâŚ right?Â Bank of America erasing $231,000 for this borrower certainly was a long way from being nothing.Â In fact, it was $92,000 worth of something, regardless of the borrowerâs debt having been discharged in bankruptcy because the lien had remained on the property, as it most often would.
Gretchenâs article, however, then pointed out that in the case of the JPMorgan Chase borrower, Ms. Esposito, both her loan AND her lien were discharged by her bankruptcy proceeding.
Okay, so I wasnât at all sure what that meant.Â As I understood it, loans attach to people, liens to housesâŚ but what did I really know? Â So, I decided to look into it.
Interestingly, the public records show that Ms. Esposito’s bankruptcy, which was filed in 2009, was later dismissed by the judge, and that would mean the second lien still existed. Â A recent title search confirmed it, the second lien was still on the property.
Now, obviously Gretchen believed otherwise. Â MaybeÂ Ms. Esposito’sÂ lawyer who gave her the information for the story didn’t remember the dismissal or maybe he didn’t stop to think that it would have resulted in the second lien remaining on the property. Â Other bankruptcies were filed on behalf of Ms. Esposito and her debt was ultimately discharged even if the lien was not. Â Or, I suppose it’s also possible that Gretchen misunderstood what he said, although I’d be very surprised if that were the case, it is Gretchen after all, but I suppose anything is possible.
One way or the other, for my purposes it really doesn’t matter. Â If her lien and loan had both been discharged, that would mean that this whole thing was over Chase sending a letter to someone who didnât owe the money, telling them they didnât have to pay back what they didnât owe anyway? Â Maybe Iâve been around this crisis too long, because all of a sudden I was having trouble understanding why this story had been written in the first place, let alone echoed throughout the World Wide Web.
I was reminded of days I had spent writing about how a bank had foreclosed on a home they never even ownedâŚ cleared everything out and took it to storage as the homeowner 1500 miles away, screamed her head off as she tried in vain to get the foreclosure monster to stop.Â Compared to that sort of thing, sending a letter that would have no real affect whatsoever just seemed like an entirely forgivable offense.
Something akin toâŚ âBank letter has typoâŚ misspells the word âarrearagesââŚ film at 11?â
There was another problemâŚ the letters the banks had sent out could have been worded more clearly.Â Both banks readily admitted as much, however, and Gretchen’s article said that Bank of America immediately improved its explanation of the debt forgiveness and lien release offers on its Website and Chase committed to the same sort of thing going forward.
What happened was that both banks had sent out the same letters to two types of borrowersâŚ those with debts the banks were offering to forgive, and those with debts already discharged in bankruptcy, but with liens remaining on the property.Â That caused confusion for the borrowers whose liens were being released after their debt was already forgiven by bankruptcy.
Because when debt is forgiven the Internal Revenue Service generally views it as being a taxable event, the letters warned that the amounts forgiven would be reported to the IRS, and I can certainly see how that could cause someone to freak outâŚ at least until they called their bank and found out that in this case, there was nothing to worry aboutâŚ debts discharged in bankruptcy are not taxable.
But, Gretchenâs larger point was that she had smelled a rat.
âAll of this made me wonder: are the banksâ forgiveness letters a way to gain credits for debts these institutions are improperly claiming to have extinguished? The banks say no.â
She contacted Joseph A. Smith, the National Monitor for the National Mortgage Settlement, who assured her that there would be systems in place to review a bankâs transactions to make sure none are fraudulent. Â She quoted Smith in her article sayingâŚ
âWe will review compliance with this requirement as we will with all of the consumer relief requirements, through review of the corporate records relating to such transactions.â
Gretchenâs reply was, âGood luck with that,â which I did appreciate for its snarky qualities, but I wasnât sure that I shared her concerns.
