Attorneys general from all 50 states are investigating mortgage foreclosures. How a proposed moratorium on mortgage foreclosures could affect homeowners, banks and the economy.

Guests

  • Tom Deutsch deputy executive director, American Securitization Forum.
  • Greg Ip U.S. economics editor, The Economist, and author of "The Little Book of Economics: How the Economy Works in the Real World."
  • Kathleen Day spokeswoman, Center for Responsible Lending; ethics teacher at Georgetown University’s graduate program in real estate studies.

Transcript

  • 10:06:54

    MS. DIANE REHMThanks for joining us. I'm Diane Rehm. Tens of thousands of home foreclosures have been called into question. Attorneys general across the country began a joint investigation into foreclosure procedures. Several major banks suspended the practice earlier this month. But yesterday, one of them -- Bank of America -- said it would resume home seizures in some states because it found no serious problems. Joining me in the studio to talk about the mortgage foreclosure crisis, Kathleen Day of the Center for Responsible Lending, Greg Ip of The Economist, and Tom Deutsch of the American Securitization Forum. Do join us, 800-433-8850. Send us your e-mail to drshow@wamu.org. Feel free to join us on Facebook or Twitter. Good morning, everybody.

  • 10:08:09

    MR. TOM DEUTSCHGood morning, Diane.

  • 10:08:10

    MS. KATHLEEN DAYGood morning.

  • 10:08:10

    MR. GREG IPGood morning.

  • 10:08:10

    REHMTom Deutsch, what is the American Securitization Forum?

  • 10:08:15

    DEUTSCHWe're a trade association that represents all of the major securitization participants in the market, so starting with the originators of mortgages, credit cards, auto loans, student loans, the financial intermediaries who package those into securities, and ultimately the mutual funds, pension funds, insurance companies that buy those securities.

  • 10:08:37

    REHMOkay. Greg Ip, tell us about this joint investigation that has been launched by attorneys general around the country to look at foreclosure practices. What's going on?

  • 10:08:54

    IPLet's go back about a month where the first revelation was that a unit of what -- the company that used to be known as General Motors Acceptance Corporation, it's now called an Ally Financial. An employee of that company disclosed that many of the affidavits he was swearing out to proceed on foreclosures -- because this company does a lot of residential lending -- he, in fact, had not properly vetted the documents. He had attested to having signed. And, now, it turns out that a number of major lenders have had similar processing flaws in that there is a established procedure -- it varies state by state -- but broadly speaking, you're supposed to follow certain steps in law in order to -- before you go with the final step of actually evicting somebody from a home and then selling it. And if not all those steps were taken, it throws into question the validity of the foreclosure.

  • 10:09:43

    IPWe're still at the stage where we don't really know whether this is just, you know, the classical sloppy paperwork problem or whether there are more deep-seated problems that really do throw into question the validity of those foreclosures. And, essentially, what the state attorneys generals have said is that they are all investigating this to try and make that distinction. At this point, we don't have anybody saying that this is so serious that all foreclosures must be stopped. We have four major lenders who have voluntarily stopped foreclosure proceedings. One of whom, Bank of America, has said yesterday it was going to resume in many states, those foreclosure proceedings. But so far, neither the Obama administration nor, as far I'm aware of, any major state has decided this is serious enough to stop the whole process.

  • 10:10:26

    REHMIn fact, the Obama administration has said it's important to continue with the foreclosure process or else reap economic harm.

  • 10:10:41

    IPAbsolutely. I mean, our economy, to get back to full health, really needs a functioning housing market. And for the housing market to function, you really need prices to essentially hit bottom. And that doesn't happen until the buyers, the sellers, the investors, the lenders are all fairly certain that that giant overhang of foreclosed properties has cleared the market. And if you stop that process, that certainty will never come.

  • 10:11:01

    REHMGreg Ip of The Economist. Turning to you now, Kathleen Day, Greg talked about one employee at GMAC who said that the documents had not properly been vetted. But what about others, how were these problems discovered?

  • 10:11:21

    DAYWe -- by the way, in the interest of disclosure -- our group is co-council in that main case that brought this to light, and that's a polite way of putting it. What this employee attested to is that he -- in thousands of sworn affidavits in a court of law, he had not done what he'd sworn to. And so, you know, on the face of it, that could be fraud. What you're supposed to attest to in that document is that the information that you're going on to start a foreclosure proceeding is accurate and that you have kept the records accurately and fairly. And you're signing and swearing that in a court of law. And he said, oh, yeah, well, in thousands of instances, I had no idea what -- whether any of that were true.

  • 10:11:59

    DAYIn this country, it is unlawful to seize private property without going through the procedures designated by law. You can't do that, and you shouldn't do that. And I don't think there's an American who would disagree with that. And I want -- I do want to say one thing. I do think there is a lot of evidence that this is not an isolated practice. This was the smoking gun. This was a company standing up -- once they had found that their employee admitted this, they stood up and said we better suspend it until we can make sure that the process is fair and honest.

  • 10:12:28

    DAYIn 2008, a law professor, Katherine Porter looked at foreclosure documents and found in over half the cases, important documents were missing and just hadn't been provided. The GAO found, in looking at loan modification applications under the new HAMP program, that 20 percent of the time the industry has miscalculated people's income. It's widespread.

