Top law enforcement officials in several states are signaling they will pressure Fannie Mae and Freddie Mac to correct what is widely seen as one of the biggest deficiencies of the $25 billion mortgage settlement announced on Thursday: It simply doesn’t help that many homeowners.
Borrowers whose loans are backed by the government-controlled mortgage giants — nearly half of all outstanding mortgages in the United States — are not eligible for payouts under the deal. State officials who negotiated the deal say they could not convince Fannie Mae and Freddie Mac, or the Federal Housing Finance Agency, which oversees the loan giants, to join onto the settlement because they are steadfastly opposed to principal reductions — loan write-downs for borrowers whose homes are at risk of foreclosure.
“This is a glaring weakness of the overall settlement,” said one state official who spoke on condition of anonymity. “Fannie and Freddie were absolutely opposed to principal reduction. You’d ask why, and they’d say ‘moral hazard to the taxpayer.'”
So far, the mortgage giants and the FHFA have only said that they’re avoiding principal reduction because of the cost to taxpayers.
Principal reductions are hailed by many economists and housing experts as the most effective way to help homeowners who are underwater on their mortgages, owing more than the home is worth. About 1 in 5 homes in the U.S. are currently underwater.
Investigators are training their sights on a type of hazard insurance policy known as force-placed insurance, a type of policy that has driven up costs for homeowners and pushed some into foreclosure. People who buy certain mortgage securities may be getting hurt, too.
Benjamin M. Lawsky, the superintendent of the New York State Department of Financial Services, is investigating institutions that underwrite and sell force-placed insurance. Last fall, his office began sending subpoenas to insurance agents and brokers. Requests for information also went out to insurance companies that write such policies.
Working his way up the chain, Mr. Lawsky’s office issued a new set of subpoenas late last week. According to a person briefed on the matter who was not authorized to discuss it, the subpoenas went to loan servicers that imposed force-placed insurance on borrowers, as well as to insurers affiliated with those servicers.
Among the servicers that received the subpoenas were Morgan Stanley Mortgage Capital Holdings and CitiMortgage. Insurer affiliates that received requests for information include BancOne Insurance, a unit of JPMorgan Chase, and Alpine Indemnity, an affiliate of PNC.
“Force-placed insurance appears to be the dirty little secret of the mortgage industry,” Mr. Lawsky said in an interview last week. “It is a silent killer harming both consumer and investors while enriching the banks and their affiliates.”
Representatives of PNC and JPMorgan Chase declined to comment. Mark Rodgers, a spokesman for Citigroup, said the bank was working with Mr. Lawsky’s office. “CitiMortgage does not sell homeowner’s insurance to consumers,” he said. “If a homeowner does not provide an insurance policy, CitiMortgage secures a policy to protect the interest of the investor. Whenever the homeowner submits proof they have obtained insurance on their own, the lender-placed insurance is canceled.”
A spokesman for Morgan Stanley said its mortgage company “does not have an affiliated agent, broker or insurance company to procure force-placed insurance.”
Force-placed insurance has exploded during the foreclosure crisis. Once a backwater that generated $1 billion a year, it is now a $6 billion-a-year business. Much of its growth has come on the backs of homeowners.
When homeowners run into financial trouble, they often let their hazard insurance lapse. Because lenders require homeowners to be insured against damage or total loss — say, from a fire — policies are then forced on the borrowers and added to their monthly mortgage payments.
There is a lot to love about force-placed insurance — if you sell it. The policies typically cost at least three times as much as ordinary property insurance. Some borrowers have been charged much more — up to 10 times the prevailing rate — according to people knowledgeable about these practices who spoke on condition of anonymity to maintain business relationships.
Mind you, force-placed policies do not protect homeowners from loss. Only lenders are covered. But homeowners must pay the freight. And lender-placed insurance typically does not carry deductibles, as typical policies do.
Borrowers have also complained of being forced to buy this high-priced insurance even when it is unnecessary. Back in 2007, a borrower with a mortgage serviced by Countrywide Financial described how the lender automatically signed her up for flood insurance even though she had proved that such insurance was unnecessary. Not being able to meet the extra payments, she fell behind on her mortgage. Countrywide then began foreclosure proceedings.
At best, this round of relief will reach about two million former and current homeowners. Under the agreement, banks will grant some $10 billion worth of principal reduction, $3 billion in refinancings and $7 billion in other mortgage relief, like forbearance for unemployed borrowers, covering roughly one million borrowers in total. Another $1.5 billion will be cash payments of about $2,000 to some 750,000 borrowers who were treated unfairly in foreclosures from 2008 through 2011.
