How long will it take before the American nightmare of home foreclosures is over? Ask Mike Dillon, who’s been fighting to keep his New Hampshire home for most of the past decade.
Though he missed two payments in 2002, Dillon then caught up and was current on his loan by later that year, he said. That’s when his mortgage problems began.
After the company servicing his mortgage failed to properly credit monthly payments to his account, it placed the loan in default. As he worked to straighten out the bookkeeping, with canceled checks in hand, the servicer began adding additional fees for property inspections, insurance and other charges.
In 2005, a New Hampshire judge agreed that the servicer’s “sleight of accounting resulted in improper assessments” against Dillon and, citing a “predatory scheme of penalties,” barred the foreclosure and ordered that the loan be reinstated without penalties as of August 2005.
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“I’ve got nine years of my life tied up in this case, and it’s done a lot of financial and emotional damage to me,” said Dillon. “This isn’t about money in the long run. This is about the principle of the issue -- somebody tried to steal my house.”
Three years after the housing bubble collapsed under the weight of lax mortgage underwriting, some 5.5 million families have lost their homes or are in the process of losing their homes to foreclosure. Estimates vary, but analysts say there are at least that many more foreclosures likely before the wave subsides.
And the number could go far higher: Without a change in government policy, some 11 million borrowers are at risk of losing their homes, according to a research report earlier this month by Amherst Securities, which advises investors in mortgage-backed securities. That’s roughly one-fifth of the 55 million mortgages outstanding on the 80 million homes in the U.S.
Almost everyone involved agrees the the foreclosure mess will likely take years more to resolve, potentially postponing any meaningful economic recovery.
“There is no magic bullet,” said Iowa Attorney General Tom Miller, who is leading an investigation by all 50 states into recent disclosures that banks and loan servicers cut legal corners in an effort to speed the foreclosure process.
The investigation was triggered by recent disclosures that some major lenders used "robo-signers" –- employees who claimed they had verified mortgage documents without actually reviewing them -– to try to speed the foreclosure process. The disclosures brought a temporary freeze on foreclosures, but most lenders now say they have reviewed their procedures and are back on track.
The wave of foreclosures over the past few years has overwhelmed a system that was designed to collect payments from borrowers with performing loans -– not remove people from their homes.
“Even if we didn’t have the problem of robo-signers, with the sheer number of foreclosures we're now seeing, the system was never designed to handle that kind of volume," said Michael Waiwood, CEO of EnTitle Insurance, a Cleveland-based title insurance company, who has been in the industry for three decades. “This is far worse than everything I’ve ever experienced. It’s a very serious situation.”
Hundreds of borrowers have told of spending months – or years – trying to work out more affordable payments with their lenders to stay in their homes. Even with the help of housing counselors, attorneys and legal aid workers, many have been unable to untangle the thicket of red tape required to modify a loan.
“There a lot of people who can be helped who are not being helped,” said John Taylor, president of the National Community Reinvestment Coalition, a housing advocacy group. “They’re being strung out and getting a lot of lip service. ... Some of the lenders are trying, but a lot aren’t.”
Lenders say part of the problem is that borrowers facing foreclosure are struggling against multiple causes of default. In some cases, they agreed to loan terms they couldn’t afford or didn’t understand. Others were victims of fraud and predatory lending, including onerous interest rate “resets” and prepayment penalties that have since been banned. Many homeowners who might have otherwise steered clear of default have lost their jobs and been unable to find new employment in the harsh economic climate.
Consumer and bankruptcy lawyers are also uncovering cases, like Mike Dillon’s, where the courts have agreed that the underlying problems were not simply the result of innocent mistakes made in haste or by untrained employees.
“It’s been an extremely widespread problem,” said O. Max Garner, a North Carolina attorney who runs a “boot camp” for bankruptcy lawyers defending homeowners against foreclosure. “I’ve had cases against every major servicer and minor servicer in the country regarding misapplication of payments, fees and charges that have been added to debtor accounts that weren’t noticed out, or approved or consented to by anybody – especially the bankruptcy court.”
Federal, state and local governments have launched multiple programs to help head off foreclosures, but most have fallen far short of their goals. The largest, by far, has been the federal Home Affordable Modification Program that was created as part of the $700 billion banking industry bailout. When the HAMP program was launched in March, 2009, some $50 billion set aside from the bailout fund to help homeowners.
Since then just $600 million - or 1 percent - has been spent, according to a report released Monday by the special inspector general for the Troubled Asset Relief Program. That report sharply criticized both the HAMP program and the Treasury Department's implementation of it:
"(Treasury) now finds itself defending a program that is failing to meet TARP’s goal of 'perserving homeownership,'" the report said. "As a result, a program that began with much promise must be counted among those that risk generating public anger and mistrust."
The housing finance food chain, which during the boom created more than $1 trillion worth of bonds backed by mortgages, is also under strain as investors challenge the paper trail that leads back to losses on defaulted loans. One critical link in that chain is a system set up to speed the process of securitizing mortgages known as the MERS, or Mortgage Electronic Registration Systems. Lawyers in several states have challenged the legal validity of mortgage transfers made by that system, which bypassed the traditional system of records in local government land offices. MERS manages some 65 million mortgages.
For some investors, the uncertainty surrounding the legal quagmire is reminiscent of the turmoil in 2007, when officials including Federal Reserve Chairman Ben Bernanke and then-Treasury Secretary Henry Paulson assured the markets that the problems associated with predatory lending and lax underwriting were “contained.”
Now, foreclosures are sweeping up a broad swath of homeowners. many of whom have simply fallen victim to the tough economy. About 30 percent of homeowners with mortgages have less than 5 percent equity, including many who are underwater, or owe more than their house is worth. If home prices continue falling, that puts roughly $650 billion worth of outstanding mortgages at risk, according to Brian Maillian, founder and CEO of Whitestone Capital.
“This could be a large hit for the entire industry,” he told CNBC. “When you look at the scope of the problem, it's a very, very large problem. No one anticipated a perfect storm happening and the problems we had in 2007. I would argue that the same dynamic is occurring here. We really don't know how deep the hole is.”
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