Four years into the foreclosure crisis, banks say they've made major improvements in how they handle struggling homeowners. They've promised, for example, not to foreclose on homeowners who are being considered for mortgage modifications. But that's still happening.
Consider the cases of Laurie Pinkerton and Lisa Peterson. The two women, both Californians and Bank of America customers, had been assured by the bank that they wouldn't lose their homes before they'd been evaluated for a possible modification. Both had their homes sold last month.
Such cases are particularly senseless, because simply modifying the mortgage by reducing the monthly payment might be in the interest not only of the homeowner, but also of the investor who owns the mortgage. Both Pinkerton and Peterson said their homes were sold after foreclosure for far less than they're worth.
Regulators have done little to stop the practice, and the "problem appears to be getting worse," said Kevin Stein, associate director of the nonprofit California Reinvestment Coalition.
Last month, the coalition surveyed 55 foreclosure-avoidance counselors throughout the state. Collectively they serve thousands of borrowers every month. Almost all of the counselors, 94 percent, reported having worked with clients who'd lost their homes while under review for a modification. About half of the counselors reported this happened "often." This year's totals, which are due to be publicly released next week, are higher than those in the group's survey last year.
Regulators have acknowledged the problem but have so far stopped short of solving it, say borrower advocates. More than a year ago, ProPublica reported extensively on how the banks' inadequate systems were causing wrongful foreclosures.
This past April, the federal banking regulators released "consent orders" with 14 of the largest banks requiring various improvements in their handling of mortgages and foreclosures. Prior to the orders, the regulators had not had clear rules on how the banks should handle modification applications. Among the new requirements, banks will now be forbidden from actually selling a home before a final decision is made on a modification. Also, if a homeowner is approved for a modification, the foreclosure process is supposed to stop. The new requirements will go into effect later this summer.
While those are necessary requirements, regulators took a "huge step backward" by not explicitly forbidding banks from pursuing foreclosure at all until a final decision has been made on a mortgage modification application, said Alys Cohen of the National Consumer Law Center.
The administration's mortgage modification program, which offers incentives to encourage modifications, has that requirement. But that program is voluntary for the banks and has been hobbled by lax oversight. What's more, over two-thirds of modifications occur outside of the program.
Federal regulators have the power to require all banks to make a decision on a modification application before moving to foreclose, but they've simply chosen not to.
Allowing the banks to pursue foreclosure while the modification process plays out hurts homeowners in multiple ways. First and foremost, there's the hazard of actually losing the home to foreclosure because of bank error. The two homeowners featured in this story show that this continues to be a real danger, especially in states like California where the bank doesn't need to go to court to foreclose. It's also just confusing and unnecessarily stressful for homeowners. Finally, in a foreclosure homeowners actually get billed for bank costs, such as paying for a bank's lawyers.
Instead of outright forbidding banks from pursuing foreclosure while they're considering homeowners for a modification, regulators have asked the banks to explore whether it's a problem. The orders ask the banks to "conduct a review to determine whether processes involving past due mortgage loans or foreclosures overlap in such a way that they may impair or impede a borrower's efforts to effectively pursue a loan modification."
The primary regulator for the biggest banks is the Office of the Comptroller of the Currency, which has been much criticized for failing to crack down on banks' foreclosure failures. Bryan Hubbard, a spokesman for the OCC, said that the orders addressed the "situations that were most confusing to the borrower" and that the issue would be revisited at a later time when regulators draft new, comprehensive standards for the industry. When asked whether regulators were deferring to the banks on the issue, he said they were not deferring, because regulators would have to approve whatever conclusion the banks came to.
Two homeowners' tales
Although Pinkerton and Peterson live about 450 miles apart, they've had strikingly similar experiences with Bank of America.
Both contacted the bank before even missing a payment to see what steps to take, because they'd taken a hit to their income. Both say Bank of America employees told them they'd have to fall at least three months behind to be considered for a modification (advice that is both inaccurate and frequently given). Reluctantly, both did so.
As a result of missing payments, both soon found themselves facing foreclosure. But at least the modification process had begun, too.
Of course, it went slowly. Like millions of other homeowners, they waited months and months for an answer on their modification applications and sent in the same documents over and over again. Despite sending in those documents, both were told at one point that they'd been denied because they hadn't sent in the required documents (another extremely common problem).
Finally, last month, both had their homes sold at a foreclosure auction, despite the assurances of Bank of America employees that that wouldn't happen until they'd received a final answer on their application for a modification.
"The next thing I know, a guy is knocking on my door saying his boss is at the courthouse buying our house," said Peterson.
What makes foreclosure particularly unnecessary in both cases is that Pinkerton and Peterson had made a point of telling the bank they had the means to bring the loan current even if they didn't get a modification. And unlike many Californians, both had the option of selling the home to pay off the mortgage because their homes are worth more than they owe on their mortgage.
"I never received any letter saying you're denied," said Pinkerton. "If that would have been the case, I would have borrowed the money and went and paid it current." Her family had offered to help, she said.
Both errors are particularly hard to undo because Bank of America can't simply give the houses back: The bank sold both homes to others. In order to get the homes back, the bank would have to essentially convince the new owner to sell the home back. In a case we reported on last year, JPMorgan Chase paid about $20,000 above the purchase price to the buyer of a property the bank had mistakenly sold.
At this point in the two stories, the homeowners' paths diverge.
After complaining to everyone she could think of, Pinkerton was contacted by a Bank of America employee who said he worked in the bank's office of the president. He told her he'd work to get the sale reversed. Regardless, Pinkerton was evicted from her home last week.
"I've spent thousands of dollars moving that I didn't have," she said.
As recently as Wednesday, the Bank of America employee told her he's still working on her case.
Bank of America spokesman Rick Simon said the bank was researching whether a mistake had been made. "To the extent it is determined that mistakes in the process contributed to the mortgage reaching foreclosure, the bank will work with Ms. Pinkerton to explore viable and appropriate considerations, which may include rescission."
Simon also noted that Pinkerton had been sent letters in March and April saying that she'd canceled her application for a modification.
Pinkerton said she'd never asked to cancel her application, and when she called Bank of America to ask about the letters, she was told to disregard them. She did once reject a modification offer, but that was because it would have significantly raised her monthly payments. She says a Bank of America employee told her to appeal the offer because it had erroneously calculated her income at twice its actual level.
Peterson has been more successful. After the foreclosure sale, she made a number of frantic calls and finally got a bank employee to admit there'd been a mistake, she says. But nothing could be done about it, she was told.
After being contacted by various employees who said they'd been assigned to help resolve the matter, but who then couldn't be reached, she eventually hired an attorney.
Earlier this month, Bank of America rescinded the sale and returned the title to Peterson.
It's unclear whether the bank paid a premium to the buyer of Peterson's property in order to get it back. Bank of America's Simon said, "We continue to work on resolution of remaining third-party issues."
In general, Simon said such mistaken foreclosures "have been relatively rare, compared to the volume of defaults and foreclosure activity in today's economy." Across the country, about 4 million mortgages are currently more than three months delinquent.
"Any problem in this regard is of tremendous concern, and we have put additional checks and practices in place to further limit the possibilities," he added.
To Peterson, the lesson from her experience is clear. "This system is broken," she said. "You can't trust what the bank tells you."