Consumer Law & Policy Blog

October Foreclosure Crisis Update

By Alan White

October’s mortgage securities investor reports are out and the news is discouraging.  The foreclosure inventory is unchanged and modifications are still down from earlier this year.  There is little evidence that Treasury’s Home Affordable modification program is yielding more permanent modifications than were being done before.  We’ll know more when Treasury releases their October numbers in the second week of November.

The data also continue to show wide random variation among mortgage servicers.  Some are modifying a lot, and some are foreclosing a lot.  The chart above shows raw numbers of modifications and liquidation sales from the October (9/25-10/26) Columbia collateral file (not all servicers are represented), which covers about 5% of mortgages and 20% of foreclosures nationally.

Can we talk? How servicers undermine mediation

By Alan White

More than 25 states and localities are using mediation programs of various kinds to address the foreclosure crisis.  These programs assume that many foreclosures could be prevented if only the servicer and homeowner could break through all their communication problems and talk until they reach an agreement.  Homeowners won't return calls, the mortgage industry complains, and if only we could talk, we could work it out.

A new study of 800 settlement conferences held in New York City in June and July 2009 found that homeowners came committed to serious negotiation, and in nearly half of the cases with documents and/or having made a loan modification proposal.  Servicer attorneys, on the other hand, came to conferences without settlement authority, without documents and without knowing the servicer's settlement position or even the status of a modification request.   

The National Consumer Law Center's report on state mediation programs points out the limitations of voluntary conciliation programs that do not require mortgage servicers to participate in good faith.  Very few mediation programs deny foreclosure relief until the servicer has completed a modification analysis and explained their decisionmaking.  The mounting evidence is that servicers do not provide timely and accurate responses when homeowners seek foreclosure alternatives.  It will be interesting to see Treasury Department reports on servicer compliance with HAMP Directive #7, which calls for homeowners to have their modification request acknowledged in 10 days and decided upon in 30 days.

Fabulous Philadelphians

By Alan White

Besides having a world-class orchestra and  baseball team, and stunning Art Deco hotel for this week's National Consumer Law Center conference, Philadelphia boasts a wonderful legal community that continues its extraordinary collaborative effort to tackle the foreclosure crisis.  This afternoon I stopped by now-famous room 676 City Hall weekly foreclosure court. Out of about 80 new judicial foreclosure filings scheduled for mediation conferences where the defendant was served, about 60 defendants actually showed up and began the process of negotiating a resolution.  A 75% response rate from foreclosure defendants is amazing, as any counseling agency, hotline or mortgage servicer will attest.  The key to Philadelphia's success is a combination of aggressive outreach and mandatory, automatic scheduling of conferences in every new foreclosure case.  Whenever a new foreclosure is filed for an owner-occupied home, the plaintiff serves the homeowner with a court-generated case management Order scheduling a date, time and place for the mandatory conciliation conference.

A quick look at mortgage investor reports reveals that Philadelphia is well ahead of the nation in foreclosure prevention.  In the month of September 2008, about 4% of Philadelphia mortgages in foreclosure were liquidated and sold by servicers, compared with a 12% foreclosure liquidation rate for the month nationwide.  Meanwhile modifications that month amounted to nearly 10% of Philly mortgages in foreclosure, compared with 7% nationwide. 

The success of the Philadelphia program is not due merely to good intentions.  The City government, bar association, legal services programs, housing counselors and court system have joined together to do the necessary outreach, staffing of weekly mediation conferences, follow-up and the tedious work of getting mortgage servicers to yes.  The system is not free; good mediation and foreclosure prevention costs money, for counselors, lawyers, mediators, and court time.  It also requires a community commitment to results, shared by lawyers for servicers and borrowers and the judicial system.  Makes me proud to be a Philadelphia lawyer. 

When Wall Street talks, Secretary Geithner Listens

Interesting story on Treasury Secretary Geithner's telephone logs, showing he talks with Goldman and Citi CEOs more frequently than the chairs of the House and Senate Banking committees.  HT Melissa Huelsman.

Home Affordable's weak start

By Alan White

            Two important reports on the foreclosure crisis and the Administration’s plan to end it were released on Friday.  So far the Home Affordable modification program (HAMP) is looking like an expensive failure.  Most disturbing is the conversion rate of temporary modifications to permanent ones, which is less than 4% for temporary mods initiated last April and May.  Servicer performance remains wildly inconsistent, and hundreds of thousands of homeowners who want to save their homes are slipping through the cracks.  The good news, I suppose, is that HAMP stimulated servicers to find half a million homeowners who appear to be suited for modifications rather than foreclosures.

