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Despite Promises, Banks Still Leave Homeowners Facing Foreclosure Out in the Cold

Throughout the foreclosure crisis, bankers have repeatedly claimed to be doing everything they can to help desperate borrowers stay in their homes. Here are three recent variations on the theme all drawn from a recent congressional hearing on the obstacles to offering mortgage relief:
  • "Helping these customers remain in their homes where possible is a top priority for Bank of America (BAC)." --Barbara Desoer, president of the company's home loans division
  • "JPMorgan Chase (JPM) is committed to ensuring that all borrowers are treated fairly; that all appropriate measures short of foreclosure are considered; and that, if foreclosure is necessary, the foreclosure process complies with all applicable laws and regulations." --Stephanie Mudick, head of the company's Office of Consumer Practices
  • "As our country's economy has continued to present new challenges, our goal is and always has been to keep as many customers in their homes as possible." --Alan Jones, manager of operations at Wells Fargo (WFC) Home Mortgage Servicing
ProPublica's Paul Kiel puts the lie to such declarations (given under oath, as is typical in such hearings, I wonder?). A new report by the non-profit media firm shows banks are offering roughly as few mortgage modifications as they were in early 2009 -- shortly before the U.S. Treasury launched its chief anti-foreclosure program, HAMP. Out of the 5.2 million borrowers who had defaulted on their loans as of September, loan servicers had modified a meager 2.9 percent of mortgages. Kiel writes:
The bottom line is that for homeowners, modifications are just as rare as they were before the program launched. The absolute number of modifications is higher now than it was then, but so are the number of defaulted loans.
Even if you suspend disbelief and take bankers at face value about striving to help homeowners, in other words, it is by now indisputable that "efforts" by the nation's biggest financial firms and by the Obama administration to slow the foreclosure epidemic are woefully inadequate. Even the handful of modifications that lenders do grant offer relatively little help in reducing mortgage payments. ProPublica also has found that banks providing modifications through their own in-house programs are less likely to cut interest rates and extend the life of the loan than when they adjust a mortgage under HAMP.

The conclusion? As I've been saying for more than a year, banks will do just about anything to avoid modifying mortgages, including commit fraud by "robo-signing" foreclosure documents. Modifications pay less, or at least cost more, than foreclosures. Loan servicers also aren't set up to help homeowners navigate the complex process of re-setting a loan, meaning firms are forced to hire additional staff and incur other costs.

Meanwhile, extending the modification process for months on end, a widespread complaint among borrowers, allows servicers to collect exorbitant fees -- charges that often wind up forcing homeowners into default and foreclosure. Delaying modifications also lets banks nursing their fragile balance sheets to defer taking a financial hit on bad mortgages.

The result: The foreclosure rate is now more than three times what it was in 1933, at the height of the Great Depression. American households are projected to lose $2.6 trillion, not counting the related economic impact on U.S. communities where foreclosures are rampant. As Diane Thompson, an attorney at the National Consumer Law Center, told lawmakers last week in testifying on the loan-mod roadblock:

We are facing a foreclosure tsunami, which has destabilized our economy, devastated entire communities, and destroyed millions of families. Yet we have failed to take aggressive action to restore stability. Neither the government nor the private sector has responded to scale in addressing the crisis. Public and private response to the crisis has been anemic at best, causing millions of families to lose their homes unnecessarily, at great cost to all of us.
The obvious solution, if there's one to be found at this late stage of the crisis -- political leadership. Obama, his legislative agenda in tatters now that Republicans are set to take control of the House, must know that allowing the foreclosure scandal to fester could be disastrous for his reelection hopes in 2012. So here's his chance to show voters what he's made of.

Fortunately, there are concrete steps the White House and Treasury can take to mitigate the damage. These include ensuring the fees loan servicers charge for modifications are reasonable and necessary; holding banks accountable for their poor modification records by more closely monitoring their loan servicing performance; forcing banks to comply with HAMP, including allowing homeowners to appeal a decision by servicers to reject them for the program; and setting up legal-aid programs to ensure that all borrowers seeking a modification have counsel.

The alternative is for the feds to carry on with their current strategy to clean up the foreclosure mess -- taking bankers at their word that they're already doing everything they can.

Image from Flickr user Respres via Wikimedia Commons, CC 2.0