  • 10:12:54

    REHMKathleen Day, spokesperson for the Center for Responsible Lending. She teaches ethics in Georgetown University's graduate real estate studies program. Turning to you, Tom Deutsch, not an isolated practice?

  • 10:13:15

    DEUTSCHI think as a key point here is that this has been one employee who had stated that they have done something wrong or illegal. I think the calls that have resulted from this have been almost irresponsible to create a nationwide foreclosure moratorium, to effectively flip the entire property system in America on its head, to stop all access to underlying collateral when borrowers haven't paid a mortgage payment in 12, 18, 24 months. I think it's a very substantial and almost a very concerning problem that we have in America about the sort of populous reaction of, well, someone has made a mistake.

  • 10:13:49

    DEUTSCHLet's stop everything. You know, if you go to the grocery store, and you're buying your groceries. And they accidentally overcharge you 50 cents for your milk, you don't just say, well, you know what, let's just stop everything and figure out whether these scanners nationwide are working or not. I mean, we're all very sensitive to borrowers losing their homes or losing their jobs and then losing their homes. But ultimately if you stop this process, you effectively flip the entire economic system on its head.

  • 10:14:16

    REHMTom Deutsch, he is with the American Securitization Forum. Do join us. I know many of you are concerned about this mortgage crisis. Do join us on 800-433-8850. Send us your e-mail to drshow@wamu.org. Join us on Facebook or Twitter. What is the significance, Greg Ip, of some states now requiring judicial approval of these foreclosures?

  • 10:14:57

    IPI believe that that has been a long standing practice in those states. There are some states that require a judge to approve the foreclosure before it can go ahead. And then there are some states where, if I understand it correctly, the lender simply has to file the appropriate documentation with the court and then publish a public notice. It can be contested during or after the fact, but you don't literally need the judge's signature. Even in the judicial process, though, you're -- there have been problems occurring. There have been reports, for example, that in Florida, some judges have been just, like, you know, approving these things, like, by the thousand and so forth.

  • 10:15:30

    REHMBut if you've got these attorneys general across the country investigating what's happening, is it one mistake, or is it thousands of mistakes?

  • 10:15:44

    DAYWell, here's -- this is the point. You know, it's -- the fact is, we agree that there is many foreclosures that are inevitable. And we get it. It's not good for the market to have this overhang of foreclosed properties that's going to come on the market that won't come on because you have to suspend it. But we also know there are many foreclosures that have been initiated unfairly and, in some cases, just wrongly. And the problem is, when you have sloppy recordkeeping, and you don't know who owns the loan. And you can't prove it, and you can't check the boxes that the law says you have to go through before you seize someone's private property, how do you know how many there are? How can you differentiate between those foreclosures, which are inevitable, and those which shouldn't be?

  • 10:16:26

    REHMHow do you answer that, Tom Deutsch?

  • 10:16:28

    DEUTSCHI think it's quite simple. It's as if a borrower has taken out a mortgage, they're not able to pay back that mortgage, and then they get a notice saying, we're going to seek to foreclose. That borrower has certain legal remedies that they can take in their own court of law to stop that foreclosure from happening or pay their mortgage. It's a quite simple process. So to assert that it will just eliminate that the banks should just stop foreclosing on borrowers because they may or may not have made this mistake -- well, if they make a mistake, then the borrowers have a redress. They have an ability to stop that foreclosure. But that's quite different than saying, well, the state attorneys general should step in and somehow stop all foreclosures. It's very clear the law should be followed. And where the law isn't followed, then the borrowers have a redress for that.

  • 10:17:12

    REHMI am confused because this morning's Wall Street Journal editorial page says, and I'm quoting here, "One left-wing financial blog has compiled news accounts that as many as seven people have unfairly suffered a foreclosure, despite making all payments -- seven in a nation of more than 310 million." I don't understand what the facts are here, Greg Ip.

  • 10:17:50

    IPThere's two different disputes. One is over the number of mistakes that were made, and the other, which is the gravity of those mistakes. I think that most people now realize that hundreds of thousands of files were improperly processed, but the key question is, how serious is that? The banks are telling us that in almost all those cases, no payments had been made in months. They've gone back. They've checked the paperwork. There were no -- nobody was unfairly evicted or anything like that. And all they're going to do is re-file the paperwork to make sure it's done. That said, some cases have come to light. Those -- we don't know if those seven cases are just the only ones that could be found or whether it's the tip of a much larger iceberg. We're still waiting to find out.

  • 10:18:27

    REHMGreg Ip, he is U.S. economics editor for The Economist and author of "The Little Book of Economics: How the Economy Works in the Real World." Take a short break, right back.

  • 10:20:03

    REHMAnd welcome back as we talk about the mortgage foreclosure situation in this country. There had been a concern that many, many foreclosures were taking place without substantiated paperwork. Now, they are going back to the drawing board. We'll see what happens. Here in the studio, Kathleen Day. She is at the Center for Responsible Lending. Greg Ip is with The Economist. Tom Deutsch is with the American Securitization Forum. You are invited to join us, 800-433-8850. Send us your e-mail to drshow@wamu.org. Greg Ip, what happens if you have investigators finding irresponsible practices versus fraudulent practices?

