After her stroke, Alice Emile of Freeport, New York, wanted to die at home. On April 24, 2009, she passed away quietly at the age of 74. Her son Darrell Emile, executor of the estate, had to close the reverse mortgage she took out in 2006, which had passed into the hands of Bank of America.
A Bank of America representative told Emile he would receive a payoff document within six months, and have six additional months to determine the best way to settle the account. This is considered standard for reverse mortgage closings. But in October 2009, a bank representative claimed that they had never received word that Emile’s mother had died (even though, by this time, the bank was addressing letters about the house to “the Estate of Alice Emile”). After Emile faxed Bank of America the death certificate, for what he says was the third time, the bank informed him that the account was in default.
Emile had the money to settle the mortgage, and would have had he simply received a payoff document. But Bank of America never delivered one, and they refused his offers to pay afterward, instead filing for foreclosure in May 2010. Since Emile cannot get a payoff document, he cannot sell the home, which is stuck in limbo awaiting completion of foreclosure. The estate did, however, benefit in April 2013 from the Independent Foreclosure Review, a Federal Reserve–led settlement designed to compensate homeowners for foreclosure errors. The check was for $300.
Politicians, economists and commentators are debating the causes of the rise in inequality of income and wealth. But one primary cause is beyond debate: the housing collapse, and the government’s failure to remedy the aftermath. According to economists Emmanuel Saez and Gabriel Zucman, the bottom 90 percent of Americans saw one-third of their wealth wiped out between 2007 and 2009, and there has been no recovery since. This makes sense, as a great deal of the wealth held by the middle and working classes, particularly among African-Americans and Hispanics, is in home equity, much of which evaporated after the bubble popped. The effects have been most severe in poor and working-class neighborhoods, where waves of foreclosure drove down property values, even on sound, well-financed homes. Absent a change in policy, Saez and Zucman warn, “all the gains in wealth democratization achieved during the New Deal and the postwar decades could be lost.”
President Obama will carry several legacies into his final two years in office: a long-sought health care reform, a fiscal stimulus that limited the impact of the Great Recession, a rapid civil rights advance for gay and lesbian Americans. But if Obama owns those triumphs, he must also own this tragedy: the dispossession of at least 5.2 million US homeowner families, the explosion of inequality, and the largest ruination of middle-class wealth in nearly a century. Though some policy failures can be blamed on Republican obstruction, it was within Obama’s power to remedy this one — to ensure that a foreclosure crisis now in its eighth year would actually end, with relief for homeowners to rebuild wealth, and to preserve Americans’ faith that their government will aid them in times of economic struggle.
Faced with numerous options to limit the foreclosure damage, the administration settled on a policy called HAMP, the Home Affordable Modification Program, which was entirely voluntary. Under HAMP, mortgage companies were given financial inducements to modify loans for at-risk borrowers, but the companies alone, not the government, made the decisions on whom to aid and whom to cast off.
In the end, HAMP helped only about one million homeowners in five years, when 10 million were at risk. The program arguably created more foreclosures than it stopped, as it put homeowners through a maze of deception designed mainly to maximize mortgage industry profits. More about how HAMP worked, or didn’t, in a moment.
HAMP cannot be justified by the usual Obama-era logic, that it represented the best possible outcome in a captured Washington with Republican obstruction and supermajority hurdles. Before Obama’s election, Congress specifically authorized the executive branch, through the $700 billion bank bailout known as TARP, to “prevent avoidable foreclosures.” And Congress pointedly left the details up to the next president. Swing senators like Olympia Snowe (Maine), Ben Nelson (Nebraska) and Susan Collins (Maine) played no role in HAMP’s design. It was entirely a product of the administration’s economic team, working with the financial industry, so it represents the purest indication of how they prioritized the health of financial institutions over the lives of homeowners.
Obama and his administration must live with the consequences of that original sin, which contrasts with so many of the goals they claim to hold dear. “It’s a terrible irony,” said Damon Silvers, policy director and special counsel for the AFL-CIO, who served as deputy chair of the Congressional Oversight Panel for TARP. “This man who represents so much to people of color has presided over more wealth destruction of people of color than anyone in American history.”
