Banks Paying Homeowners a Bonus to Avoid Foreclosures: Mortgages
By Prashant Gopal February 07, 2012, 2:48 PM EST
Feb. 7 (Bloomberg) -- Banks, accelerating efforts to move troubled mortgages off their books, are offering as much as $35,000 or more in cash to delinquent homeowners to sell their properties for less than they owe.
Lenders have routinely delayed or blocked such transactions, known as short sales, in which they accept less from a buyer than the seller’s outstanding loan. Now banks have decided the deals are faster and less costly than foreclosures, which have slowed in response to regulatory probes of abusive practices. Banks are nudging potential sellers by pre-approving deals, streamlining the closing process, forgoing their right to pursue unpaid debt and in some cases providing large cash incentives, said Bill Fricke, senior credit officer for Moody’s Investors Service in New York.
Losses for lenders are about 15 percent lower on the sales than on foreclosures, which can take years to complete while taxes and legal, maintenance and other costs accumulate, according to Moody’s. The deals accounted for 33 percent of financially distressed transactions in November, up from 24 percent a year earlier, said CoreLogic Inc., a Santa Ana, California-based real estate information company.
Karen Farley hadn’t made a mortgage payment in a year when she got what looked like a form letter from her lender.
“You could sell your home, owe nothing more on your mortgage and get $30,000,” JPMorgan Chase & Co. said in the Aug. 17 letter obtained by Bloomberg News.
$200,000 Short
Farley, whose home construction lending business dried up after the housing crash, said the New York-based bank agreed to let her sell her San Marcos, California, home for $592,000 -- about $200,000 less than what she owes. The $30,000 will cover moving costs and the rental deposit for her next home. Farley, who is also approved for an additional $3,000 through a federal incentive program, is scheduled to close the deal Feb. 10.
“I wondered, why would they offer me something, and why wouldn’t they just give me the boot?” Farley, 65, said in a telephone interview. “Instead, I’m getting money.”
Tom Kelly, a JPMorgan spokesman, declined to comment on the company’s incentives.
“When a modification is not possible, a short sale produces a better and faster result for the homeowner, the investor and the community than a foreclosure,” he said in an e-mail.
A mountain of pending repossessions is holding back a recovery in the housing market, where prices have fallen for six straight years, and damping economic growth. Owners of more than 14 million homes are in foreclosure, behind on their mortgages or owe more than their properties are worth, said RealtyTrac Inc., a property-data company in Irvine, California.
Foreclosure Holdouts
Short sales represented 9 percent of all U.S. residential transactions in November, the most recent month for which data is available, up from 2 percent in January 2008, according to Corelogic. Bank-owned foreclosures and short sales sold at a discount of 34 percent to non-distressed properties in the third quarter, according to RealtyTrac.
As lenders shift their focus to sales, they are finding that some borrowers would rather risk repossession while they wait for a loan modification, according to Guy Cecala, publisher of Inside Mortgage Finance, a trade journal. In a loan modification, the monthly payment, and sometimes principal, is reduced to help prevent seizure. Homeowners facing foreclosure may live rent-free for years before they are forced out.
“That’s why the banks have got to pay the big bucks,” Cecala said. “The real question is why is the bribe so big? Is that what it takes to get somebody out of their home?”
Multiple Banks
Banks also pay a few thousand dollars to the owners of second liens, whose loans can be wiped out by a short sale, to encourage them not to block the deals.
While JPMorgan is giving the largest incentive payments, other banks and mortgage investors are also offering them, according to interviews with 12 real estate agents in Arizona, California, Florida, New York and Washington. Lenders also provide incentives on loans they service and don’t own when the mortgage investor, such as a hedge fund, requests it.
JPMorgan, the biggest U.S. bank, approves about 5,000 short sales a month. It generally offers $10,000 to $35,000 in cash payments at settlement, real estate agents said. Not all of the sales include incentives.
Borrowers also can receive payments from the federal government’s Home Affordable Foreclosure Alternatives program, which in 2010 began offering as much as $1,500 to servicers, $2,000 to investors and $3,000 to homeowners who complete short sales.
Quicker Resolution
For banks, approving a sale for less than is owned on the home can cut a year or more off the time it takes to unload a property. From listing to sale, the transactions took about 123 days on average at the end of last year, according to the Campbell/Inside Mortgage Finance HousingPulse Tracking Survey.
Lenders spend an average of 348 days to foreclose in the U.S. and an additional 175 days to sell the property, according to RealtyTrac. In New York, a state that requires court approval for repossessions, it takes about four years to foreclose on a home and then resell it, the company said.