And $3.5 billion will go to state and federal governments for what has been described as resources for legal aid and other counseling for borrowers facing foreclosure. Such aid is vitally important, but it appears that the earmarked money also could be used to plug state budget holes, rather than empower homeowners in their fights against the banks. That would be a mistake.
What do banks get in exchange for the relief? The answer, in short, is a sweet deal.
The banks did not get the blanket release they originally sought from legal liability for all manner of mortgage misconduct. But the settlement still shields them from state and federal civil lawsuits for most foreclosure abuses, including the wrongful denial of loan modifications, excessive late fees that enriched the banks but could make it impossible for borrowers to catch up on late payments, and conflicts of interest that led banks to favor foreclosures over modifications. Going forward, the banks will have to adhere to tougher standards for servicing loans and executing foreclosures. But past sins in servicing and foreclosure are largely absolved.
The banks are not off the hook for criminal prosecutions related to the mortgage mess or for private lawsuits. They are also not off the hook for wrongdoing in their aggressive pooling of mortgages into securities and other practices that inflated the bubble. Thanks for the settlement’s narrower legal releases goes to New York’s attorney general, Eric Schneiderman, and a handful of other state attorneys general, who refused to accept a deal that would have blocked further legal action.
Which brings us back to the question of whether a new investigation will indeed get off the ground. We are skeptical. The Obama administration squandered several months resisting Mr. Schneiderman’s insistence on a broader investigation, raising questions about its willingness to now get tough with the banks and bankers. As a practical matter, that delay has allowed some potential violations to draw closer to expiration under statutes of limitation.
We love to see great articles like this one featured in The Huffington Post today.
Your lender has finally responded to your many calls. You’ve sent your documents in repeatedly and finally have a dedicated person handling your case. But then, suddenly that person disappears. He won’t return your calls and you are in limbo again. Then you get a call from your lender, it’s a new representative asking if you’d like to apply for a loan modification. You explain that you’ve already applied and are waiting for approval. This rep can’t seem to find your documents and asks you to send them again. Oh, and by the way, since so much time has passed he will need everything you send to be updated.You call several times to check with him – has he received your documents? He tells you your file is incomplete, there are several documents missing.
This scenario happens too many times to count but each time you are contacted by a new representative it gives you hope that this may be the last one! But it never ends because it is by design to keep you in a maze.
In the meantime, even though they are giving you the impression that you are on track to receive a modification (as soon as they receive your missing paperwork) there is something else going on behind the scenes. It’s called dual tracking. While your stuck in the maze of lost paperwork and representative turnover the lender is advancing your home into foreclosure.
Call your senator, representative and attorney general’s office and demand that legislation be passed to prohibit lenders from starting the foreclosure process while a homeowner is in the process of a loan modification.
California lawmakers do not want the Attorney Generals to give the banks a “Get out of jail free card”.
The lawmakers wrote in support of Harris’ efforts to ensure that a settlement being negotiated between states and large banks over mortgage abuses provides substantial relief to California homeowners. Reports suggest that the settlement under discussion would provide just $20 billion to $25 billion in relief to homeowners, despite the fact that underwater homeowners nationwide owe $700 billion more on their mortgages than their homes are worth.
From the letter, “It is clear that thousands of Californians have been hurt by unfair and, in many cases, illegal practices in the foreclosure process. For this reason, we feel that it is critical that any settlement regarding these abuses must be fair to California homeowners. In particular, we believe that a deal must be structured to provide substantial financial relief for these homeowners…
“Additionally, we do not feel that it is responsible to grant a broad release of liability for abuses that have not been investigated by the attorneys general and are not remedied in the settlement. Our constituents need to know that our nation’s largest financial institutions have the same mandate to follow the law that they do—in other words, the simple fact of being an enormous Wall Street bank cannot mean getting a get-out-of-jail free card.”
Miller said his constituents are fed up. “Wall Street banks have chewed up homeowners all over the country, with no regard for the law or for what’s right. This is not an every once in a while story – it is an everyday story. Every day we hear how banks lose paperwork or charge ridiculous fees or give homeowners wrong information about a modification. This is abuse. Pure and simple. And it has been at every stage of the mortgage process. We need to provide justice to these homeowners.”
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