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A Hole So Wide You Could Drive a Moving Truck Through It An

By Kathryn Adams,2014-05-13 09:41
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A Hole So Wide You Could Drive a Moving Truck Through It An

Lenders Still Failing to Live up to their Public Commitments

to Modify Home Loans and Help Borrowers Avoid Foreclosure

Illustration by Daryl Cagle of MSNBC.com

    Chasm between Words and Deeds reports provide a snapshot of whether mortgage loan servicing The

    companies are living up to their public commitments to help borrowers avoid foreclosure. These reports

    reflect the experiences of nonprofit home loan counseling agencies in California who are on the front lines

    of the foreclosure crisis, working hard to help keep families in their homes.. The previous report, released

    earlier in 2007, focused on counselors experiences in August of 2007 at a time when relatively little data on foreclosure prevention outcomes were publicly available. That first survey found that loan servicers were

    not modifying loans to any significant degree, were not conducting early outreach to borrowers facing

    rising mortgage payments, and were most likely to foreclose on borrowers.

This second report, The Growing Chasm between Words and Deeds, focuses on loan counselors

    experiences in December 2007, a time when government officials, industry associations, and individual

    companies were representing publicly that great strides were being made to help borrowers in distress.

    Sadly, after months of public discourse about the growing foreclosure crisis and the need for loan

    modifications, this new survey demonstrates that loan servicers failures to meaningfully respond to the

    crisis continue; the servicers are neither modifying home loans on any scale nor conducting sufficient

    outreach to borrowers facing rising mortgage payments, and they continue to turn to foreclosure as their

    most common response to borrowers in distress.

The California Reinvestment Coalition hopes these reports will inform the debate around foreclosure

    prevention and loss mitigation, and will promote sound policies and business practices that will help

    preserve homeownership and wealth in California communities.

This report was prepared by Kevin Stein, with valuable edits from Alan Fisher and Victoria Leon Guerrero,

    and assistance from Reem Assil. CRC would like to thank Maeve Elise Brown (Housing and Economic

    Rights Advocates), Paul Leonard (Center for Responsible Lending), and James Zahradka (Public Interest

    Law Firm of the Law Foundation of Silicon Valley) for their comments on earlier versions of this report.

    Any errors or omissions are solely those of the primary author.

    California Reinvestment Coalition advocates for the right of low-income communities and communities of color to have fair and equal access to banking and other financial services. CRC has a membership of 250

    nonprofit organizations and public agencies across the State.

     “The Growing Chasm Between Words and Deeds”

    2

    Lenders Still Failing to Live up to their Public Commitments

    to Modify Home Loans and Help Borrowers Avoid Foreclosure

In these times of exploding foreclosure rates and economic instability, the most important conversation

    taking place day to day is the one between home loan servicers and borrowers and their representatives.

    Shockingly, there are virtually no rules, no oversight, and no clear data concerning these critical often

    life-changingdiscussions.

This report is the second in a series that examines the extent to which home loan servicers are modifying

    loans and working with borrowers to preserve homeownership, as lenders maintain they are doing. In our

    first report, The Chasm between Words and Deeds,” CRC surveyed 33 nonprofit home loan counseling

    agencies and found that for the most part, lenders were not modifying loans, were not conducting proactive

    outreach to borrowers facing unaffordable interest rate resets, and were not facilitating positive outcomes

    for borrowers. Strikingly and tragically, counselors reported that the primary outcome for their clients in

    August was foreclosure.

     . CRC conducted this second survey of 38 mortgage counseling agencies statewide to determine the level of assistance lenders are offering borrowers now, and whether

    things have improved since the last survey. Counselors reported similarly frustrating experiences in the past

    four months trying to negotiate good outcomes for their clients. For the month of December, counselors

    again report the most common outcomes for their borrowers were foreclosures.

Since the release of the first home loan counseling agency survey results in October, there have been

    increasing media reports of foreclosures, and increasing public pronouncements by politicians, industry

    trade associations and lenders about what is being done to solve the problem. While many of these efforts

    are well intentioned, the bottom line is that, on the ground, servicers are simply not helping California

    borrowers to avoid foreclosure to any significant degree.

