Government Deal on Foreclosure Practices Criticized

April 3, 2012

Thumbnail image for Thumbnail image for Thumbnail image for Thumbnail image for foreclosure.bmpHomeowners throughout Northern California are continuing to struggle to keep their homes because of the reduction in values and inability to refinance their loans. Surprisingly, banks are getting headlines for donating homes or demolishing homes in neighborhoods that have been devastated by their foreclosures. The banks are taking these actions and getting positive reviews, but for the most part they continue to do nothing to help prevent foreclosure.

Beginning this month, banks can claim such activities qualify as part of their new commitment to help people stay in their homes pursuant to the 25 billion settlement with the government, although the actions have the opposite effect. The banks are taking advantage of their commitment under the $25 billion foreclosure abuse settlement between the government and five major banks announced last month. The settlement promises that of the $25 billion, the banks will give $17 billion "in assistance to borrowers who have the intent and ability to stay in their homes," according to a summary of the settlement. Unfortunately, more than half of that money can be used in ways that will not stop or affect foreclosures. According to the settlement, $2 billion of the settlement can go to donating or demolishing abandoned houses after foreclosure. Almost $1 billion can be used to help families that have defaulted on their loans move out. $1.7 billion can be used to waive "deficiency judgments," the amount a borrower still owes if a house in foreclosure is sold for less than the remaining mortgage debt. According to foreclosure experts, the banks virtually never go after homeowners for that type of debt and waiving deficiency judgments is not direct help for homeowners trying to prevent foreclosure. This means that $4.7 billion of the settlement is going toward expenses that the banks were incurring anyway before the settlement and which do not aid borrowers in foreclosure. There is also a concern that the banks will over estimate the value of this type of relief in getting credit towards the settlement.

According to the settlement, only $10.2 billion of the $25 billion must be used to reduce principal for borrowers who owe more on their mortgages than their homes are worth. According to the New York Times, Moodys.com, estimates that 700,000 borrowers, 250,000 for refinancing, and 450,000 for principal reduction would receive relief under the $10.2 billion debt reduction. The estimate is based on the fact that there are many homeowners who owe so much more than their homes are worth that the deal's average aid of $30,000 or so of principal reduction will not make them less likely to default. This is especially true in Northern California where loans tend to be higher than in most parts of the country. There may be a question as to whether or not there will be a significant number of homeowners where principal reduction works in a meaningful way in Northern California or other parts of the country.

The 25 billion settlement is between the government and Ally Financial, Bank of America, Chase, Citibank and Wells Fargo after allegations surfaced in 2010 that bank employees were fabricating or failing to review documents used in foreclosure proceedings and refusing to work with borrowers to modify loans. The settlement has attracted criticism that it is too easy on the banks. The state attorneys general, the Justice Department and HUD, have defended the settlement as appropriate. The criticism is that the settlement accomplishes remarkably little in the form of real relief for homeowners and that it gives the banks credit for far too much that they were doing before the settlement.

If you have a loan in Northern California and you have been unable to modify your loan or obtain other relief, Chapter 13 bankruptcy may be able to assist you. You may be able to pay back loan arrears over a 5 year period and catch up on your loan. You may also be able to strip any loans that do not have security because of the significant decrease in market value of homes in Northern California. We provide free legal consultations for bankruptcy in San Francisco County, Sacramento County, Alameda County, Contra Costa County, San Mateo County, Santa Clara County, Stanislaus County, San Joaquin County, Marin County, Solano County and throughout Northern California. Contact us for a free legal consultation today.