First of all, when it comes to the National Mortgage Settlement I think so many people are paying attention that the banks wouldnât even try to get credit for questionable transactions for fear of even being accused of such a thing. Â I certainly can’t imagine them doing so in any significant Â quantity as that would increase the chances of being caught. Â And slipping one or two in here and there would hardly be worth the risk because at 10 cents on the dollar, well… it’d take a whole lot of forgiveness to put a meaningful dent in a $9 billion bill.
Would it really be worth the risk to pick up credits of what amounts to a few thousand dollars, and possibly end up with fines being imposed, an unhappy monitor you have to keep dealing with, the media sneering at you… and the entire blogosphere calling you disparaging names and feeding on whatever was left of your character?
Besides, although I donât know Mr. Smith personally, I do know Katherine Porter, Californiaâs Settlement Monitor for about $18 billion of the total amount, and I donât believe for a second that sheâs going to allow much wool to be pulled over her eyes. Â I also don’t believe that she can be corrupted under any circumstances. Â (I just interviewed Katie this past week, and you can listen to what she had to say about the settlement and her role as state monitor HERE.)
Gretchenâs article closed with Ms. Esposito saying she found the letter from Chase âespecially upsettingâ after all the years she says she spent trying to get her loan modified.
Â Gretchen explainedâŚ âShe pays 9 percent on her loan and cannot refinance it into a lower-rate mortgage, given her recent bankruptcy.â
The dreaded loan modification processâŚ
As soon as I read Â about Ms. EspositoâsÂ years spent trying to get Chase to modify her loanâŚ and then filing bankruptcy, I knew exactly what was up here… exactly why she found Chase’s letter offering to forgive her debt, “especially upsetting.” Â Sounded like she had to file bankruptcy to stop a trustee sale date, doesnât it? Â Maybe not, but it happens all the time.
I can’t comment on Ms. Espositoâs loan modification situation based on the information provided, but we all know that not everyone qualifies for a loan modification… some make too much money and others not enough. Â We also all know that many homeowners that should have been approved… weren’t… and that all involved came away from the process somewhere between extremely frustrated and disbelievingly outraged. Â In point of fact, all of this is part of the reason we have a National Mortgage Settlement in the first place, and all of the reason the settlement has new mandatory servicing standards with which the banks must comply.
Espositoâs lawyer, Neil Crane, was given the last word in Gretchenâs article, sayingâŚ
âThere is no chance that this group of institutions can help homeowners,â Mr. Crane said. âThey should not be in charge of fixing problems they helped create.â
And there it was… the final piece of the puzzle. Â I don’t know this for sure, but I’m going to go out on a limb here and say that Mr. Crane was more than just a bankruptcy lawyer for Ms. Esposito. Â He was also trying to help her get her loan modified… and couldn’t. Â Then letter from Chase offering to forgive debt came… Ms. Esposito called very upset… and here’s an idea… let’s write to Gretchen Morgenson at the New York Times.
If I’m wrong, I’ll apologize, but I’m guessing that I’m not. Â Gretchen wrote this story to legitimately question whether servicers were potentially capable of gaming the settlementâs credits system by getting credited for the illusion of debt forgiveness.Â And it’s a fair question, although as I said, it would seem to me to be an unlikely path to pursue because any significant volume would likely be discovered and small numbers wouldnât be worth the risk.
Ms. Esposito’s denial for a loan modification makes so much more sense as her motivation for sending her story to The New York Times, than her being so terribly offended by the letter from Chase.Â Loan mod angst âŚ thatâs where this was coming fromâŚ why didnât everyone just say so? Â After all, I’m practically the Sigmund Freud of loan mod angst.
Iâve spent the last six months chasing down homeowners who say that they canât get their loans modified and, of course, they all blame their servicer.Â But far more times than not, although it may have been the servicer at one time, itâs now the borrowers who have simply given up and thrown in the towel somewhere along the way. Â Don’t get me wrong, I canât blame themâŚ after a while you just canât keep trying something that not only isn’t working, but is literally torturing you.