Andrew Delany, a licensed carpenter from Ashburnham, Massachusetts, was diagnosed with a spinal disorder a couple weeks before the financial crisis of September 2008. He immediately sought mortgage help, but his lender, Countrywide, told him to call back after the presidential election. By then, Delany had no savings left. “You do all the paperwork to get a HAMP or a HARP or a hope and some help,” Delany says, referring to the government-sponsored programs for mortgage modifications. His letters to Countrywide, and then Bank of America after they purchased Countrywide, were often returned unopened.
Delany fought for three years, acting as his own lawyer because he could not afford one, before the bank was allowed to foreclose at the end of 2011. Bank of America then suddenly withdrew the foreclosure. The loan servicing got sold to a debt collector, who has refused to take Delany’s calls. They could restart foreclosure on Delany at any time, but he’s not leaving. “I have nothing to lose but my house,” Delany says.
The Obama administration legacy on housing policy began before he entered office. By the time of Lehman Brothers’ failure in September 2008, defaults on subprime loans had spiked significantly. A critical mass of Democrats in Congress refused to agree to TARP unless some portion got devoted to keeping people in their homes. (The Obama Treasury Department would eventually devote $50 billion of TARP funds to this purpose, of which only $12.8 billion has been spent, more than five years later).
The most direct and effective policy solution to stop foreclosures is to allow bankruptcy judges to modify the terms of primary-residence mortgages, just as they can modify other debt contracts. This is known in the trade as “cramdown,” because the judge has the ability to force down the value of the debt. The logic of bankruptcy law reduces debts that cannot be repaid in order to serve a broader economic interest, in this case enabling an underwater homeowner to keep the house. Liberal lawmakers believed the threat of cramdown would force lenders to the table, giving homeowners real opportunities for debt relief. Wall Street banks were so certain they would have to accept cramdown as a condition for the bailouts that they held meetings and conference calls to prepare for it.
But although then-Senator Obama endorsed cramdown on the campaign trail, he supported a bailout package that deferred the provision until after the elections. Donna Edwards, then a freshman congresswoman, received a personal commitment from candidate Obama that he would pursue cramdown at a later date, and it swung her vote for the bailout. On January 15, 2009, Obama’s chief economic policy adviser, Larry Summers, wrote to convince Congress to release the second tranche of TARP funds, promising that the incoming administration would “commit $50-$100 billion to a sweeping effort to address the foreclosure crisis … while also reforming our bankruptcy laws.” But the February 2009 stimulus package, another opportunity to legislate mortgage relief, did not include the bankruptcy remedy either; at the time, the new administration wanted a strong bipartisan vote for a fiscal rescue, and decided to neglect potentially divisive issues. Having squandered the must-pass bills to which it could have been attached, a cramdown amendment to a housing bill failed in April 2009, receiving only 45 Senate votes.
Senate Majority Whip Dick Durbin, who had offered the amendment, condemned Congress, declaring that the banks “frankly own the place.” In fact, the administration had actively lobbied Congress against the best chances for cramdown’s passage, and was not particularly supportive when it came up for a vote, worrying about the impacts on bank balance sheets. Former Treasury Secretary Timothy Geithner admitted in his recent book, “I didn’t think cramdown was a particularly wise or effective strategy.” In other words, to get the bailout money, the economic team effectively lied to Congress when it promised to support cramdown.
The administration’s eventual program, HAMP, grew out of the banking industry’s preferred alternative to cramdown, one where the industry, rather than bankruptcy judges, would control loan restructuring. Unfortunately, the program has been a success for bankers and a failure for most hard-pressed homeowners.
In 2005, Hurricane Wilma blew down the auto repair shop that James Elder and his brother had owned for 25 years. He had just refinanced into a new mortgage on his home in West Palm Beach, Florida, weeks earlier, through National City Bank. A subsequent business failed in the wake of the Great Recession, and by January 2009, Elder had to default on his mortgage loan payments.
He tried to get a loan modification through HAMP when the program came out in March 2009, but National City (which would eventually be purchased by PNC Bank) “dual tracked” him. One division of the bank began foreclosure proceedings while another appeared to be negotiating the loan modification in good faith. Elder sent in paperwork six times, and on two occasions got firm agreements for a modification, but both agreements fell through. He has almost never talked to a human being at his mortgage servicer during the last five years.
