BofA joins Citi in support of Judicial Mortgage Modification

Bank of America, the nation's largest lender and its biggest bank by assets, now supports changing the law to give federal judges the power to modify mortgages in bankruptcy.

The bank joins Citigroup, the nation's third-largest bank by assets, in supporting a change to existing law to give homeowners more leverage. Unlike other forms of debt, bankruptcy judges presently lack the power to change mortgage terms. The banking and home mortgage industry want to keep it that way -- by not allowing judges the authority to change the terms, troubled homeowners are at the mercy of their lenders. They take what they get.

But Tuesday, before a nearly-empty Congressional hearing room, Barbara J. Desoer, president of Bank of America Home Loans, said her bank now supports leveling that playing field.

"As we've gone through the lessons that we've learned with modifications and other programs, there probably is some segment of borrowers for whom that would be an appropriate alternative," Desoer said before the House Financial Services Committee.

"So you would support that in some circumstances?" asked Rep. Brad Miller (D-N.C.) in a follow-up to his original question.

"In some circumstances, yeah," Desoer responded.

In December, the House failed to pass an amendment to its financial reform bill that would have given judges this authority, despite the fact that it passed the chamber the previous March. The Senate defeated it the next month after banks and mortgage lenders of all sizes mobilized to kill the measure.

Bank of America, though, is the nation's largest lender and servicer of home mortgages. Desoer oversees a home mortgage unit that accounts for "about 20 percent of the U.S. mortgage origination market, with a $2 trillion servicing portfolio serving nearly 14 million customer loans," according to the bank's website.

Its support now gives homeowner advocates in Congress added ammunition to pressure lenders to either do more to give distressed homeowners sustainable mortgage modifications, or to threaten the rest of the mortgage industry with the possibility of reintroducing a bill that would allow federal judges the authority to unilaterally do it on their own.

Citigroup supported the change last year as Congress debated the proposal. Its position has not changed, bank spokeswoman Molly Meiners told the Huffington Post. Together, Bank of America and Citigroup hold a combined $4 trillion in assets, according to regulatory filings with the Federal Reserve.

After Desoer appeared to qualify her support, committee Chairman Barney Frank (D-Mass.), who supports giving judges the authority to treat home mortgages like other forms of consumer debt, interjected in hopes of getting additional clarification.

"Obviously the law would have to be modified to allow that circumstance," he said. "We should make clear that we can't change the bankruptcy law obviously case by case, so it would have to be an [inaudible] change."

Miller then asked a follow-up question.

"You would support a legislative change in the bankruptcy law to allow the modification of home mortgages in bankruptcy?" he asked Desoer.

"Yes," she replied. "And I believe that there is a segment of borrowers for whom that is the appropriate alternative, subject to them having gone through qualification for HAMP, or something like that, and failed." HAMP refers to the administration's main foreclosure-prevention initiative, the Home Affordable Modification Program.

"There is a segment of borrowers for whom that might be an appropriate alternative, yes," Desoer added.

In an interview after the hearing, Frank told HuffPost that Bank of America's new position was "encouraging."

"We may be able to reopen that," Frank said. "And of course, Citi stayed with it. We now have two of the four [biggest banks in the country]" supporting judicial mortgage modifications.

Frank added that he would tell the House Judiciary Committee about Bank of America's now-public position. Judiciary has jurisdiction over bankruptcy law, he said.

"Maybe we can revisit this," Frank said.

Odds are slim. Banks still wield tremendous influence in the Capitol.

"I'm not confident. I'm hopeful," said Frank. "Look, you've got the credit unions, the community banks -- people tend to overestimate the importance of the big banks. Frankly, it's the smaller entities that have more political clout, and I don't see that this has moved us elsewhere. It's helpful, but it's not conclusive."

The panel was quickly reminded that Bank of America and Citi were alone in their support for homeowners.

Mike Heid, co-president of Wells Fargo Home Mortgage, butted in after Desoer finished responding to Miller, and added his two cents:

"I think you'd have to ask yourself whether a change in bankruptcy law is really the best way -- and the fastest way -- to achieve assistance for homeowners. I think there's other alternatives," Heid said in a response to a question that wasn't asked of him.