With a total of 481,392 foreclosure filings on 249,513 properties during 2007, California documented

    the highest number of foreclosure filings and the most properties in some stage of foreclosure in the nation,

    according to Realtytrac. California experienced a 33 percent spike in foreclosures in December, and

    foreclosure filings in the fourth quarter were nearly three times the number reported in the fourth quarter

    1of 2006.

The consequences of these growing foreclosures numbers are being felt by families who have lost their

    largest asset, tenants who have been abruptly and often illegally evicted by banks that took over investor-

     1 “U.S. Foreclosure Activity Increases 75 percent in 2007,” Realtytrac. January 29, 2008.

     “The Growing Chasm Between Words and Deeds”

    3

owned homes, neighborhoods that have witnessed a further decline in property values, local governments

    that have suffered costs and decreased tax revenue, and the broader California economy which has taken a

    huge hit due to its dependence on the housing market. But did it have to be this way? Was foreclosure the

    only option for these servicers to take? The answer in many cases is “no,” but until servicers start taking real steps to help borrowers avoid foreclosure, we can expect more of the same.

California housing counseling agencies responding to the survey confirm that more could have been done

    to keep these families in their homes.

    . Agencies were asked if both particular servicers, and the industry as a whole, have

    been consistently modifying loans by fixing interest rates for the life of the loan. 17 groups responded that

    the industry as a whole is not consistently modifying loans for long-term affordability. No groups reported

    that the industry as a whole was modifying loans for the long term.

     In general, for borrowers in early delinquency or facing unaffordable

    interest rate resets, servicers are not fixing rates for the long term. Counseling groups were most likely to

    respond that when servicers were willing to modify loans, they were only willing to fix interest rates for one

    year at a time. These short-term modifications only delay the problem for another year, and are akin to

    giving the borrower another bad loan with a short period of affordability.

    . Counseling agencies were asked how common different outcomes were for

    their clients. The responses to this critical question were as bleak as they were a few months ago.

    Foreclosures still lead. Groups were most likely to report foreclosure a “very common” outcome ?

    for borrowers. A shocking 26 groups, or 72% of those reporting, said that foreclosures are a very

    common outcome for their clients. This was an increase from the 19 groups reporting so four

    months ago. In December, a total of 34 groups, or 94% of those reporting, said that foreclosures

    were a “very common” or “somewhat common” outcome for borrowers.

    ? Short sales still next. 17 groups, or 50% of those reporting, cited short sales”—where servicers

    minimize their losses by allowing homeowners to sell their property for less than the amount of

    money owed—as a “very common” outcome for borrowers. An additional 13 agencies reported

    short sales as “somewhat common,” meaning that for the month of December, 88% of groups

    responding reported that short sales were “very common” or “somewhat common.” While

    preferable to foreclosure, short sales still leave the borrower without a home or equity, and may

    result in a higher tax bill.

    ? Loan modifications not happening. In contrast, only 6 counseling agencies, or 17% of groups

    reporting, said that loan modifications are a “very common” outcome for borrowers. At the same

    time, 14 groups, or 44% of those reporting, said that loan modifications are “not common.”

    . Despite lenders assertions that they are reaching out to borrowers BEFORE they face problems from rising interest rates and higher monthly payments, most

    counseling agencies do not see this happening. A surprising 20 respondents, or 91% of groups responding,

     “The Growing Chasm Between Words and Deeds”

    4

said that in their experience, industry-wide, lenders were NOT making contact with borrowers before

    delinquency. Only 2 groups reported that early contact was being made with borrowers at risk of

    foreclosure.

    . Counseling agencies were asked, “In your experience, which lenders/servicers are the most difficult to work with in trying to keep borrowers in their homes? A total

    of 23 companies were named as servicers that are difficult to work with. Washington Mutual and HomEq

    were named most often, with 9 groups reporting each of them as being difficult to work with.