PNC voluntarily withdrew the case, and then re-filed it years later. Another hearing was pending as we went to press. “I don’t know what the outcome will be; we’re ready either way,” Elder says. “I don’t deny that I owed the money. All I wanted was a fair shake. Help never came for the homeowners.”
In appreciating how HAMP failed homeowners, it’s important to understand the role of “servicers.” We’re no longer in the age of It’s a Wonderful Life; your lender does not hold onto your mortgage anymore. During the housing bubble, most loans were sold to intermediaries, packaged into securities, and passed off to bond investors, such as pension funds. Servicers were hired to process monthly payments, handle day-to-day contact with homeowners, and distribute the proceeds along to the investors. Servicers also decide when to foreclose and when to modify loans, making them the key to HAMP’s success.
Servicers, basically glorified accounts-receivable departments staffed by line-level workers making relatively low wages, can eke out a profit as long as they never need to perform any customer service. They had neither the expertise nor the resources to handle millions of individual requests, no matter how much money the Treasury offered them to modify loans. “There was no way HAMP could have worked on the scale that it would have needed to work,” says Max Gardner, a bankruptcy lawyer and an expert on foreclosures. “You’re trying to turn servicers into underwriters.” From the first waves of the foreclosure crisis, it was clear that servicers had no capacity to fulfill this role.
The Treasury Department, which engineered HAMP, compounded the problem by making the program exceedingly complex, tweaking it on the fly with new rules and guidelines. This sprung from their consuming obsession with ensuring that only “worthy” borrowers received modifications, perhaps spurred on by Rick Santelli’s proto–tea party rant against undeserving homebuyers. The preoccupation with moral hazard was targeted at homeowners instead of banks, creating overlapping income and asset double-checks to weed out the unworthy and placing more burdens on overstretched servicers.
Worse yet, servicers have their own financial incentives that run counter to the modest incentive payments in HAMP. Servicers make their money based on a percentage of unpaid principal balance on a loan. Forgiving principal — the most successful type of loan modification — eats into servicer profits, so servicers shy away from principal reduction, preferring less effective interest rate cuts. Plus, servicers collect structured fees — such as late fees — which make it profitable to keep a borrower delinquent. Even foreclosures don’t hurt a servicer, because they make back their portion of fees in a foreclosure sale before the investors for whom they service the loan. The old manner of mortgage lending gave everyone a stake in keeping homeowners in their homes; now, the incentives are all mismatched.If HAMP’s goal was truly to prevent foreclosures, there is no good explanation for why the program operates the way it does. Servicers couldn’t handle a minimal caseload, let alone a byzantine program. The incentive problems between loan owners and loan servicers were well known. But if HAMP could give homeowners enough hope that they could save their home by making a few more payments, the Treasury could prevent outright defaults or deeper principal reductions from crashing the value of mortgage-backed bonds and derivatives, many of which were held by banks. So bank balance sheets, not homeowner fortunes, took priority.
HAMP defenders often cite the enormous complexity in the structure of mortgage ownership as a reason for the program’s failure to deliver more relief to homeowners. But bank bailouts were just as difficult to negotiate, says Amir Sufi, professor of finance at the University of Chicago’s Booth School of Business. “Those programs got done,” Sufi says. “Programs to help homeowners never did.”
Other officials found ways to manage mortgage relief. Former FDIC Chair Sheila Bair engineered a kind of dry run of HAMP in 2008, when her agency took over the failed subprime lender IndyMac. Needing to salvage a cascade of bad loans and prevent a foreclosure epidemic, Bair initiated a very different process. “Basically, we sent you a letter saying based on our records, we’re giving you a new mortgage payment at 31 percent of your income,” Bair says. “What you need to do is sign this form, give the first month’s check, a W2, and the name of your employer. It’s like a couple pages. Then you got your loan mod [modification].”
The Treasury’s HAMP design was infinitely more cumbersome, effectively sabotaging the program before it got started. “We would have helped unworthy borrowers, but did that matter at that point?” Bair asks. “We helped unworthy banks too.”
