Foreclosure relief helps few keep homes
When five giant mortgage firms signed a landmark $25 billion mortgage settlement last year, officials hailed debt forgiveness as the primary strategy to preserve homeownership.
The banks hoped to avoid further enforcement action over widespread foreclosure abuses; federal regulators and state attorneys general aimed to prevent even more foreclosures.
“This isn't just about punishing banks for their irresponsible behavior,” Housing and Urban Development Secretary Shaun Donovan said. “It's also about requiring them to help homeowners stay in their homes.”
Advocates for borrowers took such comments to mean that the banks would prioritize debt write-downs on first mortgages, which banks resisted before the settlement. Now, with nearly all the promised relief handed out, it is clear that the banks had other ideas.
The vast majority of the aid to borrowers, it turns out, came in the form of short sales and forgiveness of second mortgages. Just 20 percent of the aid doled out under the national settlement went to forgiveness of first-mortgage principal, the kind of help most likely to keep troubled borrowers in their homes. In terms of borrowers helped, just 15 percent of the total received first-mortgage forgiveness.
The five banks collectively delivered twice as much aid using short sales, in which owners sell their homes for less than the amount owed and move out, with the shortfall forgiven.
In all, the lenders sought credit for nearly $21 billion related to short sales and $15 billion related to second mortgages. That compares with $10.4 billion in write-downs on first mortgages.
Bank officials said the high volume of short sales in part reflected an enormous backlog of borrowers who, before the settlement was announced, already had failed to qualify for various loan modification programs. Other borrowers decided not to keep their homes, they said, for such reasons as divorce or a job offer in another city.
“The decision to pursue a short sale versus a retention option rests with the homeowner and not with the servicer,” Wells Fargo said in a statement released by Tom Goyda, a bank mortgage spokesman.
Some foreclosure-prevention counselors and officials at advocacy groups nonetheless expressed disappointment that more first-mortgage debt was not eliminated.
“We all wish there had been more principal reduction, which is what is most helpful in keeping people in homes,” said Kevin Stein, associate director of the California Reinvestment Coalition, a 300-member alliance that lobbies on behalf of low-income and minority neighborhoods.
Still, Stein said, the program set a good precedent, demonstrating that debt forgiveness can benefit lenders and borrowers alike without causing a wave of intentional defaults, as critics had warned.
Bruce Marks, founder of Neighborhood Assistance Corp. of America, a major housing counseling group, had a harsher assessment.
“It just shows you that the banks are running the government,” Marks said. “There's virtually no benefit to borrowers, and yet you give the banks credit for short sales and getting second liens wiped out — something they were going to have to do anyway.”
The housing crash made second liens almost worthless in foreclosure sales. Second-mortgage holders don't get a dime until first mortgages are paid in full. With housing values deflated, that left banks unlikely ever to collect.
Government and banking officials say borrowers nonetheless benefit when second mortgages are wiped out, which removes a major blemish from credit reports and clears away a common obstacle to first-mortgage principal reduction or short sales. What's more, they said, forgiving second liens makes borrowers more likely to continue paying first mortgages because they believe that they can recover their home equity.
Bank of America alone has forgiven nearly $10 billion in second liens, winning praise from California's settlement monitor, University of California-Irvine law professor Katherine M. Porter, along with other observers. The Bank of America program automatically wiped out 150,000 underwater second mortgages that had gone delinquent unless the borrowers, for tax reasons, opted out.
More than a third of those customers had equity in the homes restored, Bank of America mortgage spokesman Rick Simon said, and more than half wound up with a loan-to-value ratio of less than 120 percent.
Simon said the bank doesn't know how many of the borrowers retained their homes after second mortgages were erased, or how many wound up in short sales or foreclosures.
Porter, national mortgage settlement monitor Joseph A. Smith Jr. and Department of Housing and Urban Development officials said they had no idea how often wiping out a second mortgage led to home retention.
In any case, the banks appear to have fulfilled their pledges of relief, although that won't be official until Smith, a former North Carolina banking commissioner, finishes auditing the banks' reports, expected by year's end.
Show commenting policy
TribLive commenting policy
You are solely responsible for your comments and by using TribLive.com you agree to our Terms of Service.
We moderate comments. Our goal is to provide substantive commentary for a general readership. By screening submissions, we provide a space where readers can share intelligent and informed commentary that enhances the quality of our news and information.
While most comments will be posted if they are on-topic and not abusive, moderating decisions are subjective. We will make them as carefully and consistently as we can. Because of the volume of reader comments, we cannot review individual moderation decisions with readers.
We value thoughtful comments representing a range of views that make their point quickly and politely. We make an effort to protect discussions from repeated comments either by the same reader or different readers.
We follow the same standards for taste as the daily newspaper. A few things we won't tolerate: personal attacks, obscenity, vulgarity, profanity (including expletives and letters followed by dashes), commercial promotion, impersonations, incoherence, proselytizing and SHOUTING. Don't include URLs to Web sites.
We do not edit comments. They are either approved or deleted. We reserve the right to edit a comment that is quoted or excerpted in an article. In this case, we may fix spelling and punctuation.
We welcome strong opinions and criticism of our work, but we don't want comments to become bogged down with discussions of our policies and we will moderate accordingly.
We appreciate it when readers and people quoted in articles or blog posts point out errors of fact or emphasis and will investigate all assertions. But these suggestions should be sent via e-mail. To avoid distracting other readers, we won't publish comments that suggest a correction. Instead, corrections will be made in a blog post or in an article.
- Norwegian sails into luxury with Prestige purchase
- Regulators release details of Highmark’s post-UPMC transition plan
- More pipelines proposed to carry Marcellus gas to southeast markets
- Fittingly, a party ushers out Revel
- Foreign firms feel more unwelcome under China regulations
- Home Depot breach probed
- Halliburton’s $1.1B oil spill settlement may help company avoid billions in payouts
- Google’s corporate products division changes name
- McDonald’s to watch Chinese suppliers
- Manufacturing cranks up production pace
- Smaller companies outperform multinationals on U.S. strength over eurozone