By Katie Buitrago, Woodstock Institute - February 16, 2012
Throughout January and February, the Metropolitan Planning Council (MPC) is curating a blog series on vacant properties in metropolitan Chicago. In the coming weeks, MPC's blog, The Connector — as well as the web sites of some of our partners — will feature posts from elected and appointed officials, policy advocates, finance experts, and others about the many ways we are all working together to get a handle on this growing regional and national housing and community development challenge. The opinions expressed in these posts do not necessarily reflect MPC's opinion. Follow the blog series at www.metroplanning.org/vacantproperties.
This post originally appeared on the RHOPI web site.
Illinois Attorney General Lisa Madigan, along with U.S. Attorney General Eric Holder and other state Attorneys General, announced the $25 billion settlement of an investigation into widespread robosigning practices within the nation’s five largest mortgage servicers: Bank of America, JPMorgan Chase, Wells Fargo, Citibank, and Ally Bank. Illinois will receive more than $1 billion to write down principal, help underwater homeowners (those who owe more than their homes are currently worth) refinance, compensate homeowners who were harmed by robosigning, and address the causes and impacts of the robosigning and foreclosure crisis.
The majority of the settlement money, $17 billion, will be used to provide direct assistance to homeowners. Of that figure, at least 60 percent must be used to write down principal on underwater loans. HUD Secretary Shaun Donovan expects that this money could ultimately result in $35-40 billion of principal reductions, since servicers will not receive a dollar of credit towards fulfilling settlement responsibilities for every dollar of principal written down—servicers will likely receive 50 cents or less credit for every dollar written down. Negative equity has been shown to be a principal driver of foreclosure, and Illinoisans have lost billions of dollars in wealth due to plummeting home values. Approximately 380,000 homeowners in the Chicago region are underwater, with another 78,000 dangerously close to losing all of their equity. Woodstock estimates that the average underwater borrower in the Chicago region owes about $61,000 more than the value of his or her home. The rest of the homeowner assistance money will be put toward programs for short sales, forbearance for unemployed programs, waiving deficiency balances, stabilizing vacant homes, and other purposes.
At least $3 billion of the settlement will be put toward refinancing loans that are current but are underwater and have an interest rate of 5.25% or more. Monthly payments must be reduced by at least $100.
Servicers also agreed to a set of standards to improve their loan servicing operations. Servicers agreed to put the brakes on the “dual track” of simultaneously pursuing both a loan modification and a foreclosure on the same home. Under the settlement, servicers will be required to consider a borrower for a loan modification before initiating a foreclosure, increasing the chances of saving his or her home. Borrowers will also have the right to appeal a modification decision, which is crucial when servicers have been shown to have widespread problems with losing important documentation or incorrectly determining eligibility. Other changes to servicing procedures include:
- Improving communications with borrowers by requiring a notice of intention to proceed to foreclosure before foreclosure is initiated that informs borrowers of their rights to remain in the home until foreclosure is completed and explains the servicer’s right to foreclose, appointing a single point of contact for each borrower, informing borrowers of all foreclosure prevention options before foreclosure is filed, requiring timely responses to loan modification applications and other requests, creating an online portal so borrowers can track their modification status, and providing contact information of housing counselors to the borrower.
- Increasing thoroughness in preparation of foreclosure documents.
- Improving oversight of third parties involved in the foreclosure process.
- Requiring that servicers notify the borrower and local authorities when they decide not to complete a foreclosure on a property, a phenomenon documented in Woodstock Institute’s report “Left Behind: Troubled Foreclosed Properties and Servicer Accountability in Chicago.”
- Requiring that servicers have a sufficient number of adequately trained personnel to handle loss mitigation workloads in a timely and thorough manner.
- Improving transparency for proprietary modifications.
- Ensuring that servicing fees are reasonable and that late fees do not accrue during a trial modification.
- Enhancing protections for military service members in foreclosure.
- Enhancing participation in neighborhood stabilization programs, such as land banks.
Part of the settlement, $1.5 billion, will be used to provide remuneration to homeowners whose homes were improperly foreclosed upon after January 1, 2008. Payment will amount to approximately $2,000 per homeowner, depending on the extent of the response. Homeowners who receive payments will not have to waive their rights to pursue servicers in court for any claims regarding their foreclosure.
The remaining money, approximately $2.5 billion, will be disbursed to the states participating in the settlement to be distributed according to each state’s needs. Illinois will likely receive $100 million of this money. Attorney General Madigan has indicatedthat she plans to use the money for legal aid programs, housing counseling, homeowner outreach, housing policy development, and neighborhood stabilization.
In addition to robosigning, there are concerns with financial institutions’ practices regarding improperly securitizing loans and fair lending concerns. These issues are not part of, or affected by, the settlement. This settlement does not release banks from civil or criminal liability or investigation into other acts distinct from the robosigning issues. Homeowners and investors can still bring cases against the banks, either individually or as part of a class action suit. The settlement releases the five servicers only from claims brought by the state attorneys general or federal banking regulators regarding loan servicing, foreclosure preparation, and origination.
In order to ensure that the servicers abide by the settlement, it will be recorded with the court as a consent judgment. An independent monitor, North Carolina Banking Commissioner Joseph Smith, will track servicers’ compliance with the terms and report to the court and the attorneys general. Servicers will also internally track their progress towards complying with the settlement and report to the monitor. Violations will be met with fines of up to $5 million, though it is not yet clear how individual violations will be calculated.
The more than $1 billion in foreclosure prevention and community stabilization resources coming to Illinois opens up new opportunities for the state, and effective implementation of the settlement will be crucial to its success. How do you think the money should be targeted? Where can it have the biggest impact? Let us know your thoughts.