The Los Angeles Times wrote a story last Thursday about the mortgage settlement. And it is seriously off base. We'll have a column on the settlement later this week, but first, let's clear up a few errors in this near editorial.
First off, the basic premise of this whole story is off: banks foreclosing is not a crime. Borrowers who have defaulted on their payments may not be "deadbeats," but they nonetheless are not entitled to live in a home they can't pay the mortgage/rent on. This doesn't mean the process should not be followed, or that banks should treat their customers like crap. But bad customer service doesn't mean shirking the justice system. With this in mind, let's look at the LA Times piece:
The massive mortgage settlement may be setting new national standards for loan servicing, but it may be too little and too late to help troubled homeowners.
Many homeowners will see reductions in the principal they owe on their mortgages. In California, those who endured foreclosure probably will see checks averaging $1,500 to $2,000.
"It's a form of very rough justice," said Paul Leonard, director of the Center for Responsible Lending's California office. "There's really no screening to determine whether these were wrongful foreclosures; they're going to give something to everybody regardless of the circumstances."
Mr. Leonard is right that it is rough to just hand out money to anyone who was foreclosed on. The early details we've seen suggest that anyone foreclosed on by one of the five banks involved in this settlement between 2008 and 2011 will get a check. That is not justice. That is what happens when class action styled settlements do not go to court. But as there were thousands who were foreclosed on early because the paperwork was not reviewed properly, it is just that there be a fine for the robo-signing activities.
But to underwater homeowners such as Samuel Guzman, whose three-bedroom Westminster home was foreclosed in August, it's all "too little too late."
"It's not going to solve the problem," said the hairdresser, who along with four family members is trying to avoid eviction. "It's not going to make things right."
Let's get something straight, the mortgage settlement was supposed to be about robo-signing. There was foreclosure paperwork, most of which was justified as borrowers were four-months or more late on their payments, that was not properly reviewed. Underwater homeowners were not supposed to be helped out by this deal. So of course it does not solve their problem. Nor do the banks have to "make things right" with borrowers whose homes have lost value. Most financial officers thought housing prices were not going to go down ever. Most borrowers thought housing prices would rise forever too. This was way off base, but not a crime on either part. The LA Times dropping this bit in the early part of the story is distracting and distorting.
Guzman, 61, bought the home in 2001 for $211,000. When he added a room several years later, he took out a risky, adjustable-rate loan, which he quickly realized was "a balloon that was going to explode."
But he was locked in. By mid-2009, he was running behind on payments. Wells Fargo Co. rejected his loan modification application five times, he said. Guzman said he tried to pay off some of his $500,000 debt with a Treasury bill, which he said Wells Fargo declined.
He hired a lawyer. No luck: The bank foreclosed on the home in August and began threatening eviction.
So in December, Guzman filed for bankruptcy as "a kind of hail Mary to keep from being locked out." He's put "No Trespassing" signs in front of the property in an attempt to keep authorities away.
But just in case, he's slowly clearing out his furniture.
"Right now, I'm on my last leg," he said. "I've done everything I can. I'm just waiting for somebody to crush me."
That situation is really tough. No doubt. And there are plenty more like it. Banks are not really obligated to modify a mortgage, so there is no one to blame here. Bankruptcy is a good option in many cases though.
The sentiment was echoed outside a downtown Los Angeles building where California Atty. Gen. Kamala D. Harris announced the state's role in the settlement. About 100 Occupy L.A. activists assembled to deride the deal, calling the government a "sell-out" that lets banks "off the hook."
The deal is certainly a sham that won't hit the banks hard, but not in the way Occupy L.A. might think initially. Bear in mind, though, that the crime committed here was 1) foreclosing on people who were not supposed to be foreclosed on, and 2) not reviewing foreclosure paperwork properly, resulting in some borrowers being foreclosed on faster than the backlog of processing would have had them out of their homes otherwise.
The penalty for wrongful foreclosure should be steep. But even if everyone that was foreclosed on was given the full value of their mortgage and their homes back, plus even some kind of high restitution payment of $100,000, since there are only a dozen or so cases like this, the total costs would be something like $50 million to $100 million. So how is a $1.5 billion settlement pool for homeowners that were robo-signed letting the banks "off the hook"?
It is when you look at the other parts of the settlement, the principal modifications and refis, that the settlement begins to look sketchy. The headlines make it seem like the banks are paying $25 billion—but in fact since modifications and refis are paid for by the investors in the mortgages taking the loss, the headline is deceptive.
Real estate consultants Gayle and Ceara Threets lost four Bay Area homes — three to foreclosure and one to a short sale — when the recession hit. The couple, whose decimated credit now forces them to rent, said the settlement should have included provisions to help foreclosed homeowners repair their credit faster.
"People have already lost their homes — you can't replace that," said Ceara, 37. "The thing that would really help is if there was a way for homeowners who have lost their homes to come back to the market faster instead of having to wait."