And I have to say that Iâve been alarmed to discover just how many of today’s borrowers have given up on applying for a loan modification before they’ve even tried it themselves, but after receiving advice from a supposed expert who told them with great flourish why it wouldn’t work.
If you havenât been on the streets lately, you probably donât know this, but there are a huge number of peopleÂ today making their livings by telling homeowners that itâs impossible to get their loans modified.Â These âhelpersâ then offer to sell the homeowners a variety of fraud audits and other high-priced documents of questionable value, the idea being that homeowners can take their bank to court as a precursor to obtaining a modification.
Do any of these strategies work?Â Well, since my mother used to tell me never to say never I wonât say that, but at most, the answer would be âvery, very rarely,â as in almost lottery winner rarely.
The simple fact, however, is that the loan modifications keep people in their homes, and nothing else does in any significant number, with any consistency, or as cost-effectively. Â And now that servicers have finally been required to comply with standards that protect consumers, itâs tragic to see homeowners shunning the process by far most likely to save their homes from foreclosure.
2009: That was the year that wasnâtâŚ
While itâs true that in 2009, 2010 and even 2011, the servicersâ collective ability to help homeowners with loan modifications was at the very best limited.Â This year, however, things have been getting significantly better.Â But regardless, the numbers Iâve seen show that there have been in excess of four million modifications completed since 2009.Â A million of them are HAMP modifications.
And I don’t think you can equate those numbers with havingÂ âno chanceâ of helping homeowners?Â Â Just like I don’t think you can describe forgiving a $231,000 lien on a home Â as providing,Â âno help.â
Gretchen handled the issue with her always velvet gloves, but Dave Dayen of Firedog Lake was less diplomatic about expressing his lack of confidence in Smithâs ability to police servicer compliance related to the terms of the settlement agreement, saying…
âJoseph Smith, the foreclosure fraud settlement monitor, claims his office will âreview complianceâ of the loans and make the determination on qualification for credits. So heâs going to go through the documentation, then? But this is the whole point; the documentation is bogus!
I donât think itâs possible that banks are just nicely announcing the discharge of a lien with no expectation that they can slide some of these through the system and get credit for loan forgiveness. Otherwise, why send the letters now, in conjunction with the settlement? And BofA admits to sending 12,000 of them. Even a small percentage getting through means they get settlement credit for millions, perhaps tens of millions, of dollars of phantom debt that they could never collect anyway.â
UnderstandâŚ I canât say with any certainty that Dayen is going to be wrong.Â First of all, heâs a very smart guy, and secondly, after what weâve all seen during the last few years in terms of oversight of federal programs, Iâd readily admit that anything is possible.Â But, I do have to ask the questionâŚ
Why shouldnât servicers receive credits for extinguishing second liens?Â
Iâm not talking about second liens that have been discharged in terms of both the debt AND any lien against the property, as Ms. Espositoâs situation was described.Â I mean regular second liens, the type that is otherwise just sitting there waiting for the house to sell for more than is owed on the first mortgage.
Dayen says the banks would be getting credits for writing off money âthey could never collect anyway,â but thatâs not entirely accurate either, right?Â A lien on property could end up being paid when the property sells.
If the lien is still secured by the property, as is true in the vast majority of instances, then the borrower is unquestionably benefiting when itâs extinguished.Â Â Why shouldnât the bank get the credits that are calculated at 10 cents on the dollar, assuming the lien is at least 180 days delinquent, which if discharged in bankruptcy all undoubtedly are?
Â A house with a lien.Â
Dayen says that banks could earn millions or tens of millions in credits through this method.Â But, itâs 10 cents on the dollar that is being reimbursed here, regardless the total, and it seems to me that an extinguished lien would be worth at least ten percent of its amountâŚ I donât knowâŚ doesnât it seem reasonable to anyone else?
