2.5 million homes completed the foreclosure process between 2007 and 2010. The 2011 report by the Center for Responsible Lending found that the country was not even halfway through the foreclosure crisis. In total, the Federal Reserve estimates that $7 trillion in home equity was lost from American households between 2006 and 2011 due to the housing crisis.We're now in the sixth year of the economic collapse and the home foreclosure crisis persists. It continues to drag down families, destroy wealth, weaken communities and prevent economic recovery. Inadequate government response has led to a long-term economic crisis that could have been avoided. With good policy, more losses can still be avoided and the economy can begin a real recovery. According to a 2010 report by the Center for Responsible Lending,
The crisis of foreclosure and lost wealth is not over. Every three months, 250,000 new families enter the foreclosure process. According to a May 2013 report of the Congressional Budget Office (CBO), more than 13 million homes are still underwater, which increases the risk of foreclosure.
This crisis could have been averted through government policy that placed the needs of people, rather than those of the bankers, first. Because that hasn't happened yet, people are coming together and demanding that the Department of Justice (DOJ) start holding the big banks accountable. The Home Defenders League, a coalition of local groups that are fighting foreclosure, held a series of actions at the DOJ last week.
In this article, we describe what individuals can do to protect themselves and what local and federal governments can do to resolve the foreclosure crisis and place the nation on a path of economic recovery for everyone, not just for the wealthy.
The Foreclosure Crisis and Fake Recovery Hurt Everyone
Homes are the most valuable asset of American workers. Each foreclosure results in an average of $131,200 in lost wealth for the homeowner. In 2012, a total of $192.6 billion in wealth was lost due to foreclosures across the United States. For each of the nation's 113.7 million households, that equals an average of $1,679 in lost wealth. If the 13 million homes still at risk are foreclosed, another $221 billion in wealth will be destroyed, according to a report by the Home Defenders League released on May 20, 2013, "Wasted Wealth: How the Wall Street Crash Continues to Stall Economic Recovery and Deepen Racial Inequity in America."
Foreclosures do not only destroy the wealth of the families who lost their homes; they also drag down neighbors and communities. A report, "The Municipal Cost of Foreclosures," shows that foreclosures can result in as much as an additional $220,000 in reduced property value and home equity for nearby homes. In addition, foreclosure can add costs to local governments. One foreclosure can impose up to $34,000 in direct costs on local government agencies, including inspections, court actions, police and fire department time, potential demolition, unpaid water and sewage, and trash removal. Foreclosures in Newark, New Jersey, have cost the city, and taxpayers, $56 million, according to a report by New Jersey Communities United.
The foreclosure crisis has been most devastating in poor communities of color. A July 2011 Pew Research analysis found the median wealth among Hispanic households fell by 66 percent and among African-American households it fell by 53 percent after the bursting of the housing market bubble in 2006 and the recession that followed. According to "Wasted Wealth," these were the people who were specifically targeted with sub-prime and high-risk loans - mortgages designed to fail. Communities in which people of color were the majority of residents saw an average of $2,198 in lost wealth per household, while people in predominantly white communities lost an average of $1,267 per household. This massive loss came from a corrupt banking industry pervaded with fraud which targeted these communities.
This massive loss of wealth for working Americans comes in the context of a deep and sustained unemployment crisis that has resulted in tens of millions of Americans giving up trying to work or struggling with long-term unemployment. And for many of those who do work, it has meant lower wages and underemployment. But that is just the most recent crisis.
The US middle class has been in a long period of decline as we experience a race to the bottom in the treatment of workers, combined with a culture of endless consumerism and easy credit, leading to high debts. At present, 52 percent of Americans live paycheck to paycheck, 43 percent spend more than they earn and 46 percent do not have $5,000 in savings. And this is also the result of a so-called "recovery" in which 121 percent of income growth since the economic crash in 2008 has gone to the richest 1 percent of Americans while the remaining 99 percent lost income.
The supposed recovery has been more smoke and mirrors than real. Over the last three years, the total national growth has been 6.3 percent, the slowest growth after an economic collapse compared to all 11 recessions since World War II. This is stagnation, not recovery. The housing market "recovery" being reported currently is a complete hoax created by the Federal Reserve's very low interest rates, which allow investors to borrow money cheaply to buy low-priced houses. The banks have kept 7 million houses in foreclosure off the market in order to create housing scarcity and raise prices. Actual families, who have lost wealth and income and cannot borrow easily, are unable to buy. The manipulation of the housing market is another way the wealthy are stealing wealth from the rest of us.
