The Second-Mortgage Shell Game 80/20 mortgage
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The Second-Mortgage Shell Game
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Piggybankblog posted on 02/18/13
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Cross linked with Nytimes.com
IN January, federal regulators announced an $8.5 billion agreement with 10 mortgage servicers to settle claims of foreclosure abuses, including bungled loan modifications and the wrongful evictions of borrowers who were either current on their payments or making reduced monthly payments.
Under the deal, announced by the Federal Reserve and the Office of the Comptroller of the Currency, the mortgage servicers will pay $3.3 billion to borrowers who went through foreclosure in 2009 and 2010 and an additional $5.2 billion to reduce the principal or the monthly payments of borrowers in danger of losing their homes.
Those numbers might look impressive, but the deal is far too modest to be a credible deterrent to reckless foreclosure practices.
Consider the last big mortgage settlement. Last February, the federal government and 49 state attorneys general reached a $25 billion deal with the country’s five largest mortgage servicers — Bank of America, JPMorgan Chase, Wells Fargo, Citibank and Ally Financial (formerly GMAC). They promised to help save homeowners from unnecessary foreclosure.
A year later, it’s clear that the settlement hasn’t worked as planned. Banks have dragged their feet in modifying first mortgages, much less agreeing to forgive part of the principal on homes that are underwater. In fact, the deal contained a few flaws. It has allowed banks to push homeowners into short sales, an alternative to foreclosure whereby the distressed homeowner sells the property for less than the debt that is owed. Not all short sales are bad — some homeowners are happy to walk away with the debt cleared — but as a matter of social policy, the program has failed to keep people in their homes.
A lesser-known but equally grave problem is that banks have been given a backdoor mechanism to continue foreclosures at the same pace as before.
The problem involves second mortgages, which millions of homeowners took out during the housing bubble. It’s estimated that as much as a quarter of all mortgage debt in the United States is in the form of second mortgages. Some of these loans were taken out to finance home improvements; others were part of a subprime product known as an “80/20 mortgage,” in which 80 percent of the purchase price was covered by a first, adjustable-rate mortgage, and the remainder by a second mortgage, often with a much higher interest rate.
The second mortgages have given the banks a loophole: each dollar a bank forgives goes toward fulfilling its obligation under last year’s settlement. But many lenders have made it a point to almost exclusively modify secondary loans while all but ignoring the troubled, larger primary mortgages.
It’s a real problem: when it comes to keeping your home, it’s the first mortgage that counts.
Take Tiberio Toro, a Queens resident who took out an 80/20 mortgage in 2006 when he purchased his home, and who now owes far more to the bank than his house is currently worth. Recently, Wells Fargo told him that it completely forgave his second loan. But at the same time, it declined to modify his first mortgage — an adjustment Mr. Toro needs to get his monthly payment to a level he can afford.
Why would a bank forgive a second mortgage completely but move forward with foreclosure on the first mortgage?
Surprisingly, such a tactic often makes sense for banks. When a lender forecloses on a first mortgage, the house in question is typically sold at auction. If the house is worth less than the loan amount, the bank gets only part of its money back. But after the sale, of course, there’s no asset left to pay off any of the second loan. The holder of that second loan — which has lower priority than the holder of the first — gets nothing.
So a lender can forgive a second mortgage — which in the event of foreclosure would be worthless anyway — and under the settlement claim credits for “modifying” the mortgage, while at the same time it or another bank forecloses on the first loan. The upshot, of course, is that the people the settlement was designed to protect keep losing their homes.
The five banks covered under last year’s settlement are wiping out second mortgages in record numbers. In New York State, for example, during the first six months of the settlement period, three times as many homeowners received second-mortgage forgiveness (2,933) as received permanent modifications on first mortgages (967).
In New York State, 36.2 percent of the banks’ credits under the settlement have been related to second loans, compared with only 18.2 percent for first mortgages.
In 2011, the five banks that are subject to last year’s settlement sent 230,678 pre-foreclosure notices to New York State homeowners, according to data I obtained from the Finance Department through the Freedom of Information Law.
As is well known, many of those at greatest risk of losing their homes are African-American or Latino. Under the settlement, banks get more credit for forgiving mortgages that they own (“portfolio loans”) than those they sold to Wall Street and currently only service. These portfolio loans are largely conventional loans; those sold to Wall Street were subprime. It was these notorious subprime loans that were marketed, often through predatory lending practices, to black and Latino borrowers during the housing bubble.
There is a lesson to be learned from the deficiencies of the National Mortgage Settlement. And the new deal reached by the Fed and the comptroller of the currency provides an opportunity to get right what the 49 attorneys general got wrong. At a Senate Banking Committee hearing on Thursday, Senator Elizabeth Warren, Democrat of Massachusetts, called on regulators to take tough enforcement actions and not settle for negotiated agreements with banks.
To do that, the government must clearly require that relief be given in the form of first-mortgage modifications. In addition, the settlement should direct the banks to provide relief in the ZIP codes hardest hit by predatory lending.
Finally, we need real transparency to monitor the new settlement. That means that the public should easily be able to determine who is getting relief, and how. Until that’s done, as we’ve seen, banks are likely to keep playing the same old shell game.
Elizabeth M. Lynch is a lawyer at MFY Legal Services, a New York City organization that provides free civil legal aid.
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1 Comment
Not only is this not a deterrent, the banks are continuing the same crimes with some of the same robo docs and new robo docs and new tactics. Noting has changed and so far none of the unlawful foreclosed homes have been returned to the homeowners. The banks are sending notices to foreclose or do a mod with the letters stating “you must admit to the debt”. Pressure to make the homeowner admit to a debt they do not owe this party. My friends just brought a notice of motion for relief of stay on a BK that was finalized under pressure of UNLAWFUL RECONTRUST THROWN OUT OF WASHINGTON and MERS claiming to the Beneficiary forcing them by fraud docs into BK. Now trying to take the house before the Independent Review comes back they have also signed up for. Forcing them to seek an attorney I recommended. He and Melissa won the Bains V MERS and Selkawitz cases. There was rumor those cases were settled in modifications. However I emailed Melissa’s office questioning the rumor and the response was “OH Lord”. So I am sure Melissa Huelsman and Richard Jones settled for more than a mod. I am sure the settlement is sealed from public notice. THERE IS NO SHAME BY THESE CRIMINALS AND THEY STOP AT NOTHING AND WHY SHOULD THEY, THERE IS NO ACCOUNTABILITY. THEY JUST COME AT YOU LIKE A TRAIN WITH NO TRACKS.
ON TOP of the second mortgages being credited for the settlement claiming to be doing principal reductions, some seconds have been to homeowners not in danger of losing their houses, which they deserve due to the fraud appraisal inflation however it was never the intentions of the banks to save distressed homeowners from losing their houses to foreclosure. Three people I know of never asked for the principal reduction or a mod and were given one without their applications or request to do so and were elated they were given from 40,000.00 to 90,000.00 off their principle and reduced rates and payments. To their surprize. This is good but not a good faith to keep distressed forsaken homeowners in their houses with the credit for doing what the settlements was intended for.
The smaller percentage of first place loans that were forgiven were in short sales in non judicial statse where the forecloser would get no deficiency money away, and only in the cases the homeowner short sales and was forced out of their homes, which is opposite of what the settlement was for. The bsnks again taking credit for the principal reduction on the first but not for keeping the forsaken homeowners in their homes, But driving them out of their homes with robo signed docs and fraud closures.