Miller quickly retorted, "We're trying to do other alternatives now, and have been for three years, and without much to show for it."

Last year lenders foreclosed on more than 2.8 million homes, according to real estate research firm RealtyTrac. The firm estimates three million homes will get foreclosure notices this year; more than one million of them will be repossessed by lenders

Gov't expands assistance for homeowners with property values under their mortgages

The government launched a new effort on Monday to speed up the time-consuming, often-frustrating process of selling your home if you owe more than it's worth.

The Obama administration will give $3,000 for moving expenses to homeowners who complete such a sale -- known as a short sale -- or agree to turn over the deed of the property to the lender. It's designed for homeowners who are in financial trouble but don't qualify for the administration's $75 billion mortgage modification program.

Owners will still lose their homes, but a short sale or deed in lieu of foreclosure doesn't hurt a borrower's credit score for as much time as a foreclosure. For lenders, a home usually fetches more money in a short sale than a foreclosure. And the bank avoids expensive legal bills, cleanup fees and maintenance costs that follow a foreclosure.

"It's very traumatic and embarrassing and frustrating to go through a foreclosure," said Laurie Maggiano, policy director of the Treasury Department's homeownership preservation office. With a short sale, she said, "your financial issues are your own problem and not neighborhood conversation."

Falling home prices and lost jobs have forced many sellers into this position. For example, in Orange County, Calif., short sales made up about 26 percent of the market in March, compared with 17 percent a year earlier, according to data complied by Altera Real Estate, a local brokerage. In the Minneapolis-St. Paul metro area, about 12 percent of all deals since October were short sales, up from about 8 percent a year earlier, according to the Minneapolis Area Association of Realtors.

The expanded incentives will help accelerate short sales, said Mark Zandi, chief economist at Moody's Analytics. He expects 350,000 homeowners nationwide to use the program through the end of 2012, more than double his earlier forecast.

For buyers, though, short sales can be a great opportunity.

Along with the financial incentives, the new government program makes another key change. Mortgage companies will have to set their minimum bid before the house is listed for sale. If the offer is above that, the lender must accept it.

That's a big change from current practice. Lenders generally don't calculate how much money they are willing to accept on a short sale until they have an offer in hand, causing long delays before the sale is approved.

The new program "will give us a degree of efficiency that we have not had in the past," said Matt Vernon, Bank of America's executive in charge of short sales and foreclosed properties.

Under the new process, buyers who submit an offer to purchase a home in a short sale should get a response within two weeks, as opposed to months. If that happens as planned, it would be a big improvement. Real estate agents across the country have complained that lenders are often difficult to reach, sometimes only communicating by e-mail and infrequently at that.

Some real estate agents who specialize in short sales are optimistic. Most borrowers in Las Vegas, owe so much more on their mortgages than their properties are worth they can't qualify for a loan modification.

The Treasury Department outlined the plan last November, but doubled the original $1,500 in relocation money after realizing that many homeowners need more cash to move out. That's because landlords usually want large deposits from people whose credit records have gone sour after missing mortgage payments.

However, there are plenty of restrictions. To qualify, the home needs to be a borrower's primary residence. Homeowners either have to be behind on their mortgages or on the verge of becoming delinquent.

Currently, the program is not available for mortgages owned or guaranteed by mortgage finance companies Fannie Mae and Freddie Mac, though the two government-controlled companies will soon follow suit, said the Treasury's Maggiano.

Obama To Order Lenders To Cut mortgage Payments For Unemployed

After months of criticism that it hasn't done enough to prevent foreclosures, the Obama administration is expected to announce Friday a plan to reduce the amount some troubled borrowers owe on their home loans.

The effort will let people who owe more on their mortgages than their properties are worth get new loans backed by the Federal Housing Administration, people briefed on the plan said. It would be funded by $14 billion from the administration's existing $75 billion foreclosure-prevention program.

The people briefed on the plan asked Thursday that they not be identified because the details had not yet been announced.

The plan will also require the more than 100 mortgage companies participating in the administration's existing foreclosure prevention program to consider slashing the amount borrowers owe. They will get incentive payments if they do so.