We talked with David Petrovich of the Society for the Preservation of Continued Home Ownership on the "Clearing the FOG" radio program we host about what steps people facing foreclosure can take to protect themselves.
Petrovich described how to keep a foreclosure workbook: a centralized binder to keep track of notices, log telephone calls, and record loan information and any promises made by the banks. He emphasized that the homeowner needs to know as much as possible about the loan's servicing. People should always try to keep track of who owns their loan. It is also important to keep a paper history by putting every request in writing.
When there is an attempt to collect on a mortgage, this should be immediately challenged in writing by certified mail, with copies to regulatory agencies, Congressional representatives and the CEO of the mortgage lending institution. The loan servicer needs to be put on notice that the homeowner will be challenging foreclosure every step of the way. Loan servicers do not want their loans investigated by regulatory authorities. Because many foreclosures are based on incomplete or false information, the banks fear allegations of fraud may arise when a loan's servicing record is subject to audit.
The homeowner should demand that the loan servicer make available the original mortgage loan documents. This should not be a copy, but the version with the actual ink of the signed promissory note, and the homeowner should verify any subsequent endorsements and assignments. This is important because Petrovich reports that an estimated 50 percent of mortgage loans may be deemed unenforceable as mortgage loans because they are in fact unsecured loans which are dischargeable in bankruptcy.
Homeowners should be on the lookout for robo-signed documents, which means forged signatures on backdated documents. Homeowners should be careful not to allow the lender to "fix" the deficient loan because they will attempt to seduce borrowers into executing NEW loan documents which are legitimate mortgage loans ... replacing the bad with good.
Petrovich warns that the homeowner will be put through an endless series of hoops and hurdles, but should be persistent and "jump through and around them." Throughout the process, the homeowner should continue to challenge the alleged lenders' purported standing to modify the loan, approve a pre-foreclosure short sale, or foreclose. These should all be challenged in writing and sent via certified mail. More information about these steps can be found in Petrovich's book, Fight Foreclosure.
Steve Bailey, who also appeared on "Clearing the FOG," is a homeowner who never missed a payment but still lost his home to foreclosure. He is now active with the Colorado Foreclosure Resistance Coalition. Bailey was negotiating to refinance his mortgage and though the refinancer claimed that the process was going fine, the mortgage holder foreclosed on his house. Petrovich says that you have to deal with people in the loan industry as though they are not your friends. You cannot trust loan officers because they have their own agenda which runs counter to the needs of the homeowner.
Petrovich cautions that people hear what they want to hear when they receive offers to apply for a loan modification. For example, when people are told they are "prequalified" and need to make three payments, they think their loan will be modified and their stressful problems will be solved. But there is always more to it. The three payments requested allow servicers to make it appear that loans are "performing" so they can be sold more easily to an investor, rather than modified, which brings no benefit to the homeowner.
Sometimes homeowners are directed by a loan servicing representative to discontinue making payments for several months in order to qualify for a particular loan modification program. If this occurs, the homeowner should set up their own escrow account and make payments into that account to have it ready in case the loan modification does not occur. The loan officer is paid more by investors who own the loans when the loans are delinquent, in default, or in foreclosure, which means the servicers' incentive to profit is in conflict with loan resolution.
There are two major federal programs designed to help homeowners. The Home Affordable Refinance Program (HARP) is for underwater mortgages when borrowers are current with their payments, and the Home Affordable Modification Program (HAMP) seeks to ease terms on borrowers who have missed payments.
The HARP program got off to a slow start but seems to be beginning to work. The Los Angeles Times reports that in 2013, "Nearly 1.1 million homeowners with little or no equity were able to refinance last year under HARP. That's nearly as many as in the three previous years combined, and the latest figures show that early this year, the pace of these refis abated only slightly." The program was revamped in 2011 to end the limit on percentage of home value that can be borrowed (which had been 125 percent of the home's value), streamline the process and extend the program to 2015. Approximately 2 million homeowners are eligible for HARP. A key to making the program work was eliminating the lender's responsibility for defects in the original loans. HARP is limited to loans already backed by Freddie Mac and Fannie Mae and is not available for mortgages that are privately held securities.