            Treasury’s report of September data continues the approach of jealously guarding information about HAMP that does not cast it in a positive light.  The October monthly data report consists mostly of useless fluff, i.e. a bar graph showing the cumulative number of trial modifications, rather than simply reporting month-by-month totals, as HOPE NOW did.  The monthly totals of temporary modifications for July, August and September are around 100,000 to 120,000, basically the same number as the permanent modifications the industry was doing voluntarily before HAMP.  In fairness, servicers also closed 50,000 to 70,000 permanent modifications during those months, without HAMP subsidies.

            Treasury chose not to reveal the number of permanent modifications in September, which are appallingly low.  That information appears in the Congressional Oversight Panel’s report on HAMP.  After six months and 487,000 trial modifications, HAMP has resulted in fewer than 1,800 permanent modifications.  Nearly half of the permanent mods were done by a single servicer, Ocwen.  Even if we consider only the 50,130 temporary mods reported for the first two months of HAMP (April and May), the conversion rate is shockingly low.  The policy wonks who came up with the trial modification plan assumed that after culling out the homeowners who failed to make three payments, the rest of the trial mods would seamlessly convert to permanent mods in month four, given that three months should be sufficient to get the necessary paperwork in place.  It seems highly doubtful that 96% of homeowners with April and May trial mods were not able to make three payments.  The problem, therefore, must lie in servicers obtaining and completing the income verification and written agreement necessary to conclude a permanent mod. 

Foreclosure Update

By Alan White

Two years into the foreclosure crisis, the problem is still getting worse.  July saw a new record high in foreclosure starts of 280,000 for the month, according to HOPE NOW.  Mortgages are entering the foreclosure pipeline at a rate in excess of 3 million annually, more than quadruple the pre-crisis rate of about 700,000 annually, or 60,000 per month (in the first quarter of 2006.)  Delinquencies also continue to rise, according to most reports.  Monthly foreclosure sales are also rising, although they remain at only about one-third of new foreclosure starts.  As a result, millions of homeowners have foreclosures hanging over their heads, but are muddling along in bankruptcy, payment plans, modifications or servicer neglect. 

Meanwhile, modifications are down.  Well, permanent modifications are down.  If we add the roughly 360,000 temporary Home Affordable plan modifications reported by the Treasury Department (May through August) to the permanent modifications reported by HOPE NOW, there is some cause for optimism.   The combined total would translate to roughly 180,000 monthly modifications, a 50% increase from the first quarter of 2009.  The problem is that we don't know how many temporary modifications will successfully convert to permanent ones, so it is too soon to judge the success or failure of the Administration's plan.  The acid test, of course, will be whether the foreclosure filings start to decline.  That may require some stronger medicine, including extended unemployment benefits, tackling the principal reduction issue, and other measures to address the multiple causes of the foreclosure crisis.

HAMP Update

By Alan White

Trial mortgage modifications under the Home Affordable mortgage program (HAMP) have reached about the same levels that servicers were achieving voluntarily in the first quarter of 2009.  Treasury's unhelpful data presentation in its second monthly report on mortgage modifications posted today touts 360,000 temporary mortgage modifications, but that is for the life of the program, i.e. since April.  By comparing this report to the first one issued last month, we can infer that about 125,000 new trial modifications were concluded in August, a number about equal to the permanent modifications servicers reported each month in January, February and March. 

To be fair, there were probably some voluntary permanent modifications done outside the HAMP program as well, although my data on securitized mortgages indicate a big decline in permanent modifications in the last two months.  The Treasury report does not tally any permanent modifications under the program, or report the number of foreclosure sales, foreclosure starts, or delinquent mortgages, as the HOPE NOW reports do.  It thus fails to provide meaningful yardsticks to evaluate the success or failure of the program.

While it is still early, the HAMP program to date has not made any significant impact on the number of foreclosures, and modifications are still well behind new foreclosure filings.