  • 10:21:14

    IPThe line between the two actually gets a little bit, you know, fuzzy. I mean, we've seen many instances where attorneys general basically do bring types of actions. We've seen this, for example, in the past with respect to Wall Street research where the firms say, this is really just human error. And the attorneys general say, actually, this is a pattern of a systemic abuse. And in some sense, it's a little bit subjective, and you often end up with people getting into a room. And after a year, then the lawyers hammer out some big negotiation.

  • 10:21:40

    IPBut even though it looks, at this point, that we're not going to get a national moratorium on foreclosures, the stock market is still very worried. You've seen the shares of many of these banks get pounded. And one of the reasons why is 'cause they're afraid of lawsuits. They're afraid of lawsuits from the attorneys general because they can, you know, levy very large penalties against banks that they conclude were irresponsible or abusive. And they're afraid of lawsuits from the investors who bought the mortgages. And they're now claiming that the quality of the mortgages were misrepresented or, in some cases, said the bank didn't ever actually sign over to them the original mortgage note.

  • 10:22:15

    REHMAnd what have the banks been saying, Tom?

  • 10:22:18

    DEUTSCHWell, I think it's very clear that the loans have actually been assigned to the securitization trust. These are the exact same procedures that have been used since 1968 for starting with Ginnie Mae, a government-owned entity, as they've transferred mortgages into securities. So it's very clear that the securitization trust actually are the beneficial owners of the underlying mortgage laws. There still is a lot to be written on this "repurchase obligations" over the course of the next few months and, really, years. This is going to be a longstanding issue where investors do have significant concerns as to whether or not the bank should repurchase some of the loans that were included into the trust.

  • 10:22:58

    REHMKathleen, what evidence is there of actual fraud?

  • 10:23:04

    DAYWell, someone signing something in a court of law, an affidavit, that's a sworn statement right there, and knowing that they didn't know anything in there, technically, that is fraud. I mean, that's -- you shouldn't do that. But the problem here is, again, we agree there's going to be some that are inevitable foreclosures and some that aren't. But if you don't have proper recordkeeping, and you don't go through the -- a lawful means of seizing someone's property, you can't tell how many those are.

  • 10:23:27

    DAYThe industry that has -- four major lenders have stood up and suspended things 'cause they know this is not a little problem. They know it's big. They had to do that. This is the same industry that brought us the subprime mortgage mess and said these loans were great. Then when they weren't great, they said, don't worry, it's a little problem. Then they said, well, maybe it's a big problem, but we can handle it. Don't mandate that we do modifications because we'll do a great job voluntarily, and they haven't done it. We now have one in seven homeowners who are in either seriously delinquent or in foreclosure. That's up from one in 11 just two years ago.

  • 10:24:01

    DAYAnd the modifications, at best, under the HAMP program may be half a million. We have, you know, millions of people about to go into foreclosure, and the modification process hasn't kept pace. Now, the big thing here, the reason that there's been so much sloppiness and just get it done, and it has been a robo-signing mill with these services is the financial incentive for the servicer to do a foreclosure greatly outweighs their financial incentive to do a loan modification. And so you see -- I mean, there was this lawyer -- this mill in Florida was actually giving gifts to their employees to -- the more...

  • 10:24:38

    REHMMmm.

  • 10:24:38

    DAY...of these foreclosures, they could just churn out.

  • 10:24:40

    REHMWe have several e-mails similar to this from Mandy, who says, "My husband and I just bought a foreclosure home. Do we have to worry that it was not foreclosed on properly?" Greg.

  • 10:24:58

    IPI think I'll leave the experts to weigh in on this. But I believe if you got title insurance, as you typically must when you buy that, then the liability falls on the title insurance company if, in fact, the property was not bought free and clear.

  • 10:25:12

    REHMHere's another, this one from James, who said, "You should remind your guests that the mortgage bankers were allowed to rewrite the bankruptcy laws to make their lives easier. Now, the same lenders cannot even obey the laws they themselves wrote. Using robo-signatures to speed the foreclosure process denies due process." Tom Deutsch.

  • 10:25:43

    DEUTSCHI think the author of that e-mail may be confusing a lot of different issues. It's unclear to me what they're asserting in terms of rewriting the bankruptcy law. In the United States, it has long been clear that if you need to declare bankruptcy, you don't get to keep your home. That is collateral for the mortgage, so I'm not sure where they're coming from in terms of rewriting the bankruptcy law. But when it comes to the robo-signer issue, I think this has been massively overinflated in the media. Because you do -- we have one instance of one person saying they've not been able to do appropriate recordkeeping, but that does not necessarily implicate the entire industry. You've had a number of servicers -- four servicers -- who've said they're going to stop foreclosures, but now they're resuming. Bank of America announced yesterday they will be resuming foreclosures because they didn't find one single incident in their review where appropriate policies and procedures hadn't been followed.

  • 10:26:36

    REHMSo what is that decision going to mean for Bank of America's homeowners? Kathleen.

