Consumer Law & Policy Blog

Foreclosure Crisis Growing?

This article in today's Washington Post explains that mortgages on about 1 million U.S. homes are seriously delinquent, meaning that the home foreclosure crisis is likely to get worse before it gets better.

$275,000 Sanctions in Mortgage Shell Game

A Massachusetts federal court has affirmed the imposition of $275,000 in penalties against Ameriquest Mortgage and its lawyers for misrepresenting the ownership of a mortgage in bankruptcy court filings.  Ameriquest originated the mortgage, then assigned it to a securitization trust and also transferred the servicing rights to another company.  After doing all that, it nevertheless filed a claim in the borrower's bankruptcy and filed various pleadings continuing to misrepresent that it owned the mortgage.  Judge Young's strongly worded opinion in In re Nosek makes a connection between the evident sloppiness about keeping track of mortgage ownership and the broader financial crisis:  "How is it that our profession, the legal profession – which could have and should have strongly counseled against the self interested excesses that set up the collapse – instead has eagerly aided and abetted those very excesses?"

David Schmudde on the Subprime Crisis

David Schmudde of Fordham University has written Responding to the Subprime Mess: The New Regulatory Landscape.  Here's the abstract:

An era of unregulated financial markets has resulted in a global financial disaster the likes of which has never before been seen. Central banks of all major countries, and the governments of these countries, are scrambling in uncharted waters to avoid a complete meltdown of the worlds' financial markets. More than a trillion dollars has been allocated to try to fix the mess.

How did we get to this point? The unlikely culprit was residential mortgages in the United States. Regulatory bodies took no action while this market grew with increasing acceleration, increasing irresponsibility, and increasing greed. One of the great financial bubbles was created. Financial instruments were created, given an imprimatur by rating agencies, and sold the world over. These seemingly secure investments, backed by mortgages on residences in the United States, were purchased by millions of unwary investors, even the most sophisticated investors, and on an unparalleled international scale. The investment banks, anxious to ride a wave of profitability, created more and riskier investments as the bubble inflated. Part II of this article describes the mortgage landscape which predated the collapse.

In 2006, the housing market peaked and began its crash, bringing with it all of the purchasers of the mortgage backed financial instruments.

All the players in the residential housing market were devastated. Homeowners lost their homes. Mortgage lenders disappeared. Investment banks either went out of business, or merely survived thanks to government infusions of cash. Investors in the mortgage backed securities lost virtually all the value of their investment. And stock markets around the world crashed with a resounding thud, wiping out vast amounts of wealth.

How did this happen. Where were the regulators? What are the weaknesses in our residential mortgage funding system?

Part III of this article analyzes the mortgage market, its weaknesses, and its regulatory scheme. The causes of the problem, namely irresponsible borrowers, greedy lenders, unresponsive regulators, the overzealous mortgage backed securities market, the rush by foreign investors to place money in U.S. investments, the irresponsibility of the credit rating agencies, and the collusion of appraisers, are discussed and scrutinized.

Part IV breaks down the new regulations and legislation enacted in the wake of the financial meltdown.

Part V examines Fannie Mae and Freddie Mac, their ultimate decline, and resulting takeover by the federal government.

Part VI discusses and analyzes the various lawsuits which have arisen from the mortgage meltdown.

Finally, Part VII attempts to specify weaknesses in the residential mortgage funding system, and to propose elements which must be addressed in creating a more stable, yet responsive mortgage market in the future.

Gerardi & Willen on Subprime Mortgages, Foreclosures, and Urban Neighborhoods

Kristopher Gerardi and Paul Willen, both of the Boston Fed, have written Subprime Mortgages, Foreclosures, and Urban Neighborhoods. Here's the abstract:

This paper analyzes the impact of the subprime crisis on urban neighborhoods in Massachusetts. The topic is explored using a dataset that matches race and income information from HMDA with property-level, transaction data from Massachusetts registry of deeds offices. With these data, we show that much of the subprime lending in the state was concentrated in urban neighborhoods and that minority homeownerships created with subprime mortgages have proven exceptionally unstable in the face of rapid price declines. The evidence from Massachusetts suggests that subprime lending did not, as is commonly believed, lead to a substantial increase in homeownership by minorities, but instead generated turnover in properties owned by minority residents. Furthermore, we argue that the particularly dire foreclosure situation in urban neighborhoods actually makes it somewhat easier for policymakers to provide remedies.