Servicers quickly discovered that they could game HAMP in their own interest, using it as a kind of predatory lending program. One tactic was to chronically lose borrowers’ income documents to extend the default period. “I’m doing a book now,” Bair says, “and [in] almost every family I interviewed, servicers had lost their paperwork at least once.” Prolonged “trial modifications” allowed servicers to rack up payments and late fees while advancing the foreclosure process behind the borrower’s back. They could then trap the borrower after denying the modification, demanding back payments, missed interest, and late fees, using the threat of foreclosure as a hammer. “They created a situation where the borrower would start making the payments, end up not getting the modification, and still go into foreclosure,” Bair says.
This pattern happened with disturbing regularity. According to a recent Government Accountability Office report, 64 percent of all applications for loan modifications were denied. Employees at Bank of America’s mortgage servicing unit offered perhaps the most damning revelations into servicer conduct. In a class-action lawsuit, these employees testified that they were told to lie to homeowners, deliberately misplace their documents, and deny loan modifications without explaining why. For their efforts, managers rewarded them with bonuses — in the form of Target gift cards — for pushing borrowers into foreclosure.
Because of all this, HAMP never came close to the three–four million modifications President Obama promised at its inception. As of August 2014, 1.4 million borrowers have obtained permanent loan modifications, but about 400,000 of them have already re-defaulted, a rate of about 30 percent. The oldest HAMP modifications have re-default rates as high as 46 percent. And HAMP modifications are temporary, with the interest rate reductions gradually rising after five years. The first rate resets began this year.
Kim Thorpe, whom everyone knows as KT, answered her door one day to find the sheriff of Harrison, Maine, handing her foreclosure papers. “This has to be wrong, I just made the payment,” Thorpe told him.
That was in March 2010. Citi Mortgage, which services the loan, has taken Thorpe to court on multiple occasions, but the servicer keeps voluntarily dismissing the cases before trial. Citi Mortgage continues to call Thorpe to collect a debt, which they claim has ballooned to $157,000. But Citi has never found the documents to prove standing to foreclose, which Thorpe never tires of telling them. “When they know that you don’t fear them, you’ve taken away their power,” she says.
Citi can still try to locate the proper documents and pursue foreclosure again. In the meantime, Thorpe is fighting stage three breast cancer. She and her husband have separated and their kids have moved out. “It’s a house now, not a home,” she says. But she continues to wait for the bank’s next move.
The cynical view is that HAMP worked exactly to the Treasury’s liking. Both Senator Elizabeth Warren and former Special Inspector General for TARP Neil Barofsky revealed that then-Secretary Geithner told them HAMP’s purpose was to “foam the runway” for the banks. In other words, it allowed banks to spread out eventual foreclosures and absorb them more slowly. Homeowners are the foam being steamrolled by a jumbo jet in that analogy, squeezed for as many payments as they can manage before losing their homes.
HAMP facilitated such a scheme perfectly. Giving discretion on modifications to mortgage servicers meant that they would make decisions in their own financial interest. No losses would be forced on the owners of the loans, and no principal forgiveness would be made mandatory. The system, by design, worked for financial institutions over homeowners.
The Obama administration “viewed foreclosures as an instrument of housing markets clearing,” Damon Silvers says. “And they thought foreclosures were unavoidable, in order to maintain the fiction that these loans were worth what banks said on the balance sheet.”
Silvers explains that only minimal taxpayer funds, far less than the total needed, were devoted to preventing foreclosures; banks never had to kick in their own share. “In order for the economy to be revived, we needed to write down the principal on these loans,” he says. “The decision that was made amounted to debt peonage on U.S. families to the benefit of the banks.”
Indeed, the administration missed or delayed several opportunities to provide relief and prevent foreclosures while also boosting the economy. During the 2008 presidential debates, John McCain proposed a $300 billion plan to buy up mortgages and renegotiate their terms, similar to the Depression-era Home Owner’s Loan Corporation. There were also bipartisan calls for a mass refinancing program for underwater homeowners, which would save them billions in monthly payments. Ultimately, the administration never tried to buy mortgages (though plenty of hedge funds did), and their refinancing program didn’t produce even its meager results until 2012, years after the crisis erupted.