  • 10:26:44

    DAYWell, it means that they're going to proceed, but that doesn't mean that the errors that have been found -- including at Bank of America, just like all other lenders -- are not there. And the fact is, look, we have four major lenders who stood up and recognized the gravity of this problem. It was not a clerical error as you're describing, and if you go in an affidavit and sign it and lie, we think there's other instances where this has been found. What -- people in the industry have known about this for years and years and years. And consumer advocates and lawyers have known about it for years and years. Up until now, there's been lots of cases where judges, on the record, have admonished the lenders, saying, you didn't provide adequate documentation, there's irregularities, there's things that are wrong.

  • 10:27:30

    DAYBut until now, the industry could always shrug it off and say, that's a renegade. That's an isolated incident. Now, when we have this employee, who, under oath, says, I had no idea what was in the documents I swore to, the industry had to stop and say, uh-oh, this is the smoking gun. We need to stop and see what is going on. If it turns out that they have everything in order, great. But it's not -- you know, when you say that customers have redress if they're being unfairly foreclosed on, not too oftentimes they protest. And the lender is supposed to take that seriously, and they don't even return the phone call. Or they stop accepting someone's payment and say they're in default because they haven't paid when they themselves are -- they won't accept the payment.

  • 10:28:09

    REHMTom.

  • 10:28:09

    DEUTSCHI think -- in response, I think there's a couple of issues there that -- first, you're conflating one individual with, now, terms in -- of the whole industry is making these massive systemic mistakes. I think that's really exaggerating the situation, particularly when you had pause from four major lenders. Now, you have Bank of America saying after their pause, they've reviewed everything, and now they're back on track. They reviewed their policies and procedures. Everything was appropriate, and now they're resuming the foreclosure process. But, I think, secondly, one key aspect of this is that as these borrowers move through the foreclosure process -- they haven't paid their mortgage anywhere from six to 12 to 18 to 24 months -- there is ample opportunity for them in that process to be able to take legal claim against the lender and stop that foreclosure process.

  • 10:28:58

    REHMGreg Ip, it strikes me that this whole process is going to create a mess for years to come.

  • 10:29:07

    IPGoing to create a mess? It seems to me it already...

  • 10:29:08

    REHMHas.

  • 10:29:09

    IP...has created a mess. You know...

  • 10:29:10

    REHMWell, and it's going to last for years.

  • 10:29:12

    IPYou know, mortgage (word?) crisis starts as tragedy and becomes farce, doesn't it? I think, though, some sense of proportion here is necessary. First of all, this is a reminder -- as if we needed one -- that, in many cases, banks' internal controls were simply quite poor and that they had a shocking lack of attention to detail. But as far as we can tell, the harm that has been done from this particular rash of problems is far smaller than the harm that was done from their initial failure to properly underwrite the mortgages in the first place.

  • 10:29:43

    IPI'm going to stick my neck out here and make a prediction. We have got evidence of some people that were wrongly thrown out of their homes. It's a small number. It's definitely going to be a larger number than it was five years ago because there are more foreclosures going on. Even if the percentage of foreclosures that were wrongly processed has stayed the same, we're going to have a lot more now, just because of the sheer volume. But I think the fact that the attorneys general and the administration have not called for a national moratorium is evidence that they -- from what they've seen, the vast majority of these cases, it was no harm, no foul, no harm.

  • 10:30:17

    REHMAll right.

  • 10:30:17

    IPAnd so many of those homes were actually empty.

  • 10:30:20

    REHMLet's go now to the phones to Middleburg, Fla. Good morning, Debbie. You're on the air.

  • 10:30:27

    DEBBIEYes. Thanks for having this show. It gives us a chance to speak out. We had a mortgage through a local bank which was sold to Countrywide, which in turn was Bank of America. Through Countrywide and Bank of America, they have taken our home. We tried modifying with both companies many times. I have documentation. I have certified mail. I have all the letters they sent me, dated when they came in my house, who I called. I wrote on there what they told me.

  • 10:31:00

    DEBBIEThen they lied last October and said that they had not received anything from me to the court, and so they moved forward with the foreclosure. And first of all, my husband lost his job -- I forgot that part -- and I called them. We had excellent credit in the high 700s. Never, we're late, always paid our payments. And I was still working full-time, and they would not work with us because we weren't delinquent. I said, but I'm going to become delinquent, and they would not do anything. Then when we did become delinquent, they still wouldn't do anything. Every time we called, they'd tell us our payment was going to be higher.

  • 10:31:41

    REHMOh, Debbie, what a mess.

  • 10:31:43

    DEBBIEYes. So they lied to the court and said that I never responded, so I went to the courts with all my proof. And they...

  • 10:31:50

    REHMGood for you.

  • 10:31:52

    DEBBIEThey set the default aside, so I was waiting for a hearing. Then they never notified me of the hearing. They showed up. We didn't. We lost our house. And they harassed me all the way up to the end. I documented everything, and it actually made me ill.

  • 10:32:09

    REHMI can certainly understand that. Greg Ip, what do you make of that?

  • 10:32:15

    IPThat's a terrible story. The -- I mean, that's – it's -- if everything she, you know, tells us is to suggest that this was really, you know, a travesty and sort of expanding the debate a little bit beyond the specifics of the particular problems we're facing now. This has been a constant problem in our crisis, which is that just the sheer volume of these cases going on has made it very difficult for people to get heard in the process.