Several other articles also raised the possibility of a servicers imposing a tax liability resulting from the forgiveness of debt by the bank, on the homeowner, but no one was particularly definitive about how this would work, and I suppose it depends on a number of factors, including what the amounts loaned were used for, and a law that as of today is due to expire at the end of this year that allows amounts forgiven to be tax-exempt under certain circumstances.
But clearly, the IRS views forgiveness of a lien as providing a benefit to the borrower because, these circumstances notwithstanding, in general such forgiveness is a taxable event.
An exploding tax bill?
Bank of America FAQs, and Iâve provided a link to them at the end of this article, explain that borrowers who receive letters offering to extinguish their second liens can contact the bank should they want to decline the bankâs offer, and although I personally would think that itâs better to pay a small tax as opposed to a large debt, that decision is left to the borrower.Â No one is forcing anyone to have their lien forgiven.
And, think about where weâre doing hereâŚ do we want such debt to be forgiven or not?Â Are we saying that we do, but only if itâs tax-free? Â FineâŚ then extend the law that makes it so. Â Otherwise, blaming the U.S. Internal Revenue Code on Bank of America or JPMorgan Chase seemsâŚ well, a little silly.
Donât get me wrong, Iâm not suggesting that we paint any overly rosy pictures of the settlement or what itâs like to get a loan modified, Iâm only interested in being accurate.Â Because when you look at the numbers, itâs abundantly clear that if weâre going to save homesÂ from foreclosure in any even remotely meaningful number then weâre going to need to modify loans. Â It’s not my “opinion, nor is it debatable.
Water is wet, the sky is blue and there are millions of homes that have been saved as a result of modified loans.Â How many have been saved by the second most successful way to save a home from foreclosure?
I donât even know what the second most successful way to save a home from foreclosure would be, except maybe short sales, but thatâs not what I mean.Â I mean saved a home, as inÂ the people still live in it.Â Would the number two method for saving a home from foreclosure be successful litigation, because if thatâs the case there’s no reason to get your calculator outâŚ it isnât anywhere closeâŚ loan modifications save homes more than any and all sorts of litigation by a factor ofâŚ I donât even know… a million?
By perpetuating tales of loan mods in 2009, weâre doing homeowners a great disservice by coloring their views, adding to their frustration, and ultimately driving them into the arms of those that profit from telling homeowners that loans never get modified. Â When we cause borrowers to fear a modification process that has changed significantly and in many ways no longer exists, we become in some number of cases the proximate cause of people losing their homes.Â Why would WE EVER want to do that?
Just look at the echo effect that this story had, and with each subsequent version of the story becoming harsher and harsherâŚ as you read a dozen variations on Gretchenâs theme, it starts to feel like âdeath panels,â or anything of the other urban myths that became increasingly believable as they were repeated.
I talk to at least a dozen homeowners at risk of foreclosure every single day, and have been doing so for just a month shy of four full years.Â Back in 2009, when HAMP was just getting started and Secretary Geithner was considering homeowners âfoam for the runway,â I wrote about the fact that it was a torturous process, and I was very critical of servicers for their treatment of homeowners in that process.
But this year things have finally been improving, at most of the servicers. Â And it’s not just me who is saying that… calls to foreclosure defense lawyers around the country have consistently confirmed it… loan modifications have gotten better in 2012.
Understand, getting a loan modified means you can’t make your payments, it’s never going to feel like being a bank’s one millionth customer complete with a band, balloons and confetti, but this year the process of getting approved for a loan modification bears little resemblance to that of 2009.Â For example, I don’t regularly hear about servicers repeatedly losing paperwork anymore, and I canât remember the last time I saw a trial modification not be converted to a permanent one. Â I couldn’t have said either of those things in 2009, 2010 or 2011. Â Also, I’ve seen approvals take a few weeks on more occasions than I could count, and never more than a few months. This is as opposed to the years some people spent in the hellish approval process of the past.