HAMP has not worked. About 93 percent of the people who applied for a home loan modification didn't get one. According to Pro Publica, one problem with HAMP is that the government was not supervising the banks. Throughout 2009 and 2010, when the government provided little oversight and administered no sanctions, servicers reviewed 2.7 million modification applications and denied two-thirds of them. Homeowners regularly complained they had been mistreated by servicers in the program. A 2012 Government Accountability Office (GAO) report concluded that the program reached many millions fewer people than was hoped.
TARP Inspector General Neil Barofsky writes in Bailout: An Inside Account Of How Washington Abandoned Main Street While Rescuing Wall Street, HAMP brought "with it a rash of misconduct and criminal activity. Treasury's bungling of HAMP and its refusal to heed our warnings and those of other TARP oversight bodies resulted in the program harming many of the people it was supposed to help." Barofsky warned of a basic conflict in HAMP because the mortgage servicers who operated the program were the first to get their fees when there was a foreclosure.
Local Government Action: Eminent Domain and Making Foreclosure and Abandonment Expensive
There are ways that a local government that is motivated to protect its citizens, communities and city can respond to the foreclosure crisis. One power that has been discussed by dozens of cities - but not yet used - is eminent domain. Eminent domain enables municipal, state or federal governments to take property, which includes mortgages, for a public purpose. As Home Defenders League reports, the use of eminent domain to create the conditions for new sustainable mortgages at current home values while keeping homeowners in their homes serves the public interest.
The way it would work is for the government to condemn underwater mortgages for causing community harm and then issue new mortgages at rates consistent with real housing values. The city would allow the current homeowners to stay in their home. The mortgage holder would be put on notice and required to prove they own the mortgage debt, which is often difficult to do. If they are unable to do so, the lien on the property can be extinguished - leaving the property owned free and clear. If they can show they own the mortgage, then under a condemnation, the investors have the chance to contest in court the compensation they receive to ensure their rights. This threat has been discussed in cities and counties. San Bernardino, California, came the closest to using eminent domain but received threats from lenders which scared them away from it.
The threat of taking property by eminent domain could be coupled with an aggressive program to discourage lenders from abusing borrowers and instead encouraging them to find solutions with homeowners. In Los Angeles, the city attorney has taken the lead on making foreclosure expensive so lenders think twice about foreclosure or abandoning property. City attorney Carmen Trutanich has sued banks over blighted and abandoned homes and their costs to the city. The suits accused mortgage holders of allowing the homes to deteriorate into slums with hundreds of homes falling into disrepair. They also challenged 1,500 foreclosures. The city is seeking to have vacant properties cleaned up and to hold lenders responsible for the impact of loans that have gone bad.
Some cities have put fines in place for requiring registration of vacant properties and ensuring they do not become dilapidated. For example, Newark, New Jersey, has a vacant property registration ordinance requiring registration and maintenance of vacant properties. Cities should enact such laws and fully enforce them to bring in revenue and make vacancy and abandonment expensive. These ordinances should be designed to cover all vacant homes and cover the full cost of property vacancy problems to ensure that those responsible for the foreclosure crisis pay the cost.
These kinds of actions begin to change the dynamic by giving banks an incentive to avoid homes becoming vacant or falling into disrepair. By negotiating with homeowners, the banks avoid being sued or fined by the city, or worse, having their mortgage condemned.
To Prevent Loss of Wealth, Institute a Principal Reduction Program
One of the solutions recommended in "Wasted Wealth," is to institute a national policy of principal reduction. Underwater homeowners are paying housing bubble prices even though the falsely inflated bubble has burst. As a result, banks continue to profit from the high housing bubble prices created by their corrupt mortgage practices, and homeowners continue to suffer. A strategy of principal reduction would produce an average annual savings of $7,710 ($640 per month) for each underwater homeowner nationwide, boost the US economy by $101.7 billion, and create 1.5 million jobs.
Principle reduction would also bring benefits to those holding the mortgage loans. According to a Chicago Federal Reserve Board report, even investors that own distressed mortgages would stand to save significantly on the expensive costs foreclosures bring. The average foreclosure costs the lender $50,000. "For the lender, foreclosure means absorbing the full loss for outstanding principal, accrued interest, legal fees, costs of holding and maintaining the property, and real estate broker fees, less any amount recovered through the sale of the property." For loan servicers, the economic stream stops when homeowners stop paying their mortgage.