Kurt Eggert Article on Securitization

Kurt Eggert of Chapman has written The Great Collapse: How Securitization Caused the Subprime Meltdown, 41 Conecticut Law Review.  Here's the abstract:

This Article builds on existing criticism of securitizing subprime loans and argues that one of the primary causes of the subprime meltdown and the resulting economic collapse was the structure of securitization as applied to subprime and other non-prime residential loans, along with the resecuritization of the resulting mortgage-backed securities. Securitization weakened underwriting by discouraging originators from gathering “soft information” about the likelihood of borrower default and instead caused loan originators and other market participants to focus almost exclusively on such “hard information” as FICO scores and loan to value ratios. At each stage of the loan and securitization process, securitization encouraged market participants to push risk to the very edge of what the applicable market standards would tolerate, to make the largest, riskiest loans that could be sold on Wall Street, to bundle them using the fewest credit enhancements rating agencies would permit, and then to repeat the securitization process with many of the lower-rated mortgage-backed securities that resulted. Loan originators could profit by bargaining down the due diligence of other market participants and so reduce their own underwriting standards. Securitization also created a business model for subprime lenders whereby they could “profitably fail.” Thinly capitalized subprime lenders could generate large numbers of loans likely to default, along with substantial profits for the executives who directed them, and then simply exit the market when they predictably lost their access to the securitization pipeline.

HAMP: Is It Helping?

By Alan White

         

Today the Administration released its first report on the number of homeowners helped by its Home Affordable mortgage modification program (HAMP).  While the numbers of trial modifications in the first three months of the program (250,000) may sound impressive, it is much less so when compared with what the industry was doing voluntarily before the HAMP program.  Mortgage servicers modified roughly 370,000 mortgages in the first quarter of 2009, before HAMP was implemented.  Thus, if servicers have substituted HAMP trial modifications for the permanent modifications they did previously, the number of homeowners helped each month has gone down, not up. 

            In reality, it is likely that May, June and July saw some combination of pre-HAMP voluntary modifications that were already in the pipeline, as well as the new 3-month trial mods under HAMP.  Nevertheless, the Administration’s goal to help 3 million homeowners sounds less impressive in light of the three-year timetable, which translates to fewer than 100,000 homeowners helped per month.  In contrast, there are about 250,000 homeowners whose mortgages are being referred for foreclosure each month now, and about 90,000 completed foreclosure sales each month.  Neither of these numbers is showing any signs of peaking or declining, sadly.  The true measure of HAMP’s success will be when we see foreclosure filings and sales begin to return to pre-crisis levels.

            On the other hand, the HAMP program has improved the quality of modifications significantly.  According the Administration press release, 100% of HAMP modifications will reduce the borrower’s monthly payment.  Voluntary modifications previously were reducing payments in only about 50% to 60% of cases. The HAMP report also highlights the fact that some mortgage servicers are doing far more than others.  The HAMP program and reporting will, hopefully, stimulate the underperforming servicers to do better.

            The other bad news is that HAMP does nothing to address the necessary reduction in principal mortgage debt that is a precondition to long-term recovery of the housing market, and the economy.  Modifications that reduce principal have been shown to result in more reliable repayment by borrowers, but so far the Administration and the mortgage industry have vigorously resisted addressing principal reduction.  At this point, the only hope for a permanent solution is bankruptcy reform.

Cuomo Case Great News for State Attorneys General

by Christopher Peterson

The Supreme Court has issued an opinion striking down the federal banking regulatory preemption of state fair lending enforcement lawsuits. The Court confronted whether ambiguity in the National Bank Act left the Office of the Comptroller of the Currency free to preempt state fair lending litigation originally brought by former New York Attorney General Eliot Spitzer. In applying the administrative deference standard of Chevron U. S. A. Inc. v. Natural Resources Defense Council, Inc., the Court explained:

[T]he presence of some uncertainty does not expand Chevron deference to cover virtually any interpretation of the National Bank Act. We can discern the outer limits of the term “visitorial powers” even through the clouded lens of history. They do not include, as the Comptroller’s expansive regulation would provide, ordinary enforcement of the law. Evidence from the time of the statute’s enactment, a long line of our own cases, and application of normal principles of construction to the National Bank Act make that clear.

Cuomo v. Clearing House Association, LLC.,  No. 08-453, slip. op. at 3 (U.S. June 29, 2009).

The decision reverses the trend in recent years, discussed here and here, of giving free reign to federal banking regulators to squelch the consumer protection efforts of state attorneys general. While the long-term impact of the decision is yet to be clear, the opinion is likely to embolden some state AGs in litigation against national banks and their subsidiaries over the subprime mortgage debacle.