Two critical moments perfectly illustrate the Treasury’s priorities on HAMP and housing. First, the department laid out precise program guidelines — in a thick handbook — that banned many of the practices in which servicers engaged. But the Treasury never sanctioned a servicer for contractual non-compliance, and never clawed back a HAMP incentive payment, despite documented abuse. In the summer of 2011, the Treasury temporarily withheld incentive payments, but they would eventually hand over all the money. If the program had actually put borrowers first, they could have used sanctions to force better outcomes.
Then, in October 2010, it was revealed that, in order to verify standing to foreclose, servicers forged and backdated assignments, and “robo-signed” affidavits attesting to their validity without any knowledge of the underlying loans. Almost immediately, the top five servicers paused their foreclosure operations. Nobody knew how much legal liability servicers had, but with state and federal law enforcement investigating and potentially trillions of dollars in mortgages affected, the numbers were expected to be high.
At the FDIC, Sheila Bair immediately saw this as an opportunity. “When robo-signing raised its ugly head, I sent a proposal to Tim [Geithner],” Bair says. “I called it a super-mod. Any loan that’s more than 60 days delinquent, take it down to face value — just take it down. Write off that principal. And if they held onto the house and kept making their mortgage payment, any subsequent appreciation they would have had to share with the lenders. But just take it down.”
But the Treasury didn’t use this newfound leverage to force losses onto the banks. Instead, they were more concerned with a “global settlement” with bankers to defuse the issue, limit bank losses, and make the situation manageable for the perpetrators.
After a perfunctory investigation, state and federal officials reached an agreement with the top five servicers, called the National Mortgage Settlement. Despite claims that a million homeowners would get principal reductions as a result, in the end only 83,000 received such help. Other settlements for fraudulent conduct delivered no jail time, the payment of penalties with other people’s money, empty promises to never misbehave again, and cash awards to victims that were so low some didn’t even bother to cash the checks. The administration refused to use the leverage from bank mistakes to the benefit of borrowers, because they didn’t want to hurt banks. “We were just seeing the world through two different prisms,” Bair says.
Mike Malleo of Manasquan, New Jersey, refinanced into an infamous “Pick-a-Pay” loan from World Savings Bank in 2005, which offered a low teaser rate. Years later, his late wife contracted stage four pancreatic cancer, and the subsequent medical bills, loss of wages and eventual reset of the interest rate made it impossible to afford the mortgage.
A settlement with the New Jersey attorney general over Pick-a-Pay mortgages entitled Malleo to a loan modification. But Malleo never received relief, despite applying on four separate occasions. Instead, Wells Fargo told him to stop paying so as to qualify for HAMP, but then used that default to file for foreclosure, sell the property to the bank itself, and set an eviction date of August 21, 2014.
Weeks before eviction, Malleo received a letter from Home Start Housing Center promising they could get him out of foreclosure. After submitting his information, Home Start sent him an offer—on Wells Fargo stationery — approving him for a HAMP modification with a lower monthly payment.
Malleo sent in his payment, but that day, two sheriffs and a moving truck came to evict him from the house. Wells Fargo claims to have never heard of Home Start. After initially insisting that Wells Fargo must accept the terms of the approved modification, days later Home Start returned his check and rescinded the offer. Malleo moved out of the house October 1. “The web of deceit is overwhelming,” Malleo says. “The embarrassment, the disgrace that has occurred is amazing.”
We’re still in a foreclosure crisis, five years after the technical end of the Great Recession. While leading indicators like delinquencies and foreclosure starts have fallen from their peak, they remain “at nearly three times the normal level,” says Sam Khater, deputy chief economist at housing specialist CoreLogic. More than 8.7 million homeowners remain underwater, with the borrower owing more than the home is worth, and more than half a million families will lose their homes this year under current trends. More troubling, delinquencies and foreclosure starts have inched back up in recent months. In August, analyst RealtyTrac found that foreclosure auctions increased for the first time in 44 months, and foreclosure filings in the third quarter of 2014 also jumped, breaking a three-year string of declines.
