[Vision2020] Whores Charging Twice

[Art Deco]

 [image: The New York Times] <http://www.nytimes.com/>

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February 17, 2013
The Second-Mortgage Shell Game By ELIZABETH M. LYNCH

IN January, federal regulators announced an $8.5 billion
agreement<http://www.federalreserve.gov/newsevents/press/bcreg/20130107a.htm>with
10 mortgage servicers to settle claims of foreclosure abuses,
including bungled loan modifications and the wrongful evictions of
borrowers who were either current on their payments or making reduced
monthly payments.

Under the deal, announced by the Federal Reserve and the Office of the
Comptroller of the Currency, the mortgage servicers will pay $3.3 billion
to borrowers who went through foreclosure in 2009 and 2010 and an
additional $5.2 billion to reduce the principal or the monthly payments of
borrowers in danger of losing their homes.

Those numbers might look impressive, but the deal is far too modest to be a
credible deterrent to reckless foreclosure practices.

Consider the last big mortgage settlement. Last February, the federal
government and 49 state attorneys general reached a $25 billion
deal<http://www.nytimes.com/2012/02/09/business/states-negotiate-25-billion-deal-for-homeowners.html>with
the country’s five largest mortgage servicers — Bank of America,
JPMorgan Chase, Wells Fargo, Citibank and Ally Financial (formerly GMAC).
They promised to help save
homeowners<http://www.ag.ny.gov/press-release/ag-schneiderman-secures-136-million-struggling-new-york-homeowners-mortgage-servicing>from
unnecessary foreclosure.

A year later, it’s clear that the settlement hasn’t worked as planned.
Banks have dragged their feet in modifying first mortgages, much less
agreeing to forgive part of the principal on homes that are underwater. In
fact, the deal contained a few flaws. It has allowed banks to push
homeowners into short sales, an alternative to foreclosure whereby the
distressed homeowner sells the property for less than the debt that is
owed. Not all short sales are bad — some homeowners are happy to walk away
with the debt cleared — but as a matter of social policy, the program has
failed to keep people in their homes.

A lesser-known but equally grave problem is that banks have been given a
backdoor mechanism to continue foreclosures at the same pace as before.

The problem involves second
mortgages<http://furmancenter.org/files/publications/Essay_Sticky_Seconds_--_The_Problems_Second_Liens_Pose_to_the_Resolution_of_Distressed_Mortgages.pdf>,
which millions of homeowners took out during the housing bubble. It’s
estimated that as much as a quarter of all mortgage debt in the United
States is in the form of second mortgages. Some of these loans were taken
out to finance home improvements; others were part of a subprime product
known as an “80/20 mortgage,” in which 80 percent of the purchase price was
covered by a first, adjustable-rate mortgage, and the remainder by a second
mortgage, often with a much higher interest rate.

The second mortgages have given the banks a loophole: each dollar a bank
forgives goes toward fulfilling its obligation under last year’s
settlement. But many lenders have made it a point to almost exclusively
modify secondary loans while all but ignoring the troubled, larger primary
mortgages.

It’s a real problem: when it comes to keeping your home, it’s the first
mortgage that counts.

Take Tiberio Toro, a Queens resident who took out an 80/20 mortgage in 2006
when he purchased his home, and who now owes far more to the bank than his
house is currently worth. Recently, Wells Fargo told him that it completely
forgave his second loan. But at the same time, it declined to modify his
first mortgage — an adjustment Mr. Toro needs to get his monthly payment to
a level he can afford.

Why would a bank forgive a second mortgage completely but move forward with
foreclosure on the first mortgage?

Surprisingly, such a tactic often makes sense for banks. When a lender
forecloses on a first mortgage, the house in question is typically sold at
auction. If the house is worth less than the loan amount, the bank gets
only part of its money back. But after the sale, of course, there’s no
asset left to pay off *any *of the second loan. The holder of that second
loan — which has lower priority than the holder of the first — gets
nothing.

So a lender can forgive a second mortgage — which in the event of
foreclosure would be worthless anyway — and under the settlement claim
credits for “modifying” the mortgage, while at the same time it or another
bank forecloses on the first loan. The upshot, of course, is that the
people the settlement was designed to protect keep losing their homes.

The five banks covered under last year’s settlement are wiping out second
mortgages in record numbers. In New York State, for example, during the
first six months of the settlement period, three times as many homeowners
received second-mortgage
forgiveness<https://www.mortgageoversight.com/wp-content/uploads/2012/11/Continued-Progress_11.19.12.pdf>(2,933)
as received permanent modifications on first mortgages (967).

In New York State, 36.2 percent of the banks’ credits under the settlement
have been related to second loans, compared with only 18.2 percent for
first mortgages.

In 2011, the five banks that are subject to last year’s settlement sent
230,678 pre-foreclosure notices to New York State homeowners, according to
data I obtained from the Finance Department through the Freedom of
Information Law.

As is well known, many of those at greatest risk of losing their homes are
African-American or Latino. Under the settlement, banks get more credit for
forgiving mortgages that they own (“portfolio loans”) than those they sold
to Wall Street and currently only service. These portfolio loans are
largely conventional loans; those sold to Wall Street were subprime. It was
these notorious subprime loans that were
marketed<http://cityroom.blogs.nytimes.com/2007/10/15/subprime-mortgages-concentrated-in-citys-minority-neighborhoods/>,
often through predatory
lending<http://www.nytimes.com/2012/10/15/business/aclu-to-sue-morgan-stanley-over-mortgage-loans.html>practices,
to black
and Latino borrowers<http://www.nytimes.com/2012/07/13/business/wells-fargo-to-settle-mortgage-discrimination-charges.html>during
the housing bubble.

There is a lesson to be learned from the deficiencies of the National
Mortgage Settlement. And the new deal reached by the Fed and the
comptroller of the currency provides an opportunity to get right what the
49 attorneys general got wrong. At a Senate Banking Committee hearing on
Thursday, Senator Elizabeth Warren, Democrat of Massachusetts, called on
regulators to take tough enforcement actions and not settle for negotiated
agreements with banks.

To do that, the government must clearly require that relief be given in the
form of first-mortgage modifications. In addition, the settlement should
direct the banks to provide relief in the ZIP codes hardest hit by
predatory lending.

Finally, we need real transparency to monitor the new settlement. That
means that the public should easily be able to determine who is getting
relief, and how. Until that’s done, as we’ve seen, banks are likely to keep
playing the same old shell game.

Elizabeth M. Lynch is a lawyer at MFY Legal
Services<http://www.mfy.org/about/about-mfy/>,
a New York City organization that provides free civil legal aid.


-- 
Art Deco (Wayne A. Fox)
art.deco.studios at gmail.com
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