ProPublica, Dec. 16, 2010, by Karen Weise
In May, we first reported on how disorganization at banks caused homeowners to lose their homes while still in the loan modification process — something that’s not supposed to happen under the rules of the government loan modification program. Treasury officials said they were working to fix the problem, but nine months later the practice is prevalent, according to a new report.
For the report, the National Consumer Law Center and the National Association of Consumer Advocates surveyed 96 attorneys, representing over 2,500 homeowners. Nearly every attorney said that they had clients whose banks tried to foreclose while the homeowner was still negotiating a loan modification. Half of the attorneys said they had represented more than 20 homeowners in that situation. (These findings echo a similar survey that we reported on in July, where nearly two-thirds of California housing counselors surveyed said they had at least one client whose home was foreclosed on during the modification process.)
Typically, foreclosures and modifications are processed at the same time in different parts of banks that often don’t talk to one another. This “dual track” became a hot topic this fall as the “robo-signing” scandal highlighted the degree to which banks automated the foreclosure process. In a congressional hearing in November, Bank of America and Chase both admitted to using this system and said it was actually an industry-wide practice.
Diane Thompson, an attorney who works with the NCLC, told us a big hurdle to changing the system is the government-sponsored mortgage giant Fannie Mae, which owns or guarantees a third of all mortgages. Fannie Mae favors the dual track processing and is “far behind other people” in addressing the situation, Thompson said.
In congressional testimony earlier this month, a Fannie Mae executive generally defended the dual track system: “The longer the process takes, and the further in arrears the borrower becomes, the less likely it is that the borrower will succeed with a modification and the greater potential there is for loss to Fannie Mae and the U.S. taxpayer.”
The government’s loan modification program has always barred banks and others from foreclosing on homeowners trying to get modifications. And in March, Treasury announced a new rule saying banks and companies that service loans on behalf of investors couldn’t even initiate the foreclosure process without first evaluating the homeowner for a modification. (In early December, Fannie Mae said it plans to adopt the measure.) The rule does not affect the 2.1 million borrowers already in the foreclosure process. Thompson said the new report shows that so far Treasury’s efforts haven’t stopped the practice. “There is absolutely no penalty for the servicers if they do that,” Thompson said.
Since the survey was deployed, earlier this month the regulator of national banks said it will direct servicers to suspend foreclosures for homeowners who are in active trial modifications. Its website does not yet show any formal orders.
In the survey, attorneys also reported that servicers themselves often caused the foreclosures. As we’ve written before, what constitutes a “wrongful” foreclosure is hotly contested. Banks say they only foreclose on homeowners who are in default, while advocates say banks’ poor accounting and inflated fees cause the foreclosures. Half of the attorneys surveyed said they represented homeowners who were placed into foreclosure due to improper fees (such as inspection fees or appraisal fees), misapplication of payments (where the servicer does not properly credit a homeowner’s account) and force-placed insurance (where the banks charge homeowners for expensive insurance).