It also will include three to six months of temporary aid for borrowers who have lost their jobs. And there will be additional payments designed to give banks an incentive to reduce payments or eliminate second mortgages such as home equity loans – a problem that has blocked many loan modifications.

The changes "will better assist responsible homeowners who have been affected by the economic crisis through no fault of their own," an administration official said.

To date, the administration's $75 billion foreclosure-prevention program has been a disappointment. Critics have complained the program does little to encourage banks to cut borrowers' principal balances on their primary loans. Nearly one in every three homeowners with a mortgage are "under water" – they owe more than their property is worth – according to Moody's Economy.com.

An expansion of the foreclosure-prevention program has long been expected because only 170,000 homeowners have completed the process out of 1.1 million who began it over the past year.

The program is designed to lower borrowers' monthly payments by reducing mortgage rates to as low as 2 percent for five years and extending loan terms up to 40 years. To complete the program, homeowners need to go through a three month trial period and provide proof of their income, plus a letter documenting their financial hardship.

n spent. Lenders had received $58 million in incentive payments as of last month, according to the Government Accountability Office.

Meanwhile, one long-delayed piece of the government effort is getting off the ground.

Citigroup Inc. on Thursday joined the government's program to modify second mortgages such as home equity loans. With Citi on board, now four big owners of second mortgages have joined. The others are Bank of America Corp., Wells Fargo & Co. and JPMorgan Chase & Co.

Republican Strategist Pens Memo To Kill Financial Regulatory Reform

Nine months after he penned a memo laying out the arguments for health care legislation's destruction, Republican message guru Frank Luntz has put together a playbook to help derail financial regulatory reform.

In a 17-page memo titled, "The Language of Financial Reform," Luntz urged opponents of reform to frame the final product as filled with bank bailouts, lobbyist loopholes, and additional layers of complicated government bureaucracy.

"If there is one thing we can all agree on, it's that the bad decisions and harmful policies by Washington bureaucrats that in many ways led to the economic crash must never be repeated," Luntz wrote. "This is your critical advantage. Washington's incompetence is the common ground on which you can build support."

Luntz continued: "Ordinarily, calling for a new government program 'to protect consumers' would be extraordinary popular. But these are not ordinary times. The American people are not just saying 'no.' They are saying 'hell no' to more government agencies, more bureaucrats, and more legislation crafted by special interests."

In Republican circles Luntz's words, which have helped the party score win the message wars over health care and other legislative battles, are often treated as gospel. Already, some of the advice he's offered on regulatory reform has found its way into the political discourse -- with a proposed Consumer Financial Protection Agency seemingly on life support under Republican objections.

In addition to tying regulatory reform to a massive government takeover, Luntz's memo includes several other data points and messaging suggestions as a blue print for the legislation's defeat. Opponents, he writes, would be well served to link the package to the financial industry bailout (which, it should be noted, is fundamentally not part of the legislation). According to accompanying polling data, 52 percent of voters said they would be "much less likely" to vote for their member of Congress if they voted for a financial reform bill that contained a fund to bail out banks and Wall Street.

"Public outrage about the bailout of banks and Wall Street is a simmering time bomb set to go off on Election Day," Luntz wrote. "Frankly, the single best way to kill any legislation is to link it to the Big Bank Bailout."

Another effective strategy to kill the bill, according to Luntz, is to make the case that it was written in secret by lobbyists.

"The American people are tired of add-ons, earmarks, and backroom deals - but they are mad as hell at 'lobbyist loopholes,'" Luntz wrote. "You must put proponents of the legislation on the defense, forcing them to attempt to justify the 'lobbyist loopholes' and exemptions placed in the bill... Highlight the exemptions. Broadcast them. Remind them, 'The legislation is filled with lobbyist loopholes that exclude certain wealthy, powerful industries from regulations.'"

On the specific issue of a Consumer Financial Protection Agency, Luntz argued that opponents should stress the high-cost of creating an additional regulatory body in addition to the damaging effects it will supposedly have on "small business owners" (as opposed to, merely, small businesses).

"Owning a small business is part of the American Dream and Congress should make it easier to be an entrepreneur," wrote Luntz. "But the Financial Reform bill and the creation of the CFPA makes it harder to be a small business owner because it will choke off credit options to small business owners."