  • 10:32:40

    REHMGreg Ip, he is U.S. economics editor for The Economist. You're listening to "The Diane Rehm Show." I must say, Tom Deutsch, that sounds like a pretty outrageous situation.

  • 10:32:55

    DEUTSCHIt does. I think what troubles me the most out of that situation is that the court didn't notify the borrower of the hearing. That, I think, is the most troubling aspect out of all of that, is to have a court of law who is not notifying the borrower.

  • 10:33:08

    REHMWho's responsible for making that notification? Is it the lender? Is it the court?

  • 10:33:16

    DEUTSCHAbsolutely, it's the court in that situation. They're the one who needs -- they're effectively the arbiter...

  • 10:33:21

    REHMWhy, how outrageous that she lost her home because she wasn't notified.

  • 10:33:25

    DAYBut also, why did it even get to that point?

  • 10:33:27

    REHMExactly.

  • 10:33:27

    DAYHere is the point. Three years ago, industry said they could do this. What that entailed or should have entailed is hiring enough people, training them and getting their records in order. They needed to roll up their sleeves and get to work. Instead, the financial incentives that servicers had, meant that many of these lenders and servicers created these mills, and they weren't doing -- they weren't following procedures the law requires.

  • 10:33:50

    REHMAll right. To Marion, Mass. Good morning, Sarah.

  • 10:33:55

    SARAHGood morning. I'm calling from Massachusetts. I was on a mortgage modification since March 1, and in July, the bank said that we have to reapply for some reason. We'd sent them everything, and they keep saying that we -- they don't have it. So, now, they send us these letters that are so -- they're threatening acceleration, foreclosure notice, you are no longer on modification. And at the same time, we make the modification payment. We are current with it since Oct. 1st, the last payment went. And now, they're telling me that I owe them $9,000 plus fees, and I'm going to foreclose in 32 days.

  • 10:34:47

    REHMTom Deutsch, this does not strike me as a sensible, responsible way for the securitization entities to be behaving.

  • 10:35:04

    DEUTSCHWell, it's not clear who actually owns the loan from just the circumstances that are described, whether the...

  • 10:35:09

    REHMBut no matter who owns the loan, why should this woman had been told that her loan was being modified and then modified again and then gets a bill for $9,000? I don't get it. I think that a lot of this has happened, which leads to the concerns many people have around the country.

  • 10:35:37

    DEUTSCHYeah, there's a tremendous amount of anecdotal evidence here and there and everywhere, where there are certain instances where there have been mistakes made. There's no question about that, that when you're moving...

  • 10:35:46

    REHMWhat can you tell Sarah? What can you tell her to do now?

  • 10:35:51

    DEUTSCHI think that as every borrower needs to do if they have an inability or an unwillingness to pay their mortgage, they need to contact their servicer. They need to talk through...

  • 10:36:00

    REHMShe didn't have any inability. She didn't have an unwillingness. She absolutely did what the bank told her to do.

  • 10:36:13

    DEUTSCHMm hmm.

  • 10:36:14

    REHMAnd then they're telling her, if she doesn't pay $9,000, she's going to be foreclosed on.

  • 10:36:22

    DEUTSCHWell, I think we really need to examine the facts here as to, what was the modification? That does indicate that she had an inability to pay the original terms of her note of her mortgages.

  • 10:36:31

    REHMOkay. Fair point.

  • 10:36:32

    DEUTSCHSo, at that point then, what were the terms of the modification? What's the timeline of the modification? And what we're finding through the HAMP program is that these modifications really are unsustainable modifications that are being made. What the HAMP program has created is a back-end ratio that is really unsustainable.

  • 10:36:51

    REHMI don't understand that.

  • 10:36:53

    DEUTSCHThat is that, there's been a target of a 31 percent of debt-to-income ratio, meaning, before taxes, you're supposed to pay 31 percent of your income to pay your mortgage. The problem with the HAMP program is that the back-end-ratio, that is, borrowers owe on average, an additional 34 percent on their credit cards, their students loans, et cetera.

  • 10:37:15

    REHMOkay. We don't know that about Sarah. Will you give her a telephone number where she can reach you to talk about her situation?

  • 10:37:26

    DEUTSCHAbsolutely.

  • 10:37:27

    REHMGive it to me now.

  • 10:37:29

    DEUTSCHIt's 212-412-7000.

  • 10:37:33

    REHM412-7000. Write down that number, Sarah, and see if you can get some assistance. Stay with us.

  • 10:40:03

    REHMAnd welcome back as we talk about the mortgage crisis. Our last caller talked about a modification program for her mortgage. What about these modification programs, Greg Ip? How well are they working?

  • 10:40:21

    IPUnfortunately, not very well.

  • 10:40:23

    REHMWhy not?

  • 10:40:24

    IPIt's very complicated. But it has to do with the fact that we don't really know when a person defaults on a loan, whether there really is any way to modify that loan that actually can make them current again. We do know that it's just the hard reality. A lot of people bought far more house than they could ever possibly afford.

  • 10:40:40

    REHMOkay. So give me...

  • 10:40:40

    IPAnd there is no modification that can save them.

