Here's the problem with the Obama Administration's approach to foreclosure prevention: it depends entirely on the banks voluntarily doing the right thing, even when homeowners have held up their end of the bargain to prevent a foreclosure.
Take the case of three homeowners in Queens, New York. Each one met the requirements for a "permanent" modification of their mortgages--which means a reduction of payments for five years--as laid out under the Administration's Home Affordable Modification Program (HAMP). They did so by making three months of trial modification payments to JP Morgan Chase and verifying their incomes. They had contracts with Chase and fulfilled their obligations under those contracts.
So how did Chase reward them?
Permanent modifications denied. Delinquency reports to credit rating agencies issued. And the cherry on top--foreclosure.
These three homeowners-each working full-time, with at least one job, working up to six days a week--are fighting back. With the help of the Urban Justice Center, a non-profit legal services provider in New York, they filed suit last Tuesday against the bank in federal court in Brooklyn.
"We want Chase to live up to the contracts that they entered into and give permanent modifications to these homeowners," said Ted De Barbieri, an attorney at the Urban Justice Center. "If you're going to sign onto HAMP, you have to follow the rules. These homeowners followed the rules, and now it's time for Chase to."
A spokesman for the bank told the Wall Street Journalthat Chase would be "happy to talk with the customers, review their situations and see if we can help."
This official response stands in stark contrast to what the homeowners have experienced in dealing with Chase up until now. De Barbieri said that prior to filing the lawsuit, even with the help of community-based HUD certified home loan counselors and the Urban Justice Center, the homeowners had been unable to get an adequate response from Chase.
Three Life Stories
Here's a little more information about these three citizens who Chase--post-lawsuit--suddenly says it will try to help.
Shanaz Begum lives with her husband and two sons--one of whom is headed to college in the fall--in a home they purchased in 2005. She fell behind on mortgage payments in September 2008 after she lost her job as manager of a retail business. Begum now works for the Department of Transportation on weekdays, and on weekends as a server at Boston Market. Her husband is a full-time taxicab driver. Begum has made trial modification payments of $1576 on time for eight months.
Tamara Williams lives with her two sons in a home she purchased in 2005 and has made three on-time trial payments of $1,274 this winter. She fell behind on her mortgage when she lost her job in November 2008, and went into foreclosure four months later. She now works doing post-renovation and demolition cleanup for a contractor and also attends school.
The lawsuit alleges that Chase instructed homeowner Alex Lam to deliberately miss mortgage payments in order to become eligible for a modification. Lam bought his house in 2002 and refinanced in 2005. Lam says he skipped payments in February and March of 2009 on the bank's advice. Those are the only payments he has ever missed but he now faces foreclosure. Chase says its Net Present Value (NPV) test--required by HAMP to determine if the value of a modification is worth more to investors than a foreclosure--is the reason Lam isn't receiving a modification. The infuriating thing about the NPV is that HAMP doesn't require banks to disclose the data they use for their analysis. Banks don't exactly have a stellar record for good behavior where transparency is lacking.
"The Obama administration's program was supposed to give people like me a lifeline and a chance to save our homes. But if the banks won't play by the rules, what else are we supposed to do?" said Williams.
That's why more and more homeowners are turning to the courts. Reporter Paul Kiel of ProPublica writes that "at least 50 homeowners have recently filed lawsuits alleging the servicer foreclosed with a loan mod request pending or even while they were on a payment plan." De Barbieri told me, "We're part of an advocate community that's representing homeowners who are in similar situations around the country. There are [similar] lawsuits in Massachusetts, Ohio, California, and Washington State. It's one tool that advocates are using to do what's right."
As Kiel notes, there are still no penalties for servicers who don't comply with the rules. According to the Wall Street Journal Treasury Secretary Timothy Geithner recently "threatened to crack down on banks that don't 'hold up their end' of the bargain."
But Treasury was whistling that same tune at a hearing in December. "We're putting them on notice, and then we will exact penalties of them, and be publicly outspoken about who's performing well and who's not," railed Herbert Allison, Assistant Secretary for Financial Stability. "We're going to move to the point where we're disciplining the banks if they don't perform better than they are today."
Move when exactly? I'm not sure which planet the Obama Administration is living on that they still believe the banks will do the right thing simply because they are being asked to--or because they are being offered a few carrots (a couple thousand dollars per modification--not even a garnish for the banks). Here on Earth, where the rest of us reside, we know that nothing will change until banks are forced to do the right thing.
For that reason, the House passed legislation that would allow bankruptcy judges to modify the principal on people's mortgages--known as a "cramdown"--for primary residences just like they are able to do for rich people's vacation homes. It was defeated in the Senate. Why haven't we seen one of President Obama's virtuoso performances demanding that the weak-kneed Senate take it up again--perhaps even as an amendment to the financial reform bill?
Representatives Raúl Grijalva and Marcy Kaptur have also introduced legislation that would allow homeowners the right to rent at fair market rental value for five years once they receive a foreclosure notice. Not only would that allow homeowners time to find alternative affordable housing, or new employment, it would give them time to expose banks like Chase for any bad behavior. The right to rent concept was initially proposed by Dean Baker, co-director of the Center for Economic and Policy Research, and has been embraced by individuals across the political spectrum.
Grijalva and Kaptur also signed a letter to Secretary Geithner along with twenty-five House Democratic colleagues suggesting the establishment of "a new federal entity" modeled after FDR's Home Owners' Loan Corporation (HOLC), to be capitalized through remaining TARP funds. The letter notes, "During the Great Depression, the government successfully acquired, refinanced, serviced and sold more than a million mortgages, accounting for one in every five non-farm dwellings in the United States. Such actions prevented untold foreclosures, and even managed to return a small profit to the Treasury."
Finally, in towns like Philadelphia, mandatory mediation has proven effective in foreclosure prevention. Rhode Island Democratic Senator Jack Reed has introduced legislation that would create an $80 million grant program to support those kinds of efforts.
A Treasury spokesman told me the Administration is very concerned about moral hazard--rewarding people for taking out loans they never should have taken. But clearly the most hazardous moral around is continuing to cater to the banks' interests.
It doesn't matter whether someone is losing their home because of a bad subprime mortgage, a lost job, or because they owe more on the mortgage than the home is now worth. Every foreclosure decreases the property value of a neighbor's home. Every dollar lost in property value--and over $7 trillion in wealth has now been lost by American households--reduces local and state revenues. As revenues are lost, so are jobs and services. And the vicious cycle which devastates our communities continues. A HAMP program that was supposed to help three to four million homeowners has only made 230,000 permanent modifications. March set a new monthly record with 367,056 foreclosure filings, up nearly 19 percent from February, according to RealtyTrac, which has been tracking foreclosure filings since 2005.
As John Taylor, president and CEO of the National Community Reinvestment Coalition, recently put it, "Everybody has a dog in this hunt when it comes to these foreclosures."
This week in Brooklyn, three Queens' homeowners took action. They said to the banks, "No more," and the court is giving Chase until the end of the month to respond.
The time for President Obama to show that kind of toughness with the banks is tragically overdue.
(The opinions expressed in this commentary are solely those of the author.)
By Greg Kaufman:
Reprinted with permission from The Nation