These lines or arguments are similar to the ones used by regulatory reform opponents in the past, often with some success. What's telling is that they are being trotted out again in this type of economic environment.

Luntz does seem to acknowledge that the climate makes defeating regulatory reform a bit trickier. At the top of his memo he urges opponents (primarily Republican lawmakers) to "acknowledge the need for reform that ensures this NEVER happens again," He insists that "the status quo is not an option" and that members of Congress, when addressing the crisis, "never forget its impact on your audience." Luntz even advise his audience to promote themselves the agents of change.

But for the sake of winning the debate, he adds, it is vital to insist that such change does not include additional Washington-based regulatory powers.

"Many of the same members of Congress responsible for the legislation that helped create the housing bubble and the Wall Street financial crisis are now attempting to create another new government agency with an unlimited budget and almost unlimited regulatory powers," wrote the GOP wordsith. "I'm sorry to say this but they don't know what they're doing. They have gotten it wrong time and time again..."

"A new agency with new bureaucrats is not change we can believe in," Luntz wrote. "It's not change at all."

Move Your Money to a Local/State Bank

People all over the country are choosing to move their money out of bigger banks and into smaller, community-oriented financial institutions that generally avoided the reckless investments and schemes that helped cause the financial crisis.

Fueled by the personal initiatives of thousands, it’s a grassroots effort that has the potential to shift power in the financial system away from Wall Street and to Main Street.

Smaller financial institutions are better equipped to have a cooperative approach with customers because they are less riddled by debt, which means they can more freely lend money.

“Community banks are much more likely to reinvest that money in the community and actually help create jobs,” Huffington Post editor Arianna Huffington said on MSNBC.

No matter the impact, “Move Your Money” is a better public response to national bank bailouts than apathy or boisterous tea parties. It is a promising solution for Americans fed up with how their money is handled.

~ Nico Pitney on MSNBC – January 12, 2010

Bank Foreclosure Filings Often Missing Paperwork

With skyrocketing foreclosure rates across the nation, homeowners have felt powerless to stop big banks from taking over. Many are turning to bankruptcy to try to save their homes.

Those dreaded legal proceedings are leading to free homes for some.

"We were terrified," homeowner Siwanna Green said. "We didn't know what to do."

Green is talking about the day last spring that she found out her 3-bedroom Harlem apartment was going into foreclosure – not from the bank, but from a notice in fine print in the newspaper.

"I tried to negotiate with the bank, and they wouldn't give me any information," Green said. "I keep hearing my apartment is going to be sold, and they kept saying, 'call back, call back.'"

It's the story of many families, but this one may have a nearly fairytale ending since the Greens could get their apartment for free. After being forced into bankruptcy, Green's lawyer David Shaev dug through reams of paperwork to find the bank that says they own the Green home doesn't have a legal leg to stand on.

"They cant prove they have ownership of the mortgage or the note, and they're filing basically are bogus claims," Shaev said.

These cases are far from isolated. Just a handful of attorneys are finding these foreclosure filings are either missing paperwork or fraudulent, meaning the bank doesn't have claim to the home and the mortgage just disappears.

Judges are now ruling that those mortgages be written off. A Patchogue family had their nearly $300,000 mortgage wiped out, and a Cortlandt Manor homeowner just had her $460,000 mortgage thrown out.

In a scathing court hearing the judge declared the mortgage company had a "lack of evidence" to prove they owned the home.

"The judges are very aware and catching on that the documents presented by these banks are not valid," Shaev said.

Shaev and fellow attorneys estimate there could be $1.1 trillion worth of similar mortgage mix-ups.

"If you want to take my client's house away, you better at least prove you have the right to," Shaev said.

A lack of that proof could lead to a very Merry Christmas for some.

While these homeowners can live in their houses free and clear, selling it is another matter since the title is in question. Those battles are currently being fought in court as well.

Fairness in Bakruptcy act leads to Unfair Housing Market

The financial crisis of 2008 and the current recession were triggered by the bursting of the housing bubble and the sub prime mortgage crisis that began in late 2006/early 2007. But US personal bankruptcy law also played an important role.

