The Foreclosure Crisis Is Still Unsettled 

The much-touted National Mortgage Settlement has done little to help homeowners in the East Bay and throughout California. And banks are continuing to break the law.

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In 2012, the US Department of Justice and the attorneys general for 49 states touted a historic legal settlement with big mortgage lenders, saying it would provide justice for people who lost their homes in the foreclosure crisis and would prevent further abuses by banks that had caused the Great Recession. California Attorney General Kamala Harris said at the time that the National Mortgage Settlement was the result of "thirteen months of intense discussions, sometimes battle" with the banks and their armies of lawyers.

The settlement included $18 billion in relief for residents of California, which has recorded more than 900,000 foreclosures since the housing crisis began in 2006. The agreement also required banks to cease deceptive and illegal practices used to foreclose on borrowers — tactics like robo-signing; failure to provide borrowers with a single point of contact; and dual-tracking, whereby banks tell homeowners they are modifying their loan while at the same time quietly executing a foreclosure and sale.

In press conferences, top federal and state law enforcement officials told the public that the settlement would put an end to all this chicanery, and channel financial relief to borrowers. "We discussed what we needed in terms of making sure there would be meaningful relief, but not at the expense of meaningful investigations," Harris said at the time. "It was imperative that we not give a blank check of immunity to the banks for their wrongdoing."

And yet five years after the financial crisis and two years after California's top law enforcement official uttered those words, not one bank executive has been prosecuted for his or her role in blowing up the national and global economy. Instead, top bank officials are getting big pay raises. Bank of America CEO Brian Moynihan's pay was boosted from $8 million to $13 million last year. Wells Fargo CEO John Stumpf was paid $19 million last year, and the bank's head of consumer lending, directly in charge of its mortgage department, was paid more than $8 million.

In addition, none of the banks or major mortgage servicers has been criminally prosecuted for systematic violations of the law. There have been no prosecutions of the biggest banks that perpetrated the most damaging and predatory illegal lending practices on low-income communities, especially communities of color — practices that included luring borrowers into toxic indebtedness.

Worse still, the actual financial relief delivered to distressed California borrowers under the National Mortgage Settlement has been a mere fraction of the more than $18 billion in credit claimed by the banks in fulfilling their legal obligation, according to analysts who have examined the final numbers. Critics point out that only a small portion of the settlement's relief was in the form of first-lien mortgage principal reductions, and that more than half of the total relief involved short sales in which borrowers still lost their homes and much of their savings.

Lawyers throughout California say that the big banks responsible for servicing most mortgages in the state are still flouting the terms of the settlement, violating the law, and brazenly foreclosing on borrowers who are owed modifications. Nick Pacheco, a former deputy district attorney in Los Angeles County who is now a private attorney, says there are far more borrowers still being victimized by banks than he and similar attorneys are able to represent. "In the last four years I've filed seven hundred lawsuits against the banks," he said. "I have one hundred clients in litigation right now."

One of Pacheco's clients, Gabriel Campos, obtained a mortgage from Wells Fargo Bank in 2003 for his home in Hayward. In 2012, Wells Fargo foreclosed on Campos' house. According to Pacheco, Wells Fargo violated multiple sections of California civil and business law by failing to contact Campos prior to the foreclosure, and by filing a flawed Notice of Default. Pacheco is helping Campos fight the foreclosure in Alameda County Superior Court, but he said that for every homeowner like Campos who attempts to hold the banks accountable, there are many more who disappear quietly into the giant cracks of the legal system. "The banks figure it's cheaper to deal with me and other private attorneys than to staff up and inform their employees about how to follow the rules," said Pacheco.

San Mateo attorney Matthew Mellen has also filed hundreds of civil actions against banks for their ongoing violations of state laws in spite of the National Mortgage Settlement. Many of his clients are like Hyatt Chaghouri, who purchased a small house in San Bruno in 2006 with a loan from World Savings Bank. Chaghouri alleges that a World Savings loan officer "concealed from her that the loan was actually negatively amortizing," according to a lawsuit filed two months ago in the San Mateo County Superior Court. The negatively amortizing feature of the loan caused Chaghouri's monthly payments to balloon in 2007. When Chaghouri sought a loan modification from Wells Fargo (which purchased World Savings in 2008), the bank failed to provide her with a single point of contact, repeatedly passing her off to different "home preservation specialists," said Mellen. This was in direct violation of the National Mortgage Settlement and the Home Owners Bill of Rights.

According to Mellen, Wells Fargo then lured Chaghouri into purposefully not making interest payments on the loan so as to qualify for a modification. But instead of modifying her loan as promised, the bank then filed a Notice of Default, damaging Chaghouri's credit and initiating the foreclosure process. "The National Mortgage Settlement is useless," said Mellen. "This is the greatest fraud in history, and it's going on right now day after day. Millions of more people are going to lose their homes, and the banks are incentivized to keep doing this."

Lenore Albert is a plaintiff's attorney in Orange County where she represents a seemingly endless stream of clients who contact her with stories of bank fraud and misconduct in direct violation of the National Mortgage Settlement and other laws. "The whole system is still rigged against the homeowner," said Albert. "If the [California] Attorney General's Office started to truly prosecute the banks, they would stop breaking the rules tomorrow."

As to why these banks haven't been prosecuted for the foreclosure crisis, and why they've been allowed to continue violating the National Mortgage Settlement and numerous state and federal laws, Albert said, "that's the million dollar question."