Lenders can often afford to forgive debt, offer the incentive and still make a profit because they purchased the loan from another bank at a discount, said Trent Chapman, a Realtor who trains brokers and attorneys to negotiate with banks for short sales.
Chapman, who also writes a blog on TheShortSaleGenius.com, said he’s heard about 50 homeowners who have received incentives from lenders including JPMorgan, Wells Fargo & Co., Citigroup Inc. and Ally Financial Inc.
Wells Fargo
“My guess is they want to get rid of bad loans,” Chapman said. “If they short sale these types of loans, they have less of a headache and have some goodwill with the homeowner.”
Wells Fargo, based in San Francisco, offers relocation assistance of as much as $20,000 for borrowers who complete short sales or agree to transfer title through a deed in lieu of foreclosure “in certain states with extended foreclosure timelines, including Florida,” Veronica Clemons, a spokeswoman, said in an e-mail.
Bank of America Corp. sent letters to 20,000 Florida homeowners as part of a pilot program, offering incentives of as much as $20,000, or 5 percent of the unpaid loan balance, Jumana Bauwens, a spokeswoman, said in an e-mail. The program expired in December and the Charlotte, North Carolina-based bank hasn’t decided whether to introduce it in other states, she said. About 15 percent of the homeowners agreed to participate in the program, she said.
Citigroup Offers
“The bank is pleased with the response,” Bauwens wrote. “The state is experiencing higher foreclosure rates than other parts of the country and is therefore seen as a viable market to gauge incremental short-sale response and completion rates when presenting homeowners with relocation assistance at closing.”
Citigroup offers $3,000 to most borrowers who qualify for its program, but the “amount may increase based on the circumstances of each individual case,” Mark Rodgers, a spokesman for the New York-based bank, said in an e-mail. “Investor programs have different guidelines for relocation incentives, which we honor.”
Susan Fitzpatrick, a spokeswoman for Detroit-based Ally, didn’t comment specifically on incentives when asked about them.
Borrowers typically can’t negotiate the incentives, which arrive by mail, Chapman, the Realtor, said.
Tap on Shoulder
“It’s not really easy to identify the guidelines because Chase doesn’t tell you, they kind of tap you on the shoulder,” he said. “When I first saw it in January 2011, I thought it was a joke or a typo. I was convinced it must say $3,000, not $30,000.”
Offering enough for the homeowner to put down a deposit on a rental apartment is reasonable, said Sean O’Toole, chief executive officer of ForeclosureRadar.com, which tracks sales of foreclosed properties. Giving tens of thousands of dollars to delinquent homeowners sends the wrong message, particularly if they got into trouble by running up home-equity loans during the housing boom, he said.
“It may make sense for people to walk away, it doesn’t make sense for them to get rewarded for doing it,” O’Toole said. “It’s not the homeowner’s fault that house prices dropped so dramatically, but they have already received months of free rent, if not cash out.”
Cecala of Inside Mortgage Finance said he wonders whether lenders are making big payments on properties with underlying title problems. Evan Berlin, managing partner of Berlin Patten, a real estate law firm in Sarasota, Florida, said representatives of a large bank told him the incentives are primarily given to borrowers when it doesn’t have the proper paperwork needed to win its foreclosure case. He declined to name the bank for publication.
Incentive Disconnect
State attorneys general across the U.S. began investigating foreclosure practices in October 2010 following allegations that the nation’s top mortgage servicers were using faulty documents to repossess homes.
Berlin said his office negotiated about 400 short sales in the past year and about a quarter included an incentive, ranging from $3,000 to $48,000. In some cases, the payments aren’t incentives at all because they’re offered after the borrower has almost completed the short sale, he said.
“The idea is that this is relocation assistance,” Berlin said. “But when you’re offering $48,000, obviously it doesn’t cost $48,000 to relocate.”
Cooperation Sought
The size of the payment may have little to do with sales price. JPMorgan gave one Phoenix homeowner $20,000 after she sold her property in June for $32,000, according to Royce Hauger, the real estate agent who represented the seller and shared a copy of the settlement sheet with Bloomberg News. The bank also agreed to forgive more than $70,000 in debt, she said.
Kelly, the JPMorgan spokesman, declined to comment on the payment.
The homeowners are getting the money in exchange for their cooperation, said Kris Pilles, a Riverhead, New York-based real estate broker who represents banks, servicers and hedge funds that own distressed housing debt.
Pilles is frequently dispatched to the homes of delinquent borrowers to explain the benefits of avoiding foreclosure, he said. His clients have paid as much as $92,500. In return, the lenders expect the seller to clean the house before showings, and trim the grass.