In 2005, major reform of US bankruptcy law sharply increased debtors’ cost of filing for bankruptcy. This caused a sharp reduction in the number of filings. Because credit card debts and other types of unsecured debt are discharged in bankruptcy, filing for bankruptcy loosens homeowners’ budget constraints and makes paying the mortgage easier. Thus the 2005 reform set the stage for an increase in mortgage defaults by making bankruptcy less readily available.

We estimate that the reform caused about 800,000 additional mortgage defaults and 250,000 additional foreclosures to occur in each of the past several years – thus contributing to the severity of the financial crisis.

But over longer periods, bankruptcy filings and mortgage defaults are positively rather than negatively related. To show this relationship, we use a large sample of first-lien mortgages that originated in 2004 and 2005 and are followed each month. Figure 1 shows homeowners’ cumulative probability of defaulting on their mortgages, conditional on filing for bankruptcy. More than 90% of homeowners with subprime mortgages and nearly 80% of homeowners with prime mortgages who file for bankruptcy also default on their mortgages. Most often, default occurs first and bankruptcy second. The reverse relationship (not shown) is similar although less strong: 9% of homeowners with subprime mortgages and 6.5% of homeowners with prime mortgages who default also file for bankruptcy. Figure 2 shows homeowners’ cumulative probability of filing for bankruptcy, conditional on lenders starting foreclosure. More than 70% of homeowners with subprime mortgages and nearly 20% of homeowners with prime mortgages who are subject to foreclosure file for bankruptcy.

We also estimate hazard models explaining homeowners’ decisions to file for bankruptcy following default, controlling for homeowner and property characteristics and local economic conditions. We find that when homeowners default, their probability of filing for bankruptcy over the next several months increases 14- to 16-fold, depending on whether they have prime or subprime mortgages. When lenders start foreclosure, homeowners’ probability of filing for bankruptcy increases around 25-fold, regardless of whether they have prime or subprime mortgages.

Why are homeowners’ decisions to default and to file for bankruptcy so closely related? One reason is that increases (decreases) in income levels increase (decrease) homeowners’ ability to pay both their mortgages and their unsecured debts. Similarly, increases (decreases) in homeowners’ total debt levels decrease (increase) their ability to pay both their mortgages and unsecured debts. In addition, default and bankruptcy are positively related because filing for bankruptcy helps homeowners in financial distress. Homeowners who have fallen behind on their mortgage payments and wish to save their homes gain from filing for bankruptcy, because filing delays foreclosure and gives homeowners more time to repay. Filing for bankruptcy also helps homeowners because bankruptcy trustees may challenge excessive fees and penalties that mortgage lenders frequently impose and bankruptcy judges sometimes discharge second mortgages if they are underwater. Homeowners who do not wish to save their homes also benefit from filing for bankruptcy, because the delay in foreclosure allows them to stay in their homes cost-free for several months during the bankruptcy proceeding. Deficiency judgments – claims on ex-homeowners to pay the difference between the mortgage and the sale price of the home in foreclosure – are also discharged in bankruptcy. All of these factors suggest that homeowners who default on their mortgages also gain from filing for bankruptcy.

Policy implications

These relationships have important public policy implications. Foreclosures have very high social costs, many of which are not borne by either borrowers or lenders. The external costs of foreclosure instead fall residents of neighborhoods that become blighted because of foreclosures and on residents of towns and cities that are forced to cut public services because foreclosures caused property values and property tax revenues to fall.

There is an efficiency gain from using bankruptcy policy to discourage defaults and foreclosures. In particular, the 2005 bankruptcy reform should be at least partially reversed, since lowering the cost of filing for bankruptcy will encourage more homeowners to file and therefore reduce foreclosures. And foreclosure laws should be changed to make the foreclosure process longer and more expensive for lenders – this will encourage them to modify mortgages rather than foreclosing. In addition, reforms such as the credit card legislation recently adopted by the US Congress will affect both bankruptcy and default. The new legislation, which prevents credit card lenders from raising interest rates on existing loans, is likely to reduce the cost and availability of credit card loans and therefore will also reduce both mortgage defaults and foreclosures.