The other foreclosure settlement: Millions of homeowners eligible
Millions of borrowers who suffered financial losses from foreclosure abuse now have two ways of getting compensated.
Video [embedded] Housing chief: Put out foreclosure fire
By Les Christie @CNNMoney February 20, 2012: 12:51 PM ET
NEW YORK (CNNMoney) -- Millions of borrowers who suffered financial losses because their mortgage lenders played fast and loose while processing their foreclosures now have two ways of getting a payback.
But there is also an earlier settlement that has been nearly forgotten -- and that could lead to an even bigger payoff, in some cases.
As part of an enforcement action by federal authorities last April, 14 mortgage servicers, including Bank of America (BAC, Fortune 500), Chase (JPM, Fortune 500), Citibank (C, Fortune 500), HSBC (HBC), MetLife Bank (MET, Fortune 500), PNC Mortgage (PNC, Fortune 500) and Wells Fargo (WFC, Fortune 500), agreed to hire independent consultants to investigate foreclosure abuses and compensate those who suffered financial harm.
As a result of the program, up to 4.3 million mortgage borrowers who were foreclosed on in 2009 and 2010 will have a chance to request an independent review of how their foreclosure was handled.
So far, only 90,000 eligible homeowners have submitted claims, prompting the feds to extend the deadline for applications by three months to July 31.
The exact amount of money borrowers will receive has yet to be determined. But if a review finds that "financial injury" occurred -- say a bank charged inappropriate fees or it went forward with a foreclosure without a valid claim to the property -- a homeowner could be repaid in full for their losses.
Borrowers who were improperly charged even just a single fee could be repaid for it, according to Bryan Hubbard, a spokesman for the Office of the Comptroller of the Currency, one of the federal regulatory agencies that negotiated the agreement.
And borrowers who suffered much larger losses could be in line for much bigger repayments than promised by the AG's settlement, which will pay up to $2,000 to the estimated 750,000 who lost their homes to foreclosure between 2008 and 2011.
The compensation could even repay the cost of regaining a wrongfully lost home if warranted by the facts of the case, according to Hubbard.
The Independent Foreclosure Review was sparked by the robo-signing scandal that exposed the bank's treatment of borrowers in the foreclosure process. The lenders lost documents and recreated them, had low-level employees with no knowledge of what they were attesting to sign legal papers and bent the rules requiring them to halt foreclosures if borrowers sought mortgage modifications.
Unlike the $26 billion settlement with the state attorneys general, borrowers didn't have to lose their homes in order to receive compensation, according to Hubbard.
"It could be anyone who suffered financial loss because of errors made in the foreclosure process," he said.
Since the settlements are completely independent of one another, claimants can double-dip, filing for compensation under both settlements. (To seek compensation under the state attorneys general settlement, contact your lender or servicer and ask them to review your case).
To make a claim for the Independent Foreclosure Review, borrowers have to fill out a five-page form that identifies some examples of situations that may have led to financial injury. Borrowers do not have to provide documentation. That will be handled by an independent agency.
No reviews have been completed yet, according to Hubbard. And individual cases may take months to come to decision.
Bank representatives help people with their mortgages during the Help for Homeowners Community Event in Miami. The event is for homeowners who have fallen behind on their mortgages or who are facing financial difficulty and at risk of falling behind. (Joe Raedle, Getty Images / February 22, 2012)
There's no firm evidence that mass walkaways by underwater homeowners during the housing crisis ever happened. But maybe they should have.
By Michael Hiltzik February 24, 2012, 6:11 p.m.
Walkaways. Jingle mail. Strategic defaults.
Those of you already experiencing nostalgia for the cliffhanger days of the housing crisis will remember those terms. They were applied to homeowners who were supposedly so distressed at the collapse of the homes' values that they were abandoning the properties to foreclosure, even though they still had the wherewithal to keep up their mortgage payments.
These borrowers were just "walking away" from their homes; "jingle mail" was a fanciful way of describing the sound made when they mailed their keys back to the bank; "strategic default" was the sober, nonjudgmental way of describing the phenomenon in financial journals.
The alarm was sounded mostly by banks and other lenders, who suggested that this outburst of moral turpitude by previously obedient homeowners threatened to make the housing crisis indescribably worse.
As the panicky talk of jingle mail picked up volume in May 2008, I wrote an article pointing out that there was no hard evidence that it was actually happening. Sure, millions of Americans entered foreclosure — but the notion that any of them did so even though they could afford to pay the mortgage was unproved.
Still, at the time home prices nationwide had only fallen by an average 15% from their peak, judging from the Standard & Poor's Case-Shiller home price index, and still had a ways to go. The default rate on first mortgages [ https://www.documentcloud.org/documents/302229-first-mortgage-defaults.html ] was yet a year shy of its May 2009 peak, when it would reach nearly 6% across the board. (It's now down to just over 2%.)
