Why Don't Banks Live up to Their Mortgage Promises?

By Ted Kaufman

Thought the news about the big banks’ mismanagement of the housing/mortgage crisis couldn’t get worse? Two new reports are out. You were wrong.

Federal regulators required the first report as part of the execution of the January settlement with the nation’s largest lenders. This $8.5 billion settlement was agreed to when it was shown that the banks had failed to live up to the terms of their earlier 2011 agreement with the regulators, and had spent more than $1 billion on consultants while providing relatively little relief to wronged borrowers.

Perhaps the worst part of this report was the fact that some of our largest banks improperly foreclosed on many more people than previously reported. Included were more than 700 members of the military and a number of families who were evicted even though they were current on their payments. Under the Serviceman’s Civil Relief Act, mortgage lenders cannot foreclose, or seize property while a service member is on active duty without court approval.

As Retired Air Force Col. John S Odom Jr., who represents military personnel on foreclosure issues, said: “It’s absolutely devastating to be 7,000 miles from your home fighting for this country and get a message that your family is being evicted. We have been sounding the alarms that the banks are illegally evicting the very men and women who are out there fighting for this country. This is a devastating confirmation of that.”

The second report came from the monitor of the March 2012 National Mortgage Settlement between large banks and the state Attorneys General. That $25 billion settlement was the largest mortgage settlement in U.S. history. It was the result of the Attorneys General uncovering widespread problems with the banks’ servicing of mortgages. Mortgage documents had been lost, forged or misrepresented in what came to be known as the “robo signing” scandal.

The monitor’s recent report covered what had happened during the nine months immediately following the settlement. In that time, only 50,000 people had the principle on their first mortgage modified to lower their obligation. That accounted for only 14 percent of the settlement money, much less than the 30 percent that was specifically set aside for reduction of the principle on first mortgages. This delay in reaching the agreed-to rate of first mortgage principle reduction means that as time passes more and more homeowners will be forced into foreclosure.

The monitor also reported that many more borrowers, 169,000 in all, ended up with short sales. These sales result in the borrower leaving the home, and losing the difference between the short sale price and their remaining equity. Short sales can be advantageous to the banks. They allow properties to be moved off the market without a foreclosure, thus not hurting housing values in areas where the bank might hold mortgages on many other properties.

Even more disturbing, most of the banks’ principle reductions came on second mortgages. Many of the second mortgages would never be paid off, because once a bank reaches a short sale or first mortgage modification the second mortgage is usually worthless. Even so, the bank received credit under the settlement – without helping any borrower avoid foreclosure and without spending a dime.

Also, as the Maryland Consumer Rights Coalition pointed out, “the monitor’s progress report noted continued problems and concerns around dual-tracking of foreclosures (a practice that is supposed to be banned under the settlement, in which a foreclosure moves ahead even as a homeowner applies for a loan modification) as well as problems consumers have experienced in getting responses from the single points of contact the banks are required to set up to communicate clearly with each homeowner seeking a mortgage modification ...

“In Maryland, consumer and housing advocates also continue to lament the difficulty many homeowners are having in reaching their single points of contact and ongoing problems with dual-tracking, and note that many homeowners continue to have difficulty successfully negotiating the loan modification process.”

It was hoped that the total of more than $30 billion in the two settlements would really help people who had been mistreated by the banks get back on their feet. But these two reports show the banks might be back to the same kind of deceptions that led to the 2011 and 2012 settlements.

Fool me once shame on you, fool me twice shame on me. Sooner or later, we have to admit that’s what’s happening. It is time for the banks to stop fooling and deliver on what they agreed to.