This new foreclosure activity is not concentrated in new loans, which have very low default rates. The problem is practically all legacy loans from bubble-era mortgages sold on houses that had unsustainably high prices and appraisals to people struggling with stagnant wages and financial insecurity. In other words, the crisis was never solved; it was deferred. In the coming years, two million loan modifications, including HAMP loans, will face higher interest rate resets, and 800,000 of those loans are underwater. Another foreclosure spike is a distinct possibility.
Banks have also decided to finally cut through their foreclosure backlog, after modest increases in the value of real estate made it more attractive to them to seize the homes. In Florida, money from the National Mortgage Settlement that is supposed to help borrowers instead funds foreclosure courts, which have a stated directive to dispose of cases and get to evictions, regardless of the history of lender abuses. “The courts have been corrupted and co-opted like we’d never imagine,” says Matt Weidner, a foreclosure defense attorney in Tampa.
Mortgage servicers remain beset with the same scarce resources, wrongheaded financial incentives, and unprepared staffs. The Consumer Financial Protection Bureau recently released evidence of servicers violating new rules that the CFPB put in place in January 2014, including failure to execute loan modification agreements, incorrect reports to credit agencies, and misrepresentation of borrower options. In October, New York banking regulator Ben Lawsky found that mortgage servicer Ocwen backdated thousands of loan modification denial letters to avoid a 30-day appeal process (an old Bank of America trick).
Foreclosures before courts now often feature robo-witnesses, entry-level employees with no knowledge of the underlying loans, who come to court reading a script attesting to the veracity of the servicer’s claims. “The biggest result of the robo-signing controversy has been to move it into the courtroom,” says Thomas Ice, a Florida defense lawyer who exposed robo-signing in several depositions in 2010. “They don’t give their signature, they just perjure themselves in court.”
The persistent crisis, and the lack of sanctions for anyone responsible for misconduct, continues to weigh down the economy. As Amir Sufi and Atif Mian’s groundbreaking research shows, consumer spending fell hardest in the areas where home prices dropped the most, particularly poor areas where people of color were preyed on by the subprime lending industry. More foreclosures fueled heavier price declines, creating a vicious cycle. The consequent destruction of wealth led to reduced demand from over-indebted borrowers, contributing to a pervasively weaker economic recovery. And lower net worth means less consumption going forward, particularly in housing. “This permanent scar has been left on the middle class,” Sufi says.
The Obama administration’s most recent attempt at a solution is to loosen lending restrictions to jump-start the housing market. That trades financial instability for a short-term housing stimulus, and could put homeowners in significant peril. “Everyone’s on board with allowing debt to build up during a boom,” Sufi says, “but we now know afterwards, policymakers will leave people out to dry. You’re going to suffer losses and not get any forgiveness.”
Americans implicitly understand this. Household formation has been “disturbingly slow” since the Great Recession, says former Fannie Mae housing economist Tom Lawler. Homeownership rates have descended to 1995 levels, according to the Census Bureau, with the losses concentrated most in Generation X, which bore the full impact of the foreclosure crisis. Housing ordinarily leads an economic recovery — but not this one. Part of this weakness is caused by low income growth and depressed housing prices that feed on themselves. But there are psychological as well as economic scars from millions of foreclosures. Amid the carnage, people have naturally shied away from placing their wealth in a volatile asset like a home.
Perhaps the worst legacy of the failure to stop the crisis is the impact on trust in government itself. HAMP’s predatory lending schemes reinforced the old Ronald Reagan dictum that the most dangerous words in the English language are “I’m from the government and I’m here to help.” How do you tell families who signed up for an aid program that ended up actively harming them to ever believe in government again?
Particularly for a president like Obama, who entered office on a promise of activist government, with ardent backing from communities of color victimized by the crisis, the decision to protect banks over homeowners was debilitating. A tide of cynicism swept out Democrats in the last midterm elections, with voters more skeptical than ever that government can solve problems, or take the people’s side over the financiers. Two-thirds of voters in exit polls found the economy to be rigged for the wealthy.
“The consequence of these decisions was the disillusionment of his base in believing that political action is going to work,” says Damon Silvers. “They weakened the Obama presidency in ways he could never recover from.”