  • 10:40:42

    REHMOkay. Give me a specific example of how a loan is modified.

  • 10:40:49

    IPOkay. So for example, somebody has a loan, a mortgage, and their payment right now is $3,000 a month, and their take-home pay is only, say, $6,000. Well, the federal government has set up a program that says, we think that this person can become current if we can find a way to get that monthly payment down to, say, $2,000. And so we're going to look at a variety of ways. Perhaps we can lower the interest rate by refinancing. Perhaps we can lengthen the term of the loan from, say, 30 to 40 years. And if none of that works, perhaps we can even persuade the lender to write down the actual amount of the loan. You know, you're asking for $200,000 from a person whose house is only worth $150,000. Let's face it. You're never going to get all that money back anyway.

  • 10:41:27

    IPIn theory, this should work well because most lenders agree they get more money out of a modified mortgage than out of a foreclosure. But there's a lot of complicating things along the way. First of all, the lenders aren't always sure that they have the legal right to modify these mortgages because the mortgage were sold into a securitization trust, and they're afraid of being sued. There might be second liens attached to this mortgage, which create competing claims. And then the banks have this very big fear of moral hazard. What do I mean by that? They're afraid that if they give Tom a break on his mortgage, Cathleen, who's currently current on her mortgage, is going to demand exactly the same thing. Now, instead of having one delinquent mortgage, they have two. And that all those factors have created a very difficult series of obstacles to make for the progress here.

  • 10:42:11

    REHMTom Deutsch.

  • 10:42:12

    DEUTSCHI'd agree with a lot of the comments that Greg made. I want to go back to the points I made earlier, is that mortgage debt is not the only part of the equation here. And, in fact, what is driving a lot of delinquent mortgage borrowers down is not their mortgage payment, it's all of their other debt payments. As I indicated, the HAMP program, the median debt-to-income ratio -- it's a measure of how much their total income goes to pay their debts -- is 65 percent. But that's pre-taxed, which means the borrower and the HAMP program are paying 80 to 90 percent of their take-home income just to debt service. So how they're paying for groceries, how they're paying for gas for the car, how they're paying for the broken water heater, that all leads to very, very high redefault rates on these modifications. And those are very costly for the mutual funds and pension funds who own these mortgages.

  • 10:42:59

    REHMKathleen.

  • 10:42:59

    DAYThe problem is, we don't know why most -- a lot of people are redefaulting. Usually, it's because the loan modification has been unsustainable. There's been no systematic study of that. But that -- and, you know, everyone can come up with anecdotes saying this is a problem. You can come up with anecdotes saying it's not. The fact is, every time someone has systematically looked at this problem -- the GAO, this law professor -- they found widespread problems. The fact -- and I just want to correct one thing that I think Greg said. I -- you're right that the attorneys general are looking into this, but that -- just -- they are -- they have not called for a nationwide moratorium, but that doesn't mean that they think the problem doesn't warrant it. The fact that all 50 have launched an investigation into potential fraud, possibly civil and criminal fraud in the industry, speaks for itself.

  • 10:43:48

    REHMHere is a...

  • 10:43:48

    DAYThis is a very serious matter.

  • 10:43:49

    REHMHere is an e-mail from Keith who said, "Wells Fargo came to me about home loan modification, told me not to send in any money until they told me to. I had received notices from other arms of Wells Fargo telling me they were foreclosing. I stopped the process because they kept lying to me, telling me everything was fine. Now, I cannot get a refinance because they claim I was six months behind, which I paid up. But, now, my credit's ruined."

  • 10:44:30

    IPTimes like this, I wish I was a credit counselor instead of a journalist.

  • 10:44:33

    REHMWow. It's just a mess.

  • 10:44:37

    DAYIt's a common refrain. Oftentimes, the foreclosure process is proceeding as the loan mod proceeds, and the loan mod takes longer. So by the time the person gets the loan mod, they're being foreclosed on. It's not (sounds like) fair.

  • 10:44:47

    REHMAll right. Let's go to Indianapolis. Good morning, Ian. You're on the air.

  • 10:44:53

    IANHi. Good morning. Thank you for having me on.

  • 10:44:54

    REHMSure.

  • 10:44:56

    IANJust when it was said that those -- the process that foreclosures went through, that there are simple clerical errors made or maybe people just made mistakes. I mean, it seems like even if it just the one guy doing $10,000 a month or whatever it is -- I mean, it's just impossible, it seems like, for him to do any kind of responsible job on the -- that doesn't seem to be just common mistake. I mean, that seems just kind of a willful disregard for any kind of orderly process that would actually help people stay in their homes. And I think the point is that those loans weren't made to put people in their homes to begin with. They were made to be (word?) to all, apparently, these financial problems that were sold on Wall Street. Plus, it's the -- it just seems like those loans are just a raw material for a kind of product. Now that there is no market for that product anymore, so they shut down the factory.

  • 10:45:50

    REHMTom Deutsch.

  • 10:45:51

    DEUTSCHWell, let's go back to this question of what's been commonly termed as a robo-signer. I think there's a common misperception here that it's one guy in a room with 10,000 documents. I think that's an absolutely false misconception. That's a false perception of the situation. What's actually occurred is these large banks have very large staffs, have very significant policies and procedures, where there's a tremendous amount of individuals working together as a team to be able to process the massive volume of borrowers that are really going through the foreclosure process right now.

