So far 700,000 people were denied modification through the Home Affordable Modification Program (HAMP). Most of the lawsuits trying to stop foreclosures are based on the theme that banks denied homeowners permanent modifications even though the homeowners were making payments on time.
One California lawyer, Damian Nassiri told The Los Angeles Times that banks misled borrowers into accepting trial loan modifications "to get some kind of money out of them." He said the banks knew that they couldn't "dump all these properties out on the market all at once because we would have another Depression."
His claim is backed by at least a decade's worth of complaints by community-based organizations, housing counselors and advocates. Julia Gordon, of the Center for Responsible Lending, testified at the Congressional Oversight Panel on Oct. 27 that advocates have "documented a pattern of shoddy, abusive and illegal practices by mortgage servicers whose staff are trained for collections activities rather than loss mitigation."
Phyllis Caldwell of the U.S Department of Treasury (pictured above), testified at the same hearing that, "The reported behavior of these mortgage servicers is unacceptable." She explained that servicers must "certify to their foreclosure lawyers that all loss mitigation options have been exhausted" before they can proceed to foreclosure. This includes consideration of a short sale or a deed-in-lieu of foreclosure. The Treasury Department currently is in the process of reviewing the 10 largest servicers' internal policies to be sure that they are accurately completing the pre-foreclosure certification process.
How many possible cases will be filed? No one can answer that question, but there were 4.6 million mortgages in foreclosure or 90 days or more delinquent as of June 30. More than 60 percent of homeowners with serious delinquent loans are not involved in any loss mitigation, according to Gordon.
If Making Homes Affordable finds incidents of non-compliance corrective actions could include requiring servicers to re-evaluate homeowners and requiring foreclosure proceedings be suspended, so lawsuits may not be the only actions that could stall servicers from continuing with foreclosures.
What will these delays mean for the housing industry? Caldwell testified that "thousands of foreclosures" could be delayed for several months. She added, "Longer foreclosure timelines will likely lead to lower sales prices of houses that are already in the foreclosure process." These vacant homes will continue to "drag down the value of nearby houses in the present as long as they remain unsold." Of course this will hurt both homeowners and home-buyers because it "may exert downward pressure on overall housing prices both in the short and long-run."
But there are no easy answers and someone ultimately has to pay the bill. Federal Reserve Bank of Boston Senior Economist Paul Willen told attendees at a Federal Reserve-Federal Deposit Insurance Corp. symposium on mortgages and the future of housing finance that he doesn't think voluntary modifications will help to fix the problem. Willen said, "Modification is an expensive and ineffective medicine. We can't prevent millions of foreclosures using the tools people are currently using." He thinks either lenders or borrowers will need to be paid a lot of money or we will have to "force lenders to modify loans even when they don't want to."
Lawsuits take years to wind their way through the courts and several attempts are being made to certify these cases as class actions, which could mean thousands of homeowners not currently involved in filing cases could become part of a class. The net result will just stretch out the foreclosure mess for several years.
So what can be done to speed things up? Julia Gordon thinks it's time for Congress to pass legislation that would "meaningfully realign incentives among servicers, investors and homeowners." Key changes she advocated include:
- Change the bankruptcy code to permit modifications of mortgages on principal reductions. Congress so far has failed to pass this type of legislation even though some members of Congress agree.
- Mandate loss mitigation prior to foreclosure. So far it's voluntary in most cases. Fund legal assistance for homeowners. Right now it differs state-by-state.
- Solve the problem of mortgage debt forgiveness without the tax structure. Homeowners need to be certain they won't be hit with a large tax bill if debt is forgiven.
