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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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."

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