"What we see is that anything having to do with the National Mortgage Settlement [is] not being prosecuted by the attorneys general. They decided to settle everything out of court and just take the money."

"But where did that money go?" she asked.

Although the National Mortgage Settlement promised to make five big banks — Wells Fargo, Bank of America, JPMorgan Chase, Citibank, and GMAC — pay $18 billion in relief to Californians hurt by the foreclosure crisis, the National Monitor and California Monitor (which are appointed by the US Department of Justice and California Office of the Attorney General to oversee the performance of the banks in the settlement) reported earlier this year that the banks had fulfilled half of their obligation to Californians through short sales. Short sales accounted for $9.2 billion of relief in California. In a short sale a borrower whose home is underwater (meaning the debt owed is greater than the house's market value) sells his or her house and the bank takes virtually all the money. Under the settlement the bank "forgives" the borrower and claims credit for the balance.

The second largest category of financial relief under the settlement was second-lien mortgage principal reductions, which accounted for $4.7 billion. Many housing policy experts believe that this wasn't particularly helpful for underwater and distressed borrowers since lenders owning second-lien mortgages were not likely to initiate a foreclosure. Debt owed to a lender on a second-lien mortgage is second in line to a first-lien mortgage, and therefore the lender typically never sees a penny of repayment in foreclosure. Extinguishing a second-lien mortgage allows the bank to claim that it provided relief to borrowers under the terms of the settlement, but it hasn't stopped banks from foreclosing and wiping out household savings as well.

This is why most policy experts have pointed to reductions in first-lien mortgage principal and forgiveness of missed payments (called "forbearance") as the most meaningful forms of relief that were promised by the National Mortgage Settlement: They reduce debt that can lead directly to foreclosure, often on loans that were originally generated by fraudulent and discriminatory bank lending practices.

The final numbers, however, show that this was the smallest of the three major categories of financial aid for Californians. Just one quarter of the settlement's total assistance went toward reducing first-lien mortgage principal. About 33,000 Californians received this form of assistance. In contrast, the banks claimed credit for second-lien loan reductions for more than 52,000 borrowers, and conducted more than 63,000 short sales.

And the most widely distributed form of financial relief was restitution — cash payments the banks made to borrowers who lost their homes before the settlement came into effect. But while banks made these payments to 200,000 Californians, they were for only $1,400 each.

"The outcomes in the national settlement were not as great as we'd hoped to see," said Maeve Elise Brown, the executive director of Housing and Economic Rights Advocates (HERA). "It was not nearly so helpful to Californians as it should have. People still need help." Brown calls the settlement a "minimum starting point" from which we should continue to work.

Kevin Stein, associate director of the California Reinvestment Coalition, said another problem with the settlement is its lack of transparency in terms of how the relief was divvied up among California communities. "The reality is that for the hardest-hit communities, we don't know if the relief really trickled down," said Stein.

This is because the terms of the settlement have allowed the banks to keep much of the data about how they fulfilled their share of the $18 billion obligation confidential. "The feeling is that it was not distributed fairly," said Stein.

A year ago, the California Reinvestment Coalition, HERA, and more than one hundred other groups contacted the settlement's National Monitor about the banks' failure to provide this information. The letter asked that the banks be forced to release information about the geographic distribution of relief, and indicate the race, gender, and income levels of those receiving assistance, all to ensure that the banks haven't redlined some communities out of the settlement.

"We got no support from our Attorney General's Office regarding the request we made along with many other organizations to the National Monitor and DOJ that would have required public reporting on principal reduction in California," said Brown.

"For the hardest-hit communities, we don't have the data," added Stein. "It should be provided to governments, and evident in the conduct of the banks which should be doing independent audits to ensure their servicing practices are best practices."

Stein and Brown give credit to California Attorney General Harris for establishing the state's own Monitor Office and staffing it with Katherine Porter, an accomplished professor of law at UC Irvine. "The California attorney general, we thought, was very strong in the negotiations," said Stein. "What California got was better."

But even though the state has its own monitor, the banks have refused to release detailed data on the financial relief they've provided. Moreover, the total level of relief is small relative to the size of the foreclosure crisis.

For example, there were approximately 34,000 foreclosures in Alameda County from 2006 through 2013, according to data accessed through the county Recorder's Office. Yet the big five banks covered by the settlement only provided 1,600 first-lien mortgage principal reductions as a result of the settlement. In other words, Alameda County borrowers for whom the big five banks reduced first-lien mortgage debt represent only 5 percent of the total number of borrowers who were foreclosed on.

Even more worrisome is the fact that the foreclosure pipeline is still in effect. There were 2,800 notices of default issued in Alameda County last year, three times the number of foreclosures. Many of these borrowers recently hit with notices of default will be foreclosed on in the next year or two.

"There's no reason why a state attorney general can't say, 'I have new violations of our consumer protection laws and open brand new cases, and prosecute these new cases,'" said David Dayen, a political analyst who has closely studied the terms of the National Mortgage Settlement. "There's no reason why they can't do that. The idea that we gave it a good try — it's not accurate. If they're violating the law, the AG has the duty to look into that, and shouldn't rely on a private right of action."

Harris' office did not respond to several requests for comment for this report.

Stein said Harris should be credited for helping pass a strong Homeowner Bill of Rights. "But what has happened since then is that servicers aren't doing what they should be doing, and we haven't seen action from the AG's office to go after them."

Until officials jump back into the ring, however, it will be up to private lawyers to try to help some small fraction of the borrowers who stand to lose their homes and savings in the years to come.

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