    . When asked to comment on companies that are especially

    difficult to work with, counseling agencies had a lot to say. Respondents expressed frustration with

    companies that do not offer any real solutions and that provide poor customer service. A few of the

    responses noted procedural improvements with servicing practices since the first survey, though most

    groups report increasing caseloads and poor outcomes. Below are two representative comments (see

    Appendix I for all comments received in the survey).

    ? “Overall, the lenders are still unwilling to be proactive in their approach with loss mitigation. Our

    lending team has several deals that are "pending" ' but there are few if any resolutions.”

    ? “1. They do not return calls; 2. Take 30-60 days to give us a written answer; 3. Require their own

    authorization to release information forms; 4. Take too long to assign cases; 5. Keep changing

    officers when cases are assigned; 6. They give wrong information regarding the loan; 7. Always

    have to refax and explain the situation to different people; 8. Customer Service sends us to the

    wrong department; 9. They hang up; and 10. Never willing to work any detailsthey always have

    new personnel.”

    . The groups that took the time to fill out this survey represent a

    cross section of counseling agencies in the state. Groups came from various parts of California and range

    from small groups to large offices. These groups served 8,174 consumers in the month of December alone.

    This was an increase of 4,091 consumers from June of 2007.

RECOMMENDATIONS

In order to keep borrowers in their homes, and to address the concerns of housing counseling agencies,

    CRC urges lenders and policymakers to each take three key steps.

Lenders Must:

    . Lenders must focus resources on loan modifications that provide borrowers with loans that are affordable for the life of the

    loan. Lenders should lower interest rates, convert adjustable rate loans to fixed-rate loans, and reduce the

    amount of money owed in order to stabilize families.

    Lenders should develop a process to sell foreclosed properties to nonprofit groups or public agencies so that properties won‟t fall into the hands of

     “The Growing Chasm Between Words and Deeds”

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unscrupulous speculators and absentee investors with no stake in the community. Local nonprofits that

    acquire these properties can help first-time homebuyers build assets or create affordable rental housing

    opportunities that preserve the property as a community asset.

    These groups are on the front lines

    of efforts to prevent foreclosure. Lenders should dramatically increase funding for counseling agencies and

    legal service providers as these overstretched organizations deal with a problem that is spinning out of

    control.

Policy Makers Must:

    . Congress must finalize bankruptcy

    reform, prohibit foreclosures unless loan servicers offer borrowers meaningful loss mitigation options, and

    empower a federal agency to purchase distressed home loans at a discount and refinance these loans at a

    low, fixed rate. The California Legislature must pass legislation to reform the foreclosure process, and

    require detailed HMDA-like reporting requirements of loan servicers that will let the public know which

    companies are keeping their promises to keep borrowers in their homes.

    . Many of the problems we

    face today could have been prevented in years past with stronger consumer protection legislation. Congress

    and the state Legislature must commit to preventing this crisis from recurring by passing strong anti-

    predatory lending legislation that requires that loans be affordable to borrowers, and that bans prepayment

    penalties and yield spread premiums (fees that brokers receive from the lender for selling borrowers loans

    with higher interest rates). Legislation must also hold investors and Wall Street firms liable for violations

    so that they will exercise increased due diligence and refrain from financing predatory loans.

    . Federal and state regulators have not fulfilled their obligation to ensure that

    lenders and brokers comply with existing law. We are now witnessing the devastating consequences of this

    failure. Banking regulators must closely examine the efforts of loan servicers to keep borrowers in their

    homes, and make these exams available to the public. The California Department of Corporations must

    hold loan servicers accountable to the publicespecially those companies that have signed on to the Governor‟s Subprime Loan Agreement—and a complaint process must be developed to assist consumers and counseling agencies that are struggling to realize the benefits of the Agreement. Several of the loan

    servicers that have signed on to the Governor‟s Subprime Loan Agreement showed the poorest results in this survey.

    “The Growing Chasm Between Words and Deeds”

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    Hundreds of thousands of California homeowners are at risk of losing their homes. Most of these borrowers want to remain in their homes and could do so, if only their loan servicer was ready, willing and able to work with them. This survey of nonprofit home loan counseling agencies in California suggests that home loan servicers are largely failing their borrowers, foreclosing too quickly and too often. Record foreclosures plague the state, and the crisis threatens to grow worse.