“Money talks,” Pilles said. “From the bank side, it’s anything to initiate a conversation with someone who may not be listening to them.”
Mortgage Plan Gives Homeowners Bulk of the Benefits
The attorney general of California, Kamala Harris, left, and New York's attorney general, Eric Schneiderman.
By NELSON D. SCHWARTZ and SHAILA DEWAN February 9, 2012
After months of painstaking talks, government authorities and five of the nation’s biggest banks have agreed to a $26 billion settlement that could provide relief to nearly two million current and former American homeowners harmed by the bursting of the housing bubble, state and federal officials said in Washington on Thursday.
It is part of a broad national settlement aimed at halting the housing market’s downward slide and holding the banks accountable for foreclosure abuses.
Under the plan, [ http://www.justice.gov/opa/pr/2012/February/12-ag-186.html ] federal officials said, about $5 billion would be cash payments to states and federal authorities, $17 billion would be earmarked for homeowner relief, roughly $3 billion would go for refinancing and a final $1 billion would be paid to the Federal Housing Administration.
If nine other major mortgage servicers join the pact, a possibility that is now under discussion with the government, the total package could rise to $30 billion.
Because of a complicated formula being used to distribute the money, federal officials say the ultimate benefits provided to homeowners could equal a larger sum — $45 billion in the event all 14 major servicers participate. The aid is to be distributed over three years, but there are incentives for banks to provide the money in the next 12 months.
More than just an attempt to aid consumers and stabilize the housing market, administration officials cast the settlement as an effort to finally hold banks accountable for their misdeeds, more than three years after the mortgage collapse brought on a full-scale financial crisis.
The deal announced Thursday is about “righting the wrongs that led to the housing market collapse,” said Eric H. Holder Jr., the attorney general. “With this settlement, we recover precious taxpayer resources, fix a broken system and lay a groundwork for a better future.”
Financial shares were mixed after the announcement, but several analysts said they considered the settlement to be good news because it removed one cloud hanging over the industry. They also said the five mortgage servicers in the agreement — Bank of America, JPMorgan Chase, Wells Fargo, Citigroup and Ally Financial — had already set aside most of the money.
Shares in Bank of America, which will pay the most as the nation’s biggest mortgage servicer, actually rose 1 percent in afternoon trading after a 4 percent gain Wednesday.
“I wouldn’t say it’s a panacea for the housing industry, but it is good for the banks to get this behind them,” said Jason Goldberg, an analyst with Barclays.
The amounts from individual banks were linked to their share of the servicing market. The biggest, Bank of America, would provide $11.8 billion, followed by $5.4 billion from Wells Fargo, $5.3 billion from JPMorgan Chase, $2.2 billion from Citigroup and $310 million from Ally. Bank of America would contribute an additional $1 billion for F.H.A. loans.
Despite the billions earmarked in the accord, the aid will help a relatively small portion of the millions of borrowers who are delinquent and facing foreclosure. The success could depend in part on how effectively the program is carried out, because earlier efforts by Washington aimed at troubled borrowers helped far fewer than had been expected.
Still, the agreement is the broadest effort yet to help borrowers owing more than their houses are worth, with roughly one million expected to have their mortgage debt reduced by lenders or to be able to refinance their homes at lower rates. Another 750,000 people who lost their homes to foreclosure from January 2008 to the end of 2011 will receive checks for about $2,000.
Officials in Washington emphasized that the accord covered only one element of the housing bust, namely, the fallout for individual homeowners who defaulted on loans they couldn’t pay. Regulators and prosecutors could still pursue questionable behavior in the process by which those loans were made, known as origination, and the packaging of those mortgages into securities sold to investors by the big banks.
Shaun Donovan, the secretary of housing and urban development, said that new servicing standards would “force the banks to clean up their acts,” adding, “No more lost paperwork, no more excuses, no more runaround.”
“This is a big victory for those who have been harmed the most,” he said.
Tom Miller, who as Iowa’s attorney general led state officials through the tortuous negotiations, also highlighted what he said could be a “sea change” in how banks deal with troubled borrowers.
“This is a great opportunity for banks to do the right thing,” he said. “It’s incumbent on all of us to realize that potential and make sure they do what they promised.”
President Obama called it a landmark settlement that would “begin to turn the page on an era of recklessness.” He said the government will continue to pursue violations of law in the packaging and selling of risky mortgages that led to the crisis. “We’re going to keep at it until we hold those who broke the law fully accountable.”