ACORN Report Urges Other Communities to Adopt Philadelphia Approach to Reducing Foreclosures

ACORN has released a report, Road to Rescue: How the Philadelphia Model Can Reduce Foreclosures Across the Country.  Here's an excerpt from the Executive Summary:

Philadelphia has pioneered an innovative and remarkably effective foreclosure prevention program that requires lenders to sit down with borrowers and negotiate a mutually agreeable solution whenever possible. Approaching the one-year mark of the program’s initiation, more than three out of four homeowners who  have entered the program remain in their homes today, where in other jurisdictions they would have lost their homes. The Philadelphia program is so effective because it is mandatory, uses very effective community outreach, is easy for homeowners to participate in, and utilizes the expertise of housing counselors. Other mediation programs we investigated are less effective for lacking some of these characteristics.

Our review of monthly foreclosure statistics in 30 counties across the country and all 50 states shows that the foreclosure crisis continues to pose a serious threat to homeowners, communities, and the economy. Implementation of a mandatory mediation program as effective as Philadelphia’s will save these communities untold tragedies and significant economic losses. The federal government should invest in these successful local programs to complement the Administration’s efforts. This report examines the dire necessity for ongoing innovation, vigilance, and resource allocation to foreclosure prevention, and examines the benefits of widespread mediation in restoring our housing market and broader economy to health.

BankofAmerica signs on to Home Affordable

Bank of America announced this week that it has begun refinancing mortgages at up to 105% of home values under the Fannie/Freddie Home Affordable program, part of the Administration's foreclosure relief plan.  There are two main components to Home Affordable, the refinancing of existing mortgages that are not behind and modification of mortgages that are.  Refinancing doesn't really solve the excess debt problem, but it does slow down the foreclosure machine a bit.

 BofA also announced that it will begin offering the new and improved mortgage modifications consistent with Home Affordable guidelines in the next two weeks, and is extending its moratorium on foreclosures until April 30.  The press release mentions that homeowners needing modifications will first be placed on "trial modifications", i.e. short-term payment agreements that must be converted to permanent modifications after 3 to 6 months.  Treasury's guidelines for modifications released in March contemplated that servicers could begin offering compliant modifications on a trial basis, pending full development of the program.  The contracts between Treasury and servicers for incentive payments and data reporting on mortgage modification and foreclosures have not been rolled out yet, but are due out by the end of April.

UPDATE:  I am told that few if any employees at BofA's servicing operation know about Home Affordable modifications (designed to reduce borrower's mortgage payment to 31% of income.)  With persistence, however, it is possible to find someone who has heard of the new program.  Homeowner advocates should try calling 1-877-776-5842, and wait for the message.

Meanwhile according to a report on BankruptcyProfBlog the Bankruptcy legislation to permit modification of mortgages to actually reduce debt to align with property values appears to be dying a slow death in the Senate.

February and March Foreclosure Trends

By Alan White

The numbers are not good for foreclosure trends in February and March.  HOPE NOW's February data release shows a 12 % increase in foreclosure starts over January.  Declines in October and November in new foreclosure filings were followed by big increases in December, January and February, reflecting perhaps some temporary moratorium activity.  Similarly, completed foreclosure sales were up 25% from January to February, and back to their levels of last summer after a notable dip in November and December.  My own tabulations of subprime and alt-A investor reports (download here) confirm that the delinquent mortgage and foreclosure inventories continue to grow. 

Modification numbers were up in February (but down in March) as servicers continue to increase efforts to salvage delinquent mortgages.  Principal and interest forgiveness is being used a bit more frequently, up from 10% in November to 15% in March.  Modifications with payment reductions (as opposed to payment increase or no change) inched up from 50% to 55% between November and March.  Meanwhile, the loss severities on completed foreclosures continue to worsen, climbing form 56% to 64% in the same period.  In contrast, loans that were modified with some amount written off averaged a write-off of about 13% of the balance.