    What happened? Over the last few years, lenders and brokers aggressively sold loans to borrowers that they could not understand or afford to repay. Even the banking regulators recognized this and have since enacted new guidance on nontraditional and subprime lending to tighten underwriting standards. A current investigation by New York Attorney General Andrew Cuomo reportedly is confirming there was a clear

    2 Indeed, the loans that banks bought and significant decrease in lending standards over these last few years.

    3and sold on Wall Street during this time are increasingly going into default.

    As a result, borrowers are stuck with loans that have resetting interest rates that will make the loans impossible to pay. The growing foreclosure rates harm working families, unsuspecting tenants, neighborhoods, local governments, and the broader California economy. Yet a key question remains - was foreclosure the only option?

    In recent months, weekly press releases by industry groups and government officials suggest new programs to assist borrowers are in place and that thousands of borrowers are receiving help.

    But lenders are still not required to verify that they are keeping their promises and, as an industry, have offered no meaningful and verifiable reporting to show that they are working with borrowers to prevent foreclosure.

    CRC conducted this second survey of 38 mortgage counseling agencies across the state to determine what assistance lenders are offering borrowers now, and whether things have improved since the last survey. Sadly and tragically, counselors reported similarly frustrating experiences in the past four months trying to negotiate good outcomes for their clients. For the month of December, counselors again report the most common outcomes for their borrowers were foreclosures.

     2 Jenny Anderson and Vikas Bajaj, “Firm Gets Immunity for Information on Risky Loans,” San Francisco Chronicle, January 17, 2008, from the New York Times. The article reported that a company that analyzes the quality of thousands of home loans agreed to cooperate with an investigation by New York Attorney General Andrew Cuomo into whether information was improperly withheld from investors of mortgage backed securities. The firm, Clayton Holdings, has reportedly told prosecutors that starting in 2005, it saw a significant deterioration of lending standards and a parallel jump in loans that did not meet even lowered lending standards. Clayton was also reportedly directed by Wall Street firms to evaluate half as many loans as it had been, which would make finding problematic loans less likely. 3 Jenny Anderson and Vikas Bajaj, “Wary of Risk, Bankers Sold Shaky Debt: SEC Inquiry Focuses on Firms‟ Holdings,” New York Times, December 6, 2007. The article reports that almost a quarter of the subprime loans securitized last year by Deutsche Bank, Barclays, and Morgan Stanley are in default, according to Bloomberg. About a fifth of the loans underwritten by Merrill Lynch are in default.

    “The Growing Chasm Between Words and Deeds”

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Mortgage counseling agencies are often the only place for borrowers to turn when they are faced with

    foreclosure. Counselors help borrowers understand their options and often act as intermediaries between

    borrowers and their lenders. In California, there are roughly 80 mortgage counseling offices approved by

    the Department of Housing and Urban Development (HUD) to provide services that include loss

    mitigation, mortgage delinquency and default resolution, predatory lending and post-purchase counseling.

    More than one-third of these counseling agencies took part in CRC‟s survey. The groups that responded to

    this second CRC survey served 8,174 consumers during December. Though several groups reported that

    their offices were closed for part of this holiday month, groups still saw 4,091 more clients in December

    than they did in June, confirming the widespread belief that things are only getting worse for homeowners.

    As with the last survey, the state‟s largest servicers were selected for consideration: Bank of America,

    Citibank, Countrywide, HSBC, JPMorgan Chase, Merrill Lynch (Wilshire, HLS), Washington Mutual,

    and Wells Fargo. The following servicers were added to the second survey because they signed on to

    4: Carrington, GMAC, HomeEq, and Litton. A Governor‟s Schwarzeneggers Subprime Loan Agreement

    category of “all lenders” was again included to survey counselors on their impressions of industry performance as a whole.

    California housing counseling agencies surveyed confirm that more needs to be done.