The deal grew out of an investigation into mortgage servicing by all 50 state attorneys general that was introduced in the fall of 2010 amid an uproar over revelations that banks evicted people with false or incomplete documentation.
In the 14 months since then, the scope of the accord has widened from an examination of foreclosure abuses to a broad effort to lift the housing market out of its biggest slump since the Great Depression. Four million Americans have been foreclosed upon since the beginning of 2007, and the huge overhang of abandoned homes has swamped many regions, like California, Florida and Arizona.
In New York State, more than 46,000 borrowers will receive some form of benefit from the settlement, including an estimated 21,000 who are expected to owe less because their principal will be reduced, according to estimates by the Department of Housing and Urban Development.
Other multimillion-dollar settlements were announced on Thursday in connection with the years-long mortgage and foreclosure crisis:
¶ A mortgage servicing subsidiary of Bank of America agreed to settle Federal Trade Commission charges that it illegally assessed more than $36 million worth of fees against struggling homeowners, in violation of an earlier settlement with the F.T.C.
¶ Bank of America, Citigroup, JPMorgan Chase and Wells Fargo also agreed to pay a penalty of $394 million as part of a settlement over foreclosure abuses, the Office of the Comptroller of the Currency said.
As more and more states signed on to the $26 billion settlement this week, the negotiations with the banks became especially intense, said one participant, who wasn’t authorized to speak publicly. Two bank officials, Frank Bisignano of JPMorgan Chase and Mike Heid of Wells Fargo, played a critical role in the talks with Secretary Donovan and Thomas J. Perrelli, the associate attorney general at the Justice Department. Bank of America, facing the largest payout, moved more cautiously, the participant said.
The settlement money will be doled out under a formula that gives banks varying degrees of credit for different kinds of help. As a result, banks should be motivated to help harder-hit borrowers with homes worth far less than what they owe.
Mortgages owned by the government’s housing finance agencies, Fannie Mae and Freddie Mac, will not be covered under the deal, excluding about half the nation’s mortgages.
About one in five Americans with mortgages are underwater, which means they owe more than their home is worth. Collectively, their negative equity is almost $700 billion. On average, these homeowners are underwater by $50,000 each.
A recent estimate from the settlement negotiations put the average aid for homeowners at $20,000.
“I just don’t think it’s going to be a life-changing event for borrowers,” said Gus Altuzarra, whose company, the Vertical Capital Markets Group, buys loans from banks at a discount.
Several billion dollars would cover the direct cash payments to foreclosure victims and provide money for states’ attorneys general to provide services like mortgage counseling and to conduct future investigations into mortgage fraud.
Though many economists identify the moribund housing market as the greatest drag on the recovery, it is not clear how much the settlement will help.
Christopher J. Mayer, a housing expert at Columbia Business School, said the accord could give banks more certainty that they can clear their large backloads of seized homes, restoring the flow of those homes into the market.
“It may be good for individual homeowners, but if you don’t do something to help the foreclosure process, it’s not going to help the housing market,” he said.
Mark Zandi, the chief economist for Moody’s Analytics, said that while the settlement looked small compared with the scope of the problem, it was not necessary to erase all, or even most, of the nation’s negative equity to turn the market around.
About a third of houses on the market now are distressed, or have been through foreclosure, he said, and reducing that percentage by just a small amount could be enough to put a floor under housing prices.
More than the dollar figures, the settlement had been held up amid concern by New York’s attorney general, Eric T. Schneiderman, that it provided too broad of a release for banks for past misdeeds, making future investigations much more difficult.
Mr. Schneiderman was able to win significant concessions from the banks in recent days.
In the agreement’s expected final form, the releases are mostly limited to the foreclosure process, like the eviction of homeowners after only a cursory examination of documents, a practice known as robo-signing.
The prosecutors and regulators still have the right to investigate other elements that contributed to the housing bubble, like the assembly of risky mortgages into securities that were sold to investors and later soured, as well as insurance and tax fraud.
Officials will also be able to pursue any allegations of criminal wrongdoing. In addition, a lawsuit Mr. Schneiderman filed Friday against MERS, an electronic mortgage registry responsible for much of the robo-signing that has marred the foreclosure process nationwide, and three banks, Bank of America, JPMorgan Chase and Wells Fargo, will also go forward.
Along with how broad the releases would be, California’s attorney general, Kamala Harris, also pushed for her state to be able to use the state’s False Claims Act. That would enable state officials and huge pension funds like Calpers to collect sizable monetary damages from the banks if officials could prove mortgages were improperly packaged into securities that later dropped in value.
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