"Wasted Wealth" recommends that Congress, the Obama administration and federal officials take action to "keep people in their homes and preserve community wealth by resetting mortgages." The federal government controls $5 trillion in mortgage assets, but Fannie Mae and Freddie Mac have blocked principle reduction.
We recognize the dysfunction in Congress, so we prefer to focus on steps the Obama administration can take without Congress. "Wasted Wealth" points to the following:
- Ensure that Fannie and Freddie and servicer practices discourage foreclosures and place principal reduction at the top of the list of options for helping distressed homeowners.
- After exhausting all loan modification options, including resetting mortgage principal, ensure that Fannie and Freddie make it a priority to keep families in foreclosed homes through rental or buy-back programs and turn vacant homes over to affordable housing development and community control, not to sources of new speculation and profit-taking by Wall Street speculators.
- Hold Wall Street executives and banks legally accountable for their actions and ensure that future settlements with lenders and servicers are commensurate with the real damage done.
- Use the power of the Treasury, regulatory agencies, and law enforcement to ensure that promised relief (Home Affordable Modification Program, Hardest Hit Funds, National Mortgage Settlement, Independent Foreclosure Review, etcetera) actually reaches families and communities in need of help, starting with the communities of color and neighborhoods targeted for the most abusive lending practices. As a first step, the demographic and geographic data about who receives benefits from programs intended to aid homeowners should be tracked and made public.
- End the practice of allowing the perpetrators of mortgage and foreclosure abuses to administer settlements and ensure that they adhere to fair lending practices.
Time to Correct a Mistaken Policy: Put People's Needs Before Bank Profits
The corruption of the executive and legislative branches in Washington, DC by the big banks has resulted in weak foreclosure and housing policies that have shifted wealth to the wealthiest while destroying the already limited wealth of working families. These policies would have been very different if the government had put people's needs before corporate profits.
President Obama filled his economic team with Wall Street advisers and put Timothy Geithner, who was head of the New York Federal Reserve when the economic crash occurred, in charge of Treasury. Barofsky, the TARP inspector, charged that Geithner focused less on the needs of homeowners and more on protecting bank profits. For example, Geithner said TARP funds were to "foam the runway for the banks," that is, lengthen the foreclosure process to spread out the coming wave of foreclosures, rather than refinance mortgages to protect homeowners, many of whom were ripped off by the big banks. Barofsky makes the point that TARP benefitted a single company, American Express, more than all struggling US homeowners combined. "Helping the banks, not homeowners, did in fact seem to be Treasury's biggest concern," Barofsky said in his book, Bailout.
Current TARP Special Inspector General Christy L. Romero said in 2012 that just 3 percent of TARP funds that were specifically designated for homeowners in the communities hit hardest by the crisis had been dispersed. She explained to The New York Times: "TARP wasn't supposed to be just a bank bailout. It was specifically designed with the goal of helping homeowners, and our concern is that that goal may not be met." She also faults the Obama administration, specifically Geithner's Treasury Department. The banks got the TARP money quickly, but homeowners are still waiting.
On top of receiving $700 billion in TARP money, as of March 2009, $7.77 trillion in low-cost loans were given to the banks by the Fed with no strings attached, at nearly zero percent interest. To this day, through qualitative easing, banks are getting $85 billion a month in low-interest money from the Fed. As noted above, this is leading to a fake housing "recovery" as investors seek to profit from low-cost housing while millions of homeowners still struggle.
Last week, the anger began to boil over as scores of people who have lost their homes or are struggling to keep them protested the DOJ's failure to prosecute the big banks. Days of protests included occupying the DOJ overnight and blocking the streets and entrances to the building, to which police reacted with arrests and Tasers. They also protested at Covington and Burling, the corporate law firm where Attorney General Eric Holder was a partner and where the head of the DOJ Criminal Division, Lanny Breuer, went after admitting to Frontline that there was no intent at DOJ to prosecute the big banks. Breuer will now receive an estimated $4 million annually from Covington and Burling.
Let's hope the anger of the people continues to show itself. The government and the big banks have colluded to deprive the people and the overall economy of what is needed. The needs of big banks are protected rather than the needs of millions of families who have been thrown out of their homes and the communities which are now in decay. This will change if the people continue to rise up and demand accountability and solutions that place people before profits.
You can listen to our interview, "Fighting Fraudulent Foreclosure," with Steve Bailey, David Petrovich, Debra Castilo and Kevin Whelan on Clearing the FOG.