So it's proper to look back at whether the threat of mass walkaways ever did materialize, as home values continued to plummet and defaults soared. The answer is: There's still no firm evidence that it ever happened.
That's not for want of searching. The shelf of mortgage market analyses groans under the weight of efforts to quantify walkaways. Federal Reserve Banks, academic researchers, investment analysts all have taken a crack at the topic.
"It's always going to be fuzzy," Michael J. Seiler of Virginia's Old Dominion University, the study's lead author, told me.
Researchers do know that default rates rise in tandem with the depth of negative equity. That could be evidence that people who are underwater are giving their homes back to the bank even though they could afford to pay the mortgage. Or it could mean merely that even distressed borrowers will try to hang on to their homes in the hope of recovering their equity, until the hopelessness of their situation finally overwhelms them.
Researchers have tried every which way to mark a line between the unable and the unwilling. The consulting firm Oliver Wyman and the credit bureau Experian, for example, jointly figure that if your mortgage is in default but your non-housing debts are all current, you're a "strategic defaulter." Their rationale is that traditionally people let everything else slide as long as they could keep their house, so if the trend is reversed, something else must be at work. By this measure, they say, strategic defaults peaked [ http://www.experian.com/assets/decision-analytics/reports/strategic-default-report-3-2011.pdf ] at the end of 2008 at 20% of all defaults.
That still involves a lot of guesswork. For one thing, a mortgage payment may be a homeowner's biggest bill every month, so paying it may wipe out a debtor more thoroughly than taking care of a host of smaller bills. Plus once the foreclosure process starts, it can drag on for a year or more before the house is lost. A credit card issuer, however, can cut you off in a nanosecond.
But even presuming that many people could manage to stay in their house, that doesn't mean they necessarily should. If there's no prospect of recovering equity in a home for years or decades, the wisdom of keeping it at the expense of money better put toward college savings or retirement diminishes.
What often gets overlooked in the debate over walkaways is why it should matter. A default is a default, isn't it? Seiler, for one, disagrees — he argues that defaults for noneconomic reasons have a uniquely corrosive effect on social behavior.
That's based on the notion that borrowers have a moral obligation to pay their debts. Yet a mortgage contract is a legal document, not moral catechism. It doesn't require you to make your payment regardless of your financial state; only that you recognize that if you don't, you might lose your house.
Mortgage lenders customarily try to price the likelihood of delinquency or default into the loan; that's why borrowers with the best credit scores typically pay the lowest interest rates. Nor is the credit score a gauge of moral purity — it's an empirical reflection of the borrower's debt load and bill-paying record.
No less a towering figure in American jurisprudence than Oliver Wendell Holmes Jr. wrote skeptically in 1897 [ http://www.constitution.org/lrev/owh/path_law.htm ] of the inclination to invest contracts "with a mystic significance." He explained that the duty of fulfilling a contract means "you must pay damages if you do not keep it — and nothing else."
Nevertheless, as the recent housing crisis gained steam, bankers, government officials, financial columnists and others admonished homeowners that they had a sacred obligation to virtually bankrupt themselves so their mortgage lenders would remain whole.
In other words, strategic defaults were wicked, though strategic bankruptcies by corporations looking to shed such obligations as union contracts and pension commitments were apparently just fine. Here's then-Treasury Secretary Henry M. Paulson in full harangue [ http://www.treasury.gov/press-center/press-releases/Pages/hp856.aspx ] in 2008: "Any homeowner who can afford his mortgage payment but chooses to walk away from an underwater property … is not honoring his obligations."
Lest you mistake Paulson for an ordained minister with a diploma from a recognized divinity school, I'll remind you that he's a former chief executive of Goldman Sachs, which instead of eating its $14 billion in losses from the collapse of American International Group in 2008 mewled like a baby until the U.S. government — that is, you the taxpayer — covered those losses at 100 cents on the dollar. Paulson oversaw that bailout as Treasury secretary. If you need an ethics guru, look elsewhere.
The myth that a homeowner is morally bound to commit his wealth down to his cuff links to pay his mortgage chiefly benefits the mortgage industry. It distracts borrowers from looking objectively at their financial choices and rationalizes the lenders' resistance to modifying mortgage terms to stave off foreclosure.
"It's unfortunate how many people will squander their savings out of some misguided sense that it's immoral to make a good financial decision," says Brent T. White, a University of Arizona law professor who has written about the moral pressures on borrowers.
The vilification of strategic defaulters as walkaways or deadbeats has still not ebbed, although their numbers are still murky. What's known is that default rates on underwater homes have consistently been lower than economists would have expected, and that only a small percentage of defaults have been walkaways by any definition.
All the industry blather about the sanctity of the mortgage payment may have had its effect, after all. Given the economic realities of recent years and the wisdom of rationally weighing one's financial options, the problem may be not that too many people walked away from their devalued homes, but too few.
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