In a sweet form of payback, a couple in Collier County, Florida, this week foreclosed on a local branch of Bank of America. Sheriff’s deputies and lawyers appeared at the bank and told the branch manager that if he didn’t pay the couple’s legal fees -- as ordered months ago by a court in a wrongful-foreclosure case -- they would seize the branch’s furniture and other assets. With TV cameras on the scene, the bank finally paid.
That was the ultimate man-bites-dog story. The financial services industry typically doesn’t have to worry much about anyone interrupting its foreclosure binge. We can expect roughly a million foreclosures a year for the next few years. That’s a lot of furniture on the sidewalk.
Yet for two years, the foreclosure mess has been on the back burner for President Barack Obama. Now, with sinking house prices threatening the recovery and thus his re-election, Obama needs to find the middle ground between prudence with taxpayer money and empathy for victims of the recession. The challenge is less philosophical than logistical.
Let’s stipulate: According to the Treasury Department, the majority of foreclosures are on second homes and vacant properties, which borrowers often fraudulently claimed were their primary residences. These folks deserve nothing. Homeowners who bought houses they couldn’t possibly afford deserve our sympathy, perhaps, but not our help.
But there’s a third group, often victimized by predatory lenders, who may have lost a job or had a setback that left them just shy of affording the mortgage. They either think they can’t fight foreclosure or don’t have the money for a lawyer. The government should do all it can to help this group, which mostly means getting tough with the private mortgage servicers who have been bollixing up the process.
The Obama administration’s answer to the mortgage mess is supposed to be the Home Affordable Modification Program, or HAMP. So far it’s underwhelming. Only 700,000 permanent loan modifications have been completed out of several million troubled mortgages. Of the $45 billion set aside by the Troubled Asset Relief Program to help banks help homeowners, only $1.9 billion has been spent. (Although under current contracts, plenty more will be paid out over time).
With the Consumer Financial Protection Bureau still in development, the government doesn’t yet have the tools to rein in industry abuses. Neil Barofsky, the outgoing inspector general for TARP, issued a stinging report last fall saying that strapped homeowners “often end up unnecessarily depleting their dwindling savings” in an “ultimately futile effort” to avoid foreclosure. “Perhaps worst of all,” the report notes, “even in circumstances where they never missed a payment, they may face back payments, penalties, and even late fees that suddenly become due on their ‘modified’ mortgages and that they are unable to pay, thus resulting in the very loss of their homes that HAMP is meant to prevent.”
Ramp to HAMP
I gave Timothy Massad, the new assistant Treasury secretary for financial stability, a chance to explain how things got so bad. Massad began by noting that the Bush administration had no foreclosure program for Obama to build on, which meant the ramp to HAMP was steep over the last two years. That excuse didn’t impress me.
He had a point, though, about the shackles placed on the hands of regulators. In order to win passage of the Dodd-Frank financial reform bill last year, Democrats had to include a provision that barred any changes to HAMP after October 2010. In other words, don’t even think about making it easier for homeowners to “avoid the inevitable,” as Representative Darrell Issa calls foreclosure.
Thanks to Republicans, it’s also verboten to devote even a tiny fraction of the billions in already-allocated TARP funds to hire mortgage counselors to help homeowners puzzle through the complexities. It’s the principle, you see. No one -- from Elizabeth Warren to the lowliest local lawyer -- can be allowed to side with regular people against the banks.
The broader problem, Massad says, is that mortgage servicers -- the companies hired by the government to handle the modifications -- were “not equipped to deal with this. They didn’t have the people, systems or procedures in place.” Neither did the state agencies assigned to help unemployed homeowners under the government’s “Hardest Hit” program, which provides extra money to the areas suffering most from the foreclosure crisis.
Financial institutions have shown a reluctance to devote time and money to processing HAMP applications. The rules for obtaining government-backed refinancing -- that homeowners be either delinquent or nearly so, that they actually live in their homes, that they have some income, that more than 30 percent of their income goes to mortgage payments, and that their mortgage be less than $730,000 -- require real human beings to pay real attention.
Instead, the industry has adopted what’s known as “robo-signing” -- low-level bank employees rubberstamping thousands of foreclosure documents. The aim, allegedly, is to speed foreclosures by covering up the fact that the documentation of the daisy-chain ownership of the underlying mortgage is often incomplete if not fraudulent. Several state attorneys general have filed lawsuits claiming the latter.
To fix the program, the Treasury Department is paying mortgage servicers $1,000 for every mortgage they modify. The hope is that the servicers and the investors caught holding the original mortgages will now have more of an incentive to complete permanent modifications, rather than the temporary ones that have mostly failed.
Even that may not work. “It’s very tough to contact people and get them to apply” for modifications, Massad says. “It’s scary for them. When they get a call, ‘This is Bank of America, and we’re asking about your mortgage,’ they hang up.”
Obama and his team need to ride herd on the mortgage-modification program and make sure it really works this time. Changing the incentive structure that has hampered HAMP will take time -- time that homeowners don’t have when the sheriff’s deputies are at the door.
(Jonathan Alter is a Bloomberg View columnist. The opinions expressed are his own.)
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