The Obama Administration’s full-bore effort to push a bank-favoring mortgage “settlement” over the line earlier this year has led to a rearguard action that appears to have caught the mortgage industrial complex and its allies flatfooted.
As Nick Timiraos reports in the Wall Street Journal (hat tip Richard F), states are disgusted with the way that banks have ignored their long-established real estate laws. Many are passing new legislation to put more teeth into existing requirements to offer modifications to borrowers that could be salvaged and comply with foreclosure procedures. You can detect the consternation from his story:
States across the country are proposing a range of new rules that would make it more difficult for banks to foreclose on troubled homeowners.
The moves have been prompted by concerns that lenders have been inefficient in restructuring mortgages, which results in unnecessary foreclosures, while using shoddy paperwork to repossess homes.
Lenders are strongly resisting the measures, arguing that they will introduce new bottlenecks in the foreclosure process that could obstruct the incipient housing recovery.
Notice how the two sides are talking past each other? The beef of the states is that banks are failing to negotiate in good faith with borrowers, and thus breaking the law there and with their reliance on bogus documentation in foreclosures. The banks, amazingly, continue to insist that more foreclosures are good for the market. Since when is increasing supply (homes for sale out of foreclosure) likely to yield an increase in prices?
The reality is that banks make more foreclosing than they do on mods, even with bribes from taxpayers like HAMP 2.0. Doing a mod is tantamount to underwriting a new loan. The servicers would have to set up new infrastructure to do that, and they don’t want to make the investment. On top of that, their existing servicing platforms are terrible, so a good deal of borrower abuse comes from their refusal to improve their systems.
Banks had hoped to escape that. Even though the Administration touted the supposedly tough enforcement standards in the settlement, Abigail Field has documented at length how the new servicing standards allow the banks to continue to engage in widespread abuses. They allow stunningly high error rates in a process that once was fail safe (did you ever, 30 years ago, hear of someone who had paid off their mortgage being foreclosed upon?). As we wrote in March:
Remember that the Administration also trumpeted that enforcement would be tough, even as Abigail Field has shown that idea to be a joke. For instance, the servicing standards allow for the astonishing concept of an acceptable error rate. Banks aren’t permitted to make errors with your checking account and ding you an accidental $10,000 and get away with it. But with people’s most important asset, their homes, servicers are allowed a certain level of reportable errors, and many of them can be serious as far as borrowers are concerned. This is one example from her post:
Let’s return to page E-1-6, and look at the second metric, which applies to everyone with a mortgage: “Adherence to customer payment processing.” According to Column C, it’s not reportable error for the B.O.Bs to tell their computers that you paid less than you did, if “Amounts [are] understated by the greater $50.00 or 3% of the scheduled payment.”
Since most people don’t pay more than what they owe each month, posting less than you paid would seem to make you delinquent when you’re not. How can that be ok? What are the consequences? The servicing standards say the banks have to take your payment if you’re within $50, (See page A-5 at 3.a) but if your mortgage payment is $2000/month, 3% is $60. What if you start facing fees? What if you were trying to bring your account current and the bank screws up the data entry and starts foreclosing? Why isn’t that potentially devastating error reportable?
And again, it gets worse because of Column D. Again, reportable error has to happen 5% of the time to matter. There’s more than 50 million mortgages in the country. 5% of 50 million is 2.5 million. In a single year the banks can tell their computers that 2.5 million people paid so much less than they in fact paid that it’s reportable error, and still the bankers won’t get in trouble.
Most plainly, the bankers can tell 2.5 million people:
“Hey, you didn’t make your payment this month, your check’s short and we’re putting it in the no man’s land of a “suspense account” triggering delinquency and fees, even though you really did pay in full and have the canceled check to prove it. And guess what? No one but you cares; law enforcement won’t even consider dinging us for it.
I’m struggling with the same level of disbelief I had when I first learned that banks were systematically committing forgery.
She also points out that wrongful foreclosures at a 1% rate are acceptable. Procedures around real estate are deliberate because any error of this magnitude has devastating consequences. But this new provision means that 1%, or over 33,000 erroneous foreclosures since 2008 would be perfectly OK as far as the authorities are concerned.
Abigail also discussed at length how the servicing standards run roughshod over the rule of law.
The amusing bit in the current bank v. states row is the way Kamala Harris, attorney general for California, appears to have played the Administration. Her cooperation was critical to getting the mortgage settlement over the line. She used that to extract more financial concessions for her state (note they were grossly inadequate, given the damage done to homeowners, but they made for nice headlines). Now look what she is trying to foist on the banks:
The biggest showdown between lenders and lawmakers could occur as soon as Monday in California, when the state legislature is set to vote on an overhaul detailing new requirements banks must follow in the foreclosure process. While similar measures have failed in each of the last two years, the state’s attorney general, Kamala Harris, has pushed strongly for the bills, improving the odds the bills will pass…
California is getting the most attention because of the volume of homes lost to foreclosure every month, and because of its bank-friendly foreclosure process. The California bill would prevent foreclosures from moving forward while a borrower is trying to modify a mortgage, require large lenders to provide a single point of contact for borrowers seeking modifications, and allow homeowners to sue mortgage companies that fall short of the new rules.
“Most fundamentally, this legislation is about having a clear process, getting to a simple ‘yes’ or ‘no’ answer on a loan modification application before they start the foreclosure process,” said Paul Leonard, California director of the Center for Responsible Lending, a borrower-advocacy nonprofit.
Equally important, they say, is a new right for borrowers to sue banks, which they hope will make it harder for lenders to dodge new rules. With voluntary loan-modification programs, “there have not been any reliable consequences for anybody’s failure to follow the rules,” said Mr. Leonard.
If California’s law passes, it will help efforts in 24 other states to pass legislation with enough penalties to get banks to start doing what they have refused to do: obey the law and honor their contracts. This fight may not be over till it’s over.