And I’m not here to argue about whether loan modifications are any sort of ideal answer to anything. Â I’ve written to inform, educate, entertain and protect homeowners for four straight years without any sort of commercial interest… over 800 articles and many as maddeningly long as this one… I’m only here to help who I can. Â If we’re on the Titanic then loan modifications are the lifeboats. Â So, until someone shows up with a feet of helicopters, another ocean liner, a submarine, or something that will stop this ship from sinking I’m going to go ahead with recommending the damn lifeboats, capiscee? Â You want to swim for it, Mark Spitz, be my guest.
CONSIDER THIS… over the last two years, two very positive Â developmentsâŚ the the widely publicized document fraud of the ârobo-signingâ scandal, andÂ the FTCâs Mortgage Assistance Relief Services Rule, MARS for short, combined to have an unintended and perverse effect on the foreclosure crisis. Â The “robo-signing” scandal was and still is the best thing to happen to the worthless paper audit industry since the laser printer. Â And the MARS Rule pushed the loan mod scammers into less definable job descriptions making them harder to identify for homeowners and harder to shut down for law enforcement.
What started as forensic loan audits that relied on software to primarily identify TILA (âTruth in Lending Actâ) violations has become an industry offering securitization audits, chain of title audits, and now credit default swap audits, and each one can set you back several thousand dollars, or more.Â Why would you put yourself through the torture of applying for a loan modification when for only $5 – $10,000 in audits, plus $1500 a month for an attorney, you can be armed with everything you need to sue your bank for some sort of fraud and win… oh, let’s see… how about NEVER.
After all, donât you read the news?Â They donât know who owns your loanâŚ they lack standing to forecloseâŚ your loan never made it into the trustâŚ thereâs fraud in your loan because of MERS or because Mickey Mouse signed something and Donald Duck notarized it, and besidesâŚ your loan has been paid off three times by various insurance policies, so you donât owe your mortgage anyway.
Loan mods donât work, everyone knows that.Â And the settlement is a sham.Â Didnât you read Gretchen Morgensonâs article last week? Â Yves Smith, Abigail Field? Â Ellen Brown? Â It’s obvious that what you need to do is sueâŚitâs your only hope… the only way to save your home.Â Can I interest you in a Bloomberg audit on sale for $3000?
If you think it was easy or fun to write this article… you’re wrong. Â It wasn’t either of those things. Â Those people I named above… Gretchen, Yves, Abigail, Ellen… I know them and I really believe they’d rather cut off a finger than knowingly assist someone who is ripping off homeowners struggling to save their homes from foreclosure. Â And yet, out on the streets of America where the foreclosure crisis lives and is very real… they do every day. Â And so have I with what I’ve written on countless occasions.
I’m not just saying that in some sort of metaphysical way either. Â There’s no two ways about it… down this rabbit hole we call home, what we write can be a double-edged sword.
A long way to goâŚ
Valparaiso Law School Professor Alan White, writing on the blog, Credit Slips recently, made clear the followingâŚ
âThe good news is that the performance of modifications continues to improve, according to the latest OCC mortgage metrics.Â As more and more modifications reduce interest rates and payments, and even principal, the number of re-defaults steadily and continually goes down.Â Only 22% of 2011 modifications later went seriously delinquent or were foreclosed.â
âPrincipal write-downs were featured in 20% of HAMP mods versus about 7% of in-house mods.â
ââŚ banks are writing down principal on 28% of their portfolio loan mods and 16% for private securitized loan mods.â
He also points out the obvious, just as Iâve said so many times I canât even bring myself to talk about it most of the timeâŚ
ââŚ there have been 4.5 million completed foreclosure sales since 2007 and there are still between 4 and 5 million mortgages delinquent or in foreclosure now.Â Defaulted mortgages are still considerably more than 10% of all mortgages, at least double the rate in normal times, and the foreclosure inventory is still at about quadruple the pre-crisis rate.Â
There are many ways to extrapolate the trends, depending on whether you use quarter-over-quarter changes or year-over-year changes, but we undoubtedly have years to go before the foreclosure crisis can be declared over.â
Undoubtedly, is correct, Mr. White.
