California Pulls Out of Talks on Foreclosure Abuses

By Rick Daysog, The Sacramento Bee

02 October 11

alifornia has pulled out of nationwide settlement talks with US banks over abuses in the foreclosure system, citing a "troubling" upsurge in recent foreclosure filings in the state.

California Attorney General Kamala Harris' decision to exit the talks means they likely will fail, banking experts said.

In a letter Friday to Associate US Attorney General Thomas Perrelli and Iowa Attorney General Tom Miller, Harris said the proposed settlement - widely reported to be $20 billion - is "inadequate" for homeowners and provides too much immunity for bank officials.

"After much consideration, I have concluded that this is not the deal California homeowners have been waiting for," wrote Harris, who met with many of the major banks in Washington, DC, last week.

"(The) relief contemplated would allow too few California homeowners to stay in their homes," she added.

For the past 11 months, a coalition of attorneys general in 50 states have been working with five of the largest mortgage servicers in the country on a settlement agreement that would provide financial relief to distressed homeowners.

The coalition was formed following the so-called "robo-signing scandal," in which some banks and mortgage servicers were accused of rubber-stamping foreclosures without actually reviewing homeowners' loan documents.

Homeowner horror stories still abound, even though lenders say they have cleaned up their foreclosure processing practices. Earlier this year, the nonprofit California Reinvestment Coalition surveyed 55 foreclosure counselors around the state. Ninety-four percent said they had worked with clients who lost homes even though they had worked out a loan modification with a lender or were in the process of finalizing one.

Consumer advocacy groups had pegged the proposed lender settlement at $20 billion, which they said is too low given the magnitude of the nationwide foreclosure crisis.

Bert Ely, an Alexandria, Va.-based banking consultant, said California's pullout all but dooms any hope of national settlement.

As the largest state and one of the hardest hit by the mortgage meltdown, California carries a lot of clout in such settlement talks. Other states, including New York, also have expressed reservations.

"The global settlement idea sounds good in theory, but it never looks good in practice," Ely said.

In her letter, Harris raised concerns about the recent upswing in foreclosures in California, noting that the state's problems have only worsened since talks began 11 months ago.

According to San Diego-based DataQuick, the number of notices of default statewide - the first step in the foreclosure process - rose 72.5 percent in August to 29,120 from July's 16,877.

During the same period, the four-county Sacramento area saw a nearly 82 percent increase, DataQuick said.

That figure included a nearly 212 percent increase in local filings by lending giant Bank of America Corp., which froze foreclosures last year only to step them up in August, saying it had made improvements to the way it processes troubled loans.

Harris said she has asked the state's Mortgage Fraud Strike Force, which she formed in May, to broaden its scope of inquiry to include the entire mortgage lending process, including how loans are originated, how they are serviced and how they are bought and sold on the secondary market.

The California Bankers Association, which represents nearly 200 lenders in the state, acknowledged that any hopes for a national resolution may "have dimmed" with California's pullout from the talks.

But the association, which was not a party to the settlement negotiations, said it will continue to work with state and local governments and community groups to craft foreclosure alternatives to help distressed homeowners.

Consumer and community groups applauded Harris for broadening the state's investigation and rejecting the proposed settlement.

Brian Heller de Leon, lead community organizer for PICO California, a Sacramento-based homeowners advocacy group, said banks need to be held accountable for their role in the foreclosure mess.

He estimated that California's portion of the proposed $20 billion settlement would have been enough to help 20,000 homeowners, a fraction of the 2.2 million homeowners who are facing foreclosure or whose mortgages exceed what their homes are worth.

Kristina Bedrossian, spokeswoman for the California Reinvestment Coalition, said her organization has raised concerns that the proposed deal does not require the banks to reduce the amount of principal payments on distressed homeowners.

"With 32 percent of the mortgages underwater, principal reduction is the only way distressed homeowners are going to catch up and have a loan that they can afford," she said.