Mindless Evictions

By Alan White
As many speakers at last week's annual meeting of the National Community Reinvestment Coalition pointed out, banks are aggravating the blighting impact of foreclosures by mindlessly evicting tenants and former owners, even in markets where homes are not selling.  In normal times, a lender that forecloses a home evicts the occupants, because single family homes are much easier to sell vacant than occupied.  But these are not normal times.  The excellent story by Alex Kotlowitz in the March 8 New York Times magazine takes the reader on a tour of the disastrous impact evictions are having on Cleveland and its neighborhoods.

HUD once had a program that permitted former tenants and occupants to remain in FHA's foreclosed homes, known as the "occupied conveyance" program.  The logic was to allow a foreclosed home to remain occupied if sales were slow and vandalism or other vacancy costs were high.  The banks now accumulating hundreds of thousands of foreclosed homes ("REO") have given little or no thought to the possibility that automatic eviction is dragging down their REO values along with the surrounding communities.

ACORN is organizing a campaign to fight back, and to encourage tenants and owners or former owners to stay in their homes, at least until a bona fide buyer is found by the foreclosing lender.  A Miller-McCune mag. story reports on one homeowner who was offered a useless loan modification by Chase (increasing his payment) who is now refusing to leave.  NCRC has called for a national day of action on June 11 to demand action to save homes, jobs and communities.  This may be the germ of a grassroots movement that will pressure the Administration to stop nudging the mortgage servicing industry and to act boldly and decisively to end the laying waste to homes and neighborhoods (as candidate Obama promised he would do, with a 90-day foreclosure moratorium, on October 13, 2008 in Toledo).  Courts may also begin to rethink the automatic granting of eviction writs for foreclosed homes, especially in areas of concentrated foreclosures and abandonment.
HT to Robert Strupp of the Baltimore Community Law Center (and NYT for its photo).

Foreclosure Crisis Still Getting Worse

One out of 8 American homeowners with a mortgage is now behind in mortgage payments (either delinquent or in foreclosure) according to the Mortgage Bankers Association quarterly survey, the most reliable and longstanding source for foreclosure data.  New foreclosure filings have not increased but every other category, including total loans in foreclosure and total loans more than 90 days past due, increased and continues to set new records.  In case anyone had any doubts, subprime adjustable-rate mortgages are a failed product.  A whopping 48% of these mortgages nationwide are delinquent or in foreclosure. 

The MBA numbers, however, are from December 31, and thus a bit out of date.  As the Congressional Oversight Panel notes in its report on the foreclosure crisis, there is still no comprehensive and timely report on foreclosures, comparable to data on unemployment, housing starts, retail sales and virtually every other important economic indicator.  The Administration's foreclosure plan refers to to this problem and promises to fix it. 

I have seen some evidence in January and February data that viable modifications are increasing significantly, although incrementally, and that foreclosure starts and sales may be slowing as a result of the various lender and state-imposed moratoria.  More on the February data shortly.

California passes 90-day Foreclosure Moratorium

by Alan White

Governor Schwarzenegger signed a bill Tuesday imposing a 90-day moratorium on foreclosures in California.  The bill exempts lenders who have a modification program in place meeting standards set forth in the bill, including reduction of payments to 38% of a borrower's income (higher than the 31% DTI standard in the Obama Administration plan.)  Nevertheless a halt to at least some foreclosures is a key missing piece of the Administration's plan announced last week.  Outside of California and apart from lenders with voluntary foreclosure freezes, homes will continue to be foreclosed while the new program, and perhaps even the legislation to allow Bankruptcy Court restructuring, is rolled out.  This means not only needless home losses but also needless losses for banks, to the tune of about $125,000 per house in January.

While the Administration's new plan has some merit, it doesn't actually stop any foreclosures, which is the point.  Regrettably, the Obama/Geithner plan perpetuates two basic flaws with mortgage modifications to date:  payment reductions are temporary (5 years) so that we will have another payment shock crisis in 2014, and homeowners for the most part are not deleveraged, because principal writedowns are not a central part of the program.  To its credit, the Administration is sticking to its guns on supporting bankruptcy stripdown of underwater mortgages, but that will still require getting past the Blue Dogs in Congress. 

In upcoming posts I will report on this week's International Association of Consumer Law conference in Hyderabad India, perhaps including some topics other than the U.S. mortgage foreclosure crisis.