  • 10:46:21

    DEUTSCHBecause we have such significant job loss in America and economic circumstance, there is one guy who is signing the note, but there are 10 guys right behind him that are preparing the paperwork that are going through. But it's just like every other form. If you have a Sarbanes Oxley Certification, let's says a CEO, a company, has to sign or a CFO, it's not as if that CFO is doing all the work himself. He's got a whole team that's working on it with him.

  • 10:46:47

    REHMHere's kind of a really sort of out of the clouds of total crazy operation. Here's an e-mail which says, "In January 2008, I received several letters titled, Notice of Intent to Foreclose from GMAC. They listed the dollar amounts and the last line was total doom. That line had a credit balance. They tried to foreclose my home when I had a credit balance. It took dozens of calls, threats of legal action before they fixed it. They never apologized, and they actually blamed me." This is a mess. What has happened?

  • 10:47:54

    DAYInadequate training. The industry did not do what it promised it would do three years ago. It didn't hire enough people. It didn't train them. It didn't put the procedures and policies in place. And everyone who knows, it -- who was involved in the securitization process on Wall Street in the heyday, knew that this was stuff was just being rushed through, rammed through. Bill Seidman (word?), who is now deceased, who ran the FDIC under Bush I, predicted long ago, he said, God, help us when this hits a bump in the road, and we have to unravel these mortgage bank securities. Because the process of creating private labeled mortgage bank securities has -- is a mess.

  • 10:48:31

    REHMAll right. To Chris in Dallas, Texas. Good morning. You're on the air.

  • 10:48:38

    CHRISYes, Diane. I want to talk about an issue that I haven't heard anybody mentioned, and I hear rarely mentioned, which is the Mortgage Electronic Registration System which was set up by lenders -- Bank America, Wells Fargo, City Bank and others -- in order to avoid filing documents, deeds, liens, collateral transfers in the county records with the county clerk in which the property resides. They set that system up. They used that to securitize mortgages (sounds like) in the depths. That's part of the problem that we're seeing now. But you can't tell who owns your mortgage because you can't go to the county records to look it up.

  • 10:49:21

    REHMKathleen.

  • 10:49:21

    DAYThat's exactly right. And so the big question is, they did set up this system where -- because it was getting so complicated to keep track of it, they essentially said, let's set up this supposed clearinghouse, which is going to keep track of it. So oftentimes when a lender goes for foreclosure, they just put in MERS. Who owns the title? MERS. Then you go back to MERS, and say, where is it? You can't find it. They can't produce it. It takes forever. It's a big mess. I mean, it is a big mess.

  • 10:49:45

    REHMKathleen Day, she is at the Center for Responsible Lending. And you're listening to "The Diane Rehm Show." Tom Deutsch, do you want to comment on MERS?

  • 10:50:00

    DEUTSCHSure. There's been a lot of people who would suggest, you know, why don't we just go back to the old system, you know, 1950s, in the 1960s, where we have a simpler process? You go to a bank. You deposit your savings there. They make you the loan. They hold the loan. That's really great if you want to have a homeownership rate of 30 or 40 percent in America.

  • 10:50:19

    DAYNo one is suggesting that.

  • 10:50:21

    DEUTSCHBut we have, you know, approximately a 70 percent homeownership in America, and a large part of that is because of the securitization process. As we come back to MERS, one of the biggest owners of MERS is Fannie Mae and Freddie Mac, which are owned by the government now 'cause they're in conservatorship or receivership. They use the MERS process, just as well as private labor securities. There are a massive amount of transfers that occur for the mortgage loans to the secondary market process, and the MERS system is extraordinary sound to create legal title transfer. You have to distinguish here between actual record title ownership as well as the beneficial ownership. There's a new...

  • 10:51:00

    REHMBut, Tom, would you acknowledge that even in the MERS approach...

  • 10:51:08

    DEUTSCHMm hmm.

  • 10:51:09

    REHM...there have been lots of errors?

  • 10:51:12

    DEUTSCHIn fact, the MERS approach creates more simplicity to the process and reduces the amount of errors. If you go to the county -- if you have to register every loan in the county record office, I don't know how many times you've been down to your county record office, but -- or gotten a driver's license from your county or your state licensing office -- but those are not necessarily the most efficient places to go to find paperwork to be able to be pushed through. The MERS system creates a system where you have an electronic registry. This is something new, but it's also over the course of the last 10 to 15 years. But it makes the process more efficient, which helps keeps mortgage rates lower.

  • 10:51:50

    REHMGreg Ip.

  • 10:51:52

    IPI think one of the problems here, and this really goes back to the sources of the crisis in the first place, which is that everybody, the buyers, the sellers, the lenders are operating on the assumption that in this country housing prices only go up. Look, if you never actually thought the house was going to go down in price, then you probably thought you'd never have to foreclose on it. And if you thought you've never had to foreclose on it, you probably cut a lot of corners in terms of the paperwork. I used to cover the stock market, Diane, and I -- it was basically a rule of stock market that if I sold -- you know, stock trades get fumbled all the time. You said 16. No, you said 60. And the basic rules that nobody contested unless they actually ended up losing money on the trade, and that's exactly what we're dealing with here.