Only the best intentions…
I knowâŚ everyone hates the settlement for all sorts of reasons.Â And the idea of applying for a loan modification, for many, ranks right up there with having bowel resected.
But, the National Mortgage Settlement is what weâve got, and itâs not going to change because weâre unhappy with how it went.Â It goes without saying that itâs not enough money, and as Abigail Field has pointed out with great passion on several occasions, there is always the potential for disappointment. Â But I don’t believe that Abigail would want any homeowners to decide, based on her harshest criticism, on a path that ends with the unnecessary loss of their home. Â She means every word that she writes, but that doesn’t mean that she’s writing for the same purposes with which you may be reading.
What the settlement does offer, in addition to principal reductions for certain borrowers, is a set of new servicing standards that promise to make the loan modification process significantly better for homeowners. Â Will it make things perfect… not a chance. Â But I know a lot of homeowners who lost everything in 2009 or 2010, that would have done anything for any sort of improvement back then.
And itâs not just things like a prohibition on dual tracking and rules for communicating with borrowers, there are some 304 pages describing these new rules that now apply to the loan modification services at the top five servicers, and monitors to ensure their compliance.Â In California, the standards have even become state law.Â And last week all five servicers stated publicly that they are operating in compliance with the new standards as of now.
I know what happened here.Â A homeowner was denied for a loan modification and her lawyer told her she would have to file bankruptcy to stop the sale of her home. Â It was hell. Â Then sometime much later, she got a letter from Chase offering to erase her second lien that had already been discharged by her bankruptcyâŚ and report it to the IRS.
She flipped out, even though there was no risk of a tax liability, and her lawyer thought it would make a good story for Gretchen Morganson who wanted to legitimately question what was going on.Â And then everyone saw the story, and 100 blogs jumped on the bandwagon. Fair enough.
As a result there are untold thousands of homeowners who now believe this was evidence of continued servicer malfeasance… proof positive of servicers trying to get away with something by obtaining credits for debt forgiveness, without actually forgiving anything.Â Some undoubtedly found it further evidence that the settlement was something to be ignored, like the OCCâs independent foreclosure review.
How do I know that? Â Because that’s what they’ve told me as they’ve gone off to lose a lawsuit rather than apply to have their loan modified.
Weâre not happy with the settlement… fine. Â But that doesnât mean that homeowners are best served by ignoring itâŚ or by not opening the mail that offers a principal reductionâŚ or now that new standards exist,Â trying to get their loan modified before that isnât an option anymore. Â Weâve lost something like 4.5 million homes to-date, and there appears to be 4.5 million more foreclosures on the horizon.Â Canât we all imagine the suffering we’ll all feel in our country with a foreclosure crisis more than twice as large and severe as what weâre experiencing today?
Homeowners now at risk of foreclosure are beyond confused as to what they should do.Â And they look to us for insight and guidance as they struggle to determine whatâs real and whatâs not.Â Gretchenâs column, along with Dave Dayenâs on Firedog Lake, among others, are sources of information that homeowners trust and deservedly so.
And I understand as much as anyone could, the urge to take a bite out of the banks, the settlement, the administration, treasury, Congress, and numerous others that have largely ignored consumers over the last four years.Â Even dramatic understatement of todayâs situation would provide the material needed to write a financial-disaster-end-of-the-world-type-screenplay. Â It doesn’t need to be puffed up… it’s bad enough when just plain old accurate.
Four years ago, those writing about the financial and foreclosure crises understood above all the need to be heard in the hopes of affecting change.Â And we were, and we are. Â The statements we make, and the positions we takeâŚ guide todayâs homeowners. Â For whatever it’s worth, I guess thatâs all Iâm trying to say.
P.S. In case you want to see what Bank of America had to say about the program, hereâs a link:
Bank of America Notifies Eligible Mortgage Customers of Second Lien Mortgage Debt Extinguishment