Foreclosure Deal Credits Banks for Routine Efforts

By Shaila Dewanand, Jessica Silver-Greenberg, The New York Times

08 April 12

n February, JPMorgan Chase donated a home to an Iraq war veteran in Bucoda, Wash., and Bank of America waived the $140,000 debt that a Florida man still owed after the sale of his foreclosed home. Over the last year, Wells Fargo has demolished about a dozen houses in Cleveland.

Banks do things like this - real estate transactions that do nothing to prevent foreclosure - all the time. But beginning this month, they can count such activities as part of their new commitment to help people stay in their homes.

That commitment comes under the landmark $25 billion foreclosure abuse settlement between the government and five major banks announced last month. The settlement promises that of the $25 billion, the banks will give $17 billion "in assistance to borrowers who have the intent and ability to stay in their homes," according to a summary of the settlement. But more than half of that money can be used in ways that will not stop foreclosures, including some activities that are already standard bank practices.

For example, the banks can wipe out more than $2 billion of their obligation by donating or demolishing abandoned houses. Almost $1 billion can be used to help families that have already defaulted move out.

"The $17 billion is supposed to be the teeth of this settlement," said Neil M. Barofsky, the former inspector general for the Treasury's bank bailout fund known as the Troubled Asset Relief Program. "And yet they are getting all this credit for practices that they do every day."

Only 60 percent of the $17 billion designated for borrowers, or $10.2 billion, must be used to reduce principal for borrowers who owe more on their mortgages than their homes are worth - though banks can do more if they choose.

The architects of the settlement contend that it was meant not just to prevent foreclosure. The provisions allowing demolition and donation of homes are supposed to force banks to reduce a large inventory of empty homes that are in legal limbo, creating hazards and depressing property values, said Patrick Madigan, an assistant attorney general in Iowa who was instrumental in constructing the agreement. Just because the banks are doing some of those things already, he said, does not mean they are doing them enough.

"There are lots of ways to help homeowners and helping a person stay in their home is the primary one, but it's not the only one," Mr. Madigan said. "There's all kinds of damage that is done by inadequate loan servicing. And it's not just the people who live in those homes, it's also their neighbors - that's the really insidious thing about foreclosures."

The five banks in the settlement declined to comment.

The government officials who brokered the agreement estimated that a million borrowers would receive relief under the $10 billion-plus for debt reduction and another $3 billion to help borrowers who are current on their mortgages refinance at lower interest rates. Mark Zandi, the chief economist at Moodys.com, estimates that the total will be closer to 700,000 borrowers - 250,000 for refinancing, and 450,000 for principal reduction. That is partly because there are homeowners who owe so much more than their homes are worth that even the deal's average aid of $30,000 or so of principal reduction will not make them less likely to default.

"After looking at the data in detail, I'm beginning to wonder if you're going to find enough homeowners where principal reduction works in a meaningful way," Mr. Zandi said.

For that reason, he said, it was necessary to give banks credits for other types of activities.

The settlement was reached after months of negotiations with the five largest mortgage servicers - Ally Financial, Bank of America, Chase, Citibank and Wells Fargo - after allegations surfaced in 2010 that bank employees were fabricating or failing to review documents used in foreclosure proceedings. Banks initially fought any requirement to reduce borrowers' loan size, but the state attorneys general insisted that debt reduction be the linchpin of the plan.

Many of the options on the menu were initially suggested by the states or by the Housing and Urban Development Department, not the banks, Mr. Madigan said. Still, the settlement has attracted criticism that it is too easy on the banks. Its architects, including state attorneys general, the Justice Department and HUD, have defended the settlement as appropriate to the offense.

Shaun Donovan, the housing secretary, has said the settlement will be a catalyst that proves that reducing mortgage debt is cost-effective for lenders.

But the problem, say some academics and former regulators, is that the settlement has less bite than advertised.

"It accomplishes remarkably little in the form of real relief for homeowners because it gives the banks credit for far too much," said Adam J. Levitin, a law professor at Georgetown.

One example of credit for business as usual is the provision allowing banks to satisfy $1.7 billion of their obligations for waiving "deficiency judgments," the amount a borrower still owes if a house in foreclosure is sold for less than the remaining mortgage debt. Banks are permitted to go after homeowners to recover the shortfall in 41 states.

But some foreclosure defense lawyers say that the five major banks included in the settlement virtually never go after homeowners for that type of debt. Ally Financial does not pursue deficiency judgments at all, according to Gina Proia, a spokeswoman for the bank. Other banks declined to disclose their policies.

But last month, Bank of America let Marcos Triana walk away from the $140,303 debt he owed after he lost his home in Winter Haven, Fla. Mr. Triana, a 36-year-old fiber-optic technician, could not catch up on his mortgage payments after his wife's business was torpedoed by the recession. "I was really happy to just be able to get this off my head," Mr. Triana said.

In a case like this, Bank of America could claim $14,000 in credit, or 10 cents for every dollar of debt waived.

Because the settlement is meant to encourage banks to reduce mortgage debt before turning to other options, banks can earn more credit for principal reduction - up to $1.25 on the dollar.

While waiving deficiency judgments is not direct help for homeowners trying to stave off foreclosure, it can provide a lift for the housing market and provide indirect aid, some experts said.

"The borrowers are getting something out of it because that extra debt is not hanging over their heads," said Michael S. Barr, a former assistant treasury secretary. "I think that that is a real and meaningful form of relief. "

Under the settlement's antiblight provisions, banks get credit for donating, demolishing or forgiving debt on abandoned homes, the last of which is intended to encourage the owner to return. They receive 100 cents on the dollar for each demolition and donation and 50 cents for debt forgiveness.

JPMorgan Chase has donated roughly 3,300 homes to nonprofits or municipalities since 2009, according to a bank spokesman. Last year, Citibank donated 205 properties, and Bank of America agreed to pay for the demolition of 100 abandoned homes in Cleveland, 100 in Detroit and 150 in Chicago. William K. Black, a law professor at University of Missouri and former senior deputy chief counsel at the Office of Thrift Supervision, said he worried that banks might overstate the fair market price of the homes donated.

The credits over all, Mr. Black said, "are a pretty sweet deal for banks since it gives them a pat on the back for what they are already doing."