Why should a legal investigation into foreclosure processing failures help borrowers who buy homes as an investment restore their credit? Do we let people with investments in other asset classes get a pass when their investment goes south? If borrowers lost their homes because they could not afford them, then why would they be trying to get back into homeownership quickly? One of the biggest problems of the housing bubble was the instant gratification mentality that drove so many into homeownership too quickly. And if you were a real estate consultant that did not see the housing price trend as falsely understood, should you really be getting back into homebuying?
Like many other struggling homeowners, the couple said they had been up to date on payments until the recession hit. Three of their properties were rental units. They said they were proactive about calling Washington Mutual — since taken over by JPMorgan Chase & Co. — about their options before they began to fall behind.
But the bank, the Threetses said, wouldn't talk to them until their homes were underwater. So it only makes sense for mortgage servicers to give such home buyers a second chance, they said.
"These are people who entered the market with 700 credit scores, who were and still are very responsible," said Gayle, 41. "It took a whole collapse of the system to make them fall delinquent."
Being underwater on a home does not mean being in default. The system's collapse did not make people delinquent, but rather people defaulting on their mortgages, piling up losses for financial institutions, led to the collapse of the system. (And this is not to mention that the "collapse" of the system was more about prices returning to their normal level.)
So if these investors were up to date on their payments when the recession hit, and they eventually lost their homes, then either people stopped renting from them—which is always a possibility for investors in rental properties—or they stopped making payments to avoid "throwing money away." In either case, the investor is clearly the one who took the risk, would happy take all of the upside, but is looking for a handout on the downside. Not a very sympathetic example. And nothing—nothing—to do with robo-signing. Why is the LA Times including them in this story?
It took another, well-publicized Occupy protest last month to get Bank of America to offer to work on Virginia Hosking's loan — just as the bank was kicking her out of her foreclosed Whittier house, she said.
Hosking, 55, had participated in the protest to vent her frustration with the bank. After her husband died in 2010, the institution refused to let Hosking replace his name on their modified loan with that of her son, she said.
Bank of America then stopped accepting her payments and told her she no longer qualified for the modified loan, she said. Hosking, who lost her job as a security guard in November 2010, was told that she owed $34,000 immediately on her home of 30 years — a number that failed to factor in the $14,400 she had paid over the past year, she said.
Unable to pay, she was forced to move. After she showed up in local news coverage of the Occupy protest, Bank of America said it would help refinance her loan — but only after she landed a job, she said.
Thursday's settlement, she said, offers a mere pittance.
"Look at what it's cost me, the emotions I've had to go through," said Hosking, who said she's lost 25 pounds since August. "They want to give me $2,000? That's nowhere near enough. Why would they think they could buy their way out of this?"
Again, that is a rough story. And the bank was clearly at fault. But that is not the robo-signing issue. This is a separate matter from the robo-signing case. This woman should get separate restitution, rather than being lumped together with processing failures.
Also upset are veterans such as Roland Yee, 45, who began falling behind on his mortgage payments three months ago and received a foreclosure notice from his bank not long afterward. But because he has a Department of Veterans Affairs loan, which along with loans from the Federal Housing Administration, Fannie Mae and Freddie Mac are not included in the settlement, he's excluded from the benefits of Thursday's deal.
The settlement covers only about 10% of all the mortgages in the country, according to the Neighborhood Assistance Corp. of America.
The settlement does not include the GSEs because they did not robo-sign anyone. Certainly some of the servicers that they contract to engaged in some robo-signing, but they didn't negotiate to be in this deal. It was the five banks that got on board, and other nine banks or so could also join in the coming months. Also, according to Inside Mortgage Finance, Ally/GMAC, Bank of America, Citi, JPMC, and Wells Fargo handle payments on 55% of U.S. mortgages. Not sure what the LA Times source could have been measuring, especially since we don't have a detailed settlement document yet. This is the kind of information that a leading news paper like the LA Times should be including in its reporting.
"I know the economy's bad," said Yee, a Desert Storm veteran and Corona resident. "But it's upsetting that the government would implement all these different funds, but I'm not able to get any of it. It could have lowered my principal and interest and made it affordable."
Since the recession hit, his wife has lost her teaching position and Yee's construction work has been spotty. The family tore through its savings to keep paying the mortgage and is now "struggling to keep the lights on" with $9,000 in debt, he said.
"We're not asking for them to take the payments away," he said. "We just want help, to get to a clean slate again."
The entitled attitude of the borrower is understandable. But what is upsetting is that the government went along with this unjust scam of a mortgage deal. Why should the government be lowering principal on homeowners today because of mortgages they robosigned in the past few years? Whether or not this last family featured by the LA Times is able to modify their mortgage is unrelated to the settlement and the story should not be framed this way. It is misrepresenting the true narrative and missing the whole point of the settlement's problems.