    . Agencies were asked if particular servicers, and the industry as a whole, consistently

    modify loans by fixing interest rates for the life of the loan.

    ? No long-term loan modifications. 17 groups responded that the industry as a whole is not

    consistently modifying loans for long-term affordability. Zero groups reported that the industry as

    a whole was modifying loans for the long term.

    ? Worst performers. Carrington, HomeEq and GMAC received the lowest marks. Only one group

    responded that Carrington was modifying loans for the long term, while 17 groups reported they

    were not. HomeEq received 2 positive and GMAC 4 positive responses, while 24 groups reported

    that neither HomeEq nor GMAC were modifying loans for the long term. These are the same loan

    servicers who signed onto the Governor‟s agreement saying they would modify loans to keep

    borrowers in their homes.

     4 For a description of the Governor‟s Subprime Loan Agreement which was designed to promote loan modifications for borrowers facing unaffordable interest rate resents, see, www.corp.ca.gov/press/news/SubprimeLending/asp

     “The Growing Chasm Between Words and Deeds”

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    Long Term Loan Modifications: % of Counselors Reporting Servicers

    Are Offering Long Term Loan Mods: California December 2007

    50%

    44%45%41%40%38%

    35%35%35%33%

    30%27%

    25%23%

    20%20%

    14%15%

    10%8%6%

    5%

    0%

    BofA

    Carrington

     CitibankMost counseling agencies that responded to the survey noted that each and every loan servicer was failing

    to offer long-term loan modifications. Countrywide

     GMAC In general, for borrowers in early delinquency or facing unaffordable rate

    resets, servicers are not fixing rates for the long term. Groups were asked if individual servicers, and HomEqservicers as a whole, were fixing interest rates for 1 year, 2 years, 5 years, or more.

    HSBC

    ? Short-term “fixes.” Counseling groups were most likely to respond that when servicers were willing Chaseto modify loans, they were only willing to fix interest rates for one year at a time; this was true for

    Littoneight of the 12 servicers considered in the survey, and for the industry as a whole. Rather than

    provide a sustainable solution for borrowers in distressed loans, these short-term modifications Merrillmost likely only delay the problem, and are akin to giving the borrower another bad loan with a

    short period of affordability followed by increasing payments that may be hard to make. Though WaMu

    the numbers were overall not encouraging, a few more groups reported better success (compared to

    Wellsfour months earlier) in obtaining loan modifications lasting longer than a year.

? Worst performers. Not one group reported that Carrington, HomEq or Merrill Lynch were

    willing to modify loans for 5 years or longer.

     “The Growing Chasm Between Words and Deeds”

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    . Counseling agencies were asked how common the following different loss

    mitigation outcomes were for their borrowers: loan modification, forbearance agreement, refinance loan,

    short sale, foreclosure, or “other.” Despite a reported increase in servicer willingness to offer loan

    modifications of more than 1 year, the responses to this critical question were as bleak as those a few

    months ago.

    Borrower Outcomes: % of Counselors Reporting Frequency of

    Various Loss Mitigation Outcomes: California December 2007

    90%

    81%80%

    72%

    70%

    60%

    50%50%Very Common44%Somewhat Common39%Not Common38%40%

    30%

    22%

    20%17%

    13%12%

    10%6%6%0%

    ForeclosureShort SaleLoan ModificationRefinance

? Foreclosures still lead. Groups were most likely to report foreclosure a “very common” outcome

    for borrowers. A shocking 26 groups, or 72% of those reporting, said that foreclosures are a very

    common outcome for their clients. This was an increase from the 19 groups reporting so four

    months ago. In December, a total of 34 groups, or 94% of those reporting, said that foreclosures

    were a “very common” or “somewhat common” outcome for borrowers.

? Short sales still next. 17 groups, or 50% of those reporting, cited short saleswhere servicers

    minimize their losses by allowing homeowners to sell their property for less than the amount of

    money owed—as a “very common” outcome for borrowers. An additional 13 agencies reported

    short sales as “somewhat common,” meaning that for the month of December, 88% of groups

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