  • 10:52:27

    REHMTo Susan in Dallas, Texas. Good morning. You're on the air.

  • 10:52:32

    SUSANGood morning, Diane. I always listen to your show all the time, and I love it. And this is such a perfect topic today. I'm calling simply to basically let your panel know that a lot of these folks that are calling and talking about how this program is not working are so right. I'm currently advocating on behalf of my sister, whose loan desperately needs to be redone, but simply because she lost her job last fall, began the whole process with Wells Fargo. It was a nightmare scenario from start to finish.

  • 10:53:00

    SUSANShe got constantly bad information, but eventually was approved. The very -- she even got a new mortgage rate amount, and she was diagnosed with stage three breast cancer about three weeks after that. And I became involved as a medical advocate, but at that point in time, she got a letter saying, your HAMP is rejected, and they said it's because you've not paid. Well, they had told her not to pay. And incidentally, my other sister, whose husband was out of work, also Wells Fargo, also tried, eventually, after four months, gave up because Wells Fargo also told them, don't pay, don't pay. Then they rejected them, said you have a lump sum payment amount, late payment and interest. And their credit's wrecked.

  • 10:53:41

    REHMKathleen.

  • 10:53:42

    DAYThis -- there's one heartbreaking story after another. And the bottom line here is, look...

  • 10:53:46

    REHMNo question.

  • 10:53:46

    DAY...know what? It's a bogus argument to say if some people suggest we should go back to the '70s and all that stuff. You know what we're saying? We're saying that the industry ought to follow the law. And it needs to keep records properly. And if it can't do it, it ought not to engage in that business. Now, what I would like to hear industry saying, instead of defending a system that is obviously broken in every way, why not -- I'd like to hear you guys stand up and say, you know what, we have screwed up. We caused this crisis. We promised something we didn't deliver. We are going to do everything that's necessary. We're going to roll up our sleeves, pull up our socks and get to work to make sure that the process is fair and honest.

  • 10:54:22

    REHMTom Deutsch.

  • 10:54:23

    DEUTSCHI think we have to take this by a loan-by-loan approach. If there's a loan that has not been properly foreclosed upon, then that borrower has specific and legal redress with that lender to be able to go back to the courts and say, you should not have foreclosed upon me. But if a borrower isn't able to pay a mortgage, we're all very sympathetic to all these situations where borrowers are losing their job. That's a macroeconomic impact that mortgage servicers and mortgage lenders can't control. But ultimately, that is a not a problem of mortgage lending. That's a problem of our macroeconomy right now.

  • 10:54:53

    REHMGreg Ip.

  • 10:54:54

    IPI think that even the banks are admitting that whatever the case -- yes, these were homes that were going to get foreclosed on anyway. We do have to dot our Is and cross our Ts. And in fairness, to give him credit, that's exactly what they've said and what they've done. That is why they imposed these voluntary moratoria so that they can go back and check all the documentation. And that's what the federal regulators have told them to do. Go over your documents. Go over your processes. If there are cases where the affidavit was incorrectly sworn, re-swear, resubmit the information, make sure that everything is just pristine and proper, and that's -- so I make this, you know, somewhat risky forecast that in a few months most of the stuff will have been probably cleared up.

  • 10:55:32

    REHMAll right. But what about those people who have purchased foreclosed-on homes?

  • 10:55:39

    IPWell, as, I think, we -- in response to the caller earlier, if that person got title insurance, then they should not be personally in trouble.

  • 10:55:47

    REHMShould not be.

  • 10:55:47

    IPI think what the bigger problem is -- that's right, yeah...

  • 10:55:49

    REHMYeah, right.

  • 10:55:50

    IPI think the bigger problem here is that we might be seeing an increasing incidence of title insurance companies actually refusing to offer those policies because they themselves are unsure of (unintelligible) ...

  • 10:55:58

    DEUTSCHBut I think that's why we need to move past this crisis as quickly as possible. The longer this drags on, the longer the housing market stays in the doldrums.

  • 10:56:07

    REHMLast word, Kathleen.

  • 10:56:08

    DAYWell, the problem is -- let's not forget why we have such a high unemployment -- is because of this recession which was caused by the housing industry caused by the lenders, which made millions of bad loans.

  • 10:56:19

    REHMHere's a last e-mail which says, "I left Wachovia last year because as a loan counselor who's supposed to help people with modifications, I realize the bank does not want to do these mods. They want to take ownership of the properties, and that's why they keep going forward with foreclosures." Don't know whether that's true. Just one comment. Kathleen Day, Greg Ip, Tom Deutsch, thank you, all.

  • 10:57:01

    ANNOUNCER"The Diane Rehm Show" is produced by Sandra Pinkard, Nancy Robertson, Susan Nabors, Denise Couture and Monique Nazareth. The engineer is Tobey Schreiner. Dorie Anisman answers the phones. Visit drshow.org for audio archives, transcripts, podcasts and CD sales. Call 202-885-1200 for more information. Our email address is drshow@wamu.org, and we're on Facebook and Twitter. This program comes to you from American University in Washington. This is NPR.

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