Will Foreclosure Scandal Lead to Better Laws—or Just a Pause?

Will Foreclosure Scandal Lead to Better Laws—or Just a Pause?

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MILPITAS, Calif.—Ching Sun has been trying for nearly two years to renegotiate his mortgage and stave off foreclosure on his family’s modest home in this San Jose suburb.

So he ought to feel heartened by a push for a national moratorium on foreclosures in the wake of a growing scandal involving some of the largest U.S. lenders.

But Sun, who fell behind on his mortgage payments after his import-export business collapsed in 2008, is skeptical that a moratorium would do much beyond provide borrowers like him a temporary “breather.” After six fruitless attempts to modify his loan, Sun received a notice from PNC Financial Services last month that his house is now formally in foreclosure. He and his wife don’t know if and when they will have to leave.

"People need something like [a moratorium by Congress], because there is nothing we can do anymore,” Sun said. But ultimately, instead of merely delaying foreclosures, “we need legislation to prevent them. I think [the banks] should be mandated to do loan modifications. This will be most helpful.”

Calls for a national moratorium have grown louder in recent days, fueled by outrage over revelations that some of the nation’s biggest financial institutions broke the law by failing to properly verify foreclosure filings. Court documents revealed the widespread practice by bank employees of rubber-stamping—“robo-signing”—foreclosure paperwork that they did not personally review.

Sun’s lender, PNC Financial, as well as Bank of America, JPMorgan Chase, and Ally Financial Inc, are among the institutions that have joined in temporarily halting foreclosures while they review their procedures. (Bof A said Monday that it will resume foreclosures in 23 states in coming weeks.)

Foreclosures Approaching Record Levels

Meanwhile, foreclosures have been approaching record levels. From July through September, banks seized 288,345 properties around the country, the most ever in a three-month period, according to data released last week by RealtyTrac, a foreclosure listing service. In the same quarter, some 930,437 U.S. homeowners received a foreclosure-related warning—or approximately one in 139 households, up 4 percent from the April-June period.

Banks have repossessed more than 816,000 homes through the first nine months of 2010, RealtyTrac reported.

“If [the big banks] are concerned [about the foreclosure process], the rest of us should be, too,” Dean Baker, co-director of the Center for Economic and Policy Research, told TheHill.com’s Congress Blog. “A [congressionally imposed] moratorium would give regulators an opportunity to review the procedures that each lender has in place. It would prevent them from moving forward until they could prove they were conducting foreclosures in compliance with the law. In this way, it would be very similar in purpose to the moratorium that President Obama imposed on deepwater drilling in the Gulf following the BP spill.”

A number of lawmakers—mainly Democrats—have also been pressing regulatory agencies to take action. Dean DeBuck, spokesperson for the Office of the Comptroller of the Currency (OCC), said in an email: “Immediately after concerns surfaced regarding Ally foreclosure processing issues, the OCC ordered large national bank servicers to review their procedures to ensure compliance with state and federal law before foreclosing on seriously delinquent borrowers.” The lenders targeted by the OCC include JPMorgan Chase, Bank of America, Citigroup, HSBC Finance Corp., PNC, and Wells Fargo.

Meanwhile, attorneys general of all 50 states have launched their own probes.

In California, prior to foreclosing on a property, banks are required to do due diligence and make a good-faith effort to contact homeowners, discuss the various options, and work out a solution, according to Jim Finefrock, spokesperson for the state Attorney General’s Office. Jerry Brown, the current holder of that office, is locked in a tight race for governor against Republican Meg Whitman.

But the banks’ actions in other states suggest that they might not be obeying California’s foreclosure laws, Finefrock said. His office has sent letters to Ally Financial, previously known as GMAC, and JP Morgan Chase, both of which have acknowledged engaging in sham verifications of foreclosure filings, and has ordered them to prove that they are complying with state law “or stop doing foreclosures in California,” Finefrock added.

Finefrock said the state is also in discussion with other banks to ensure they comply with state law.

Too Little, Too Late

While Ching Sun welcomes the investigations, he also sees them as too little, too late. “They should have done this a long time ago,” he said. In his effort to get his mortgage modified, he has consulted lawyers and written to Senator Dianne Feinstein, the Federal Reserve and the Better Business Bureau—all to no avail. “I have a better chance of winning the lottery than getting a loan modification,” he said.

Adding to Sun’s frustration is the fact that PNC Financial—formerly National City Bank—has never explained why his applications have been denied. His wife is employed, so they have some income, and their house—which they purchased for $460,000 in 2004—is underwater (meaning the mortgage exceeds the current value) by only 20 to 30 percent.

“Banks will modify loans if they see that it’s to their own benefit,” Sun says. “If you lose 50 percent of your [home’s value] or more, they lose a lot of money, so they would never foreclose on you.” But in his case, he adds, “they would rather foreclose on us. … If [the lender resells] the property, anyway, why [not let] the former owner buy it back?”

Stringing Borrowers Along

Maeve Elise Brown, executive director of Housing and Economic Rights Advocates in Oakland, Calif., echoed Sun’s concerns.

“A moratorium could be very helpful for people in our own state,” she said, “but you have to crack down on lenders for failing homeowners and stringing them along."

As Sun has discovered, lenders are not obligated to explain why a loan modification was denied, which encourages many people to reapply even if their chances are nil, Brown said. “A moratorium doesn’t fix the problem of false hope.”

Preeti Vissa, community reinvestment director with the Berkeley, Calif.–based Greenlining Institute, says homeowners would benefit most in the near term from options that reduce the total amount of their loan.

“We know today that principal reduction is the most sustainable part of a loan modification,” Vissa said. “We’re seeing that without that, the homeowner is paying [perhaps just] $15 less a month [on their mortgage], and they end up defaulting in 90 days anyway.”

But she notes that homeowners face severe hurdles in trying to renegotiate their loan principal, because 80 percent of home loans are owned by investors, “and [banks] can’t reduce principal without investor approval.”

Vissa says the current scrutiny on big lenders and a foreclosure moratorium could be opportunities for housing advocates, policymakers and bankers to step back and see what they could do to lessen the foreclosure crisis.

“I see the banks are doing a lot to contact the homeowner,” he said. “About a year ago, you wouldn’t have seen that, but there still is a lot to be done… They are discussing options, but are they really following through and aggressively pursuing the options that keep the homeowner in the home?”