$25 Billion Mortgage Lending Settlement Failing Miserably
Last winter’s highly touted $25 billion settlement between state attorneys general and the country’s largest home mortgage lenders has utterly failed to help distressed borrowers, a coalition of progressive advocates said Thursday, saying federal bank regulators and the biggest banks have obstructed efforts to restructure loans and revive the economy.
“Housing is an essential part of our economy. Housing finance is an essential part of our economy. All of this is disrupted because of what the banks did and what the banks got away with, and what remains absolutely problematic about their behaviors and their procedures,” said Simon Johnson, an ex-Intentional Monetary Fund Chief Economist, speaking Thursday at a press conference for Campaign for Fair Settlement.
“Just from a point of view from repsonsible economic policy, of resuming growth and generating jobs, we need a full, fair and complete settlement around everything to do with mortgages and all the misbehavior os financial institutions in the run up to 2008, and in terms of what they did after the crisis broke.”
But that accounting has not only not happened, according to the homeowner advocates, the situation for distressed borrowers arguably has become worse in the six months since the nation’s attorney’s general announced their nationwide settlement with the banks.
“The settlement alone is not enough,” said Rep. Raul Grijalva, D-Arizona. “It should be seen, pardon the pun, as a downpayment on the justice that homeowners harmed by all these illegal gains and manipulations that Wall Street and financial services institutions committed upon the American people. In my state of Arizona, as much as half of hard workimg people find themselves underwater in terms of their mortgages. The housing crisis was the primary spear that burst the whole recession that we are in.”
There are a half-dozen major trends that are alarming progressive housing advocates, from: failures of transparency around how and where the settlement’s billions are being spent; to efforts by the biggest federally-backed lender opposing the lowering of loan amounts and interest rates; to state legislatures spending the settlement’s billions on unrelated non-housing programs; to a lack of legal borrowing procedures that could enable settlement funds to be applied to individual loans; to the emergence of new unchecked predatory practices by banks.
Each of these factors was described in detail by the Campaign for Fair Settlement’s Brian Kettenring, Tracy van Slyke of The New Bottom Line, Congressman Grajalva and Cherie Faircloth, a Florida homeowner whose mortgage is currently underwater, meaning that the market value of her home is less than the amount she owes. When that is the case, banks historically have refused to lend any new money or refinance existing loans.
Faircloth, like the other housing advocates, said she had hoped that some part of the $306 million in settlement funds that went to Florida could close the $2,000 gap between her home’s current assessed value (according to her bank) and her loan principle, enabling her to refinance at a lower rate than her current 5.6 percent interest.
“I am not alone—45 percent of Florida homeowners are underwater like me,” she said. “And Florida has the third highest foreclosure rate in the country.”
What’s particularly unnerving about Faircloth’s situation is that she did refinance with her bank 14 months ago, but the bank—acting on its own—lowered the appraised value of her home so her loan is now underwater. In other words, Faircloth is saying that her bank is manipulating the underpinnings of her mortgage to stop her from getting a new lower-interest loan—which she cannot challenge, and locks in higher bank profits.
When asked, the housing advocates could not point to a current model or mechanism in use today where a distressed borrower like Faircloth could tap into the $25 billion in bank settlement fees paid to states to make up that difference and get a new refinanced loan. Instead, the banks, state attorney generals and federal Justice Department have not divulged key details about how the settlement is being used to help borrowers.
“When the settlement was announced six months ago, the New Bottom Line called it a drop in the bucket and that is still the case,” said van Slyke. “We have seen the release of $17 billion, which is supposed to go to principle reduction, trickling in. We don’t know where it is going, to who it is going, and who is actually doing it. We don’t have this information. We need that transparency just on the settlement itself.”
Moreover, Edward DeMarco, the acting director of the Federal Housing Finance Agency, which oversees government-backed loans controlled by Fannie Mar and Freddie Mac, has blocked efforts to restructure loans and reduce principles, which van Slyke said was a unnecessary financial boon for the banks and undermining an economic recovery.
“President Obama can remove DeMarco as a roadblock,” she said. “He can demote him, make a recess appointment. These things can happen. He can show the American public and homeowners that he is fighting for us, not for Wall Street. He can remove these roadblocks.”
But there are even more roadblocks cited by the advocates. Not only has a fraction of the settlement money been spent—helping 30,000 homeowners nationally as of last spring, Grijalva said—but in many states, revenue-strapped legislatures are diverting the funds into other programs. Many of the envisioned uses, such as reducing loan amounts, paying off late fees and other penalties, assisting unemployed homeowners, has not sufficiently happened, he said.
“Arizona is a good example. Ninety-seven million to help home owners; $50 million that was then diverted by the governor for other budget shortfalls. Andf then you are left with a minimal amount,” he said, adding that his state’s Republican leaders do not think that debt conseling or legal assistance to homeowners is a priority.
The only good news that came out of the press conference was the coalition’s pledge to bring the federal government’s terrible response before in presidential swing states that have been hard-hit by the mortgage crisis—such as Florida, Ohio and Nevada.