foreclosure law

My colleagues Brady Dennis and Dina ElBoghdady got their hands on an early version of the settlement that the country's attorney generals and a few federal agencies are hammering out with the big banks. This is the endgame to the mortgage servicing mess that dominated the news some months ago: the banks, having repeatedly broken the law while handling mortgage paperwork and conducting foreclosures, need to strike some sort of deal with regulatory authorities so they're not nipped to death by thousands and thousands of lawsuits. That means the state AGs and regulators have some leverage: the banks need relief from them, and so the question is how much relief they can get for homeowners in turn.

The hope is that they can get something capable of stabilizing the housing market. For all that the economy is improving, housing remains a huge drag, with legitimate estimates suggesting we've still got as many as 11 million foreclosures in the pipeline. "The number one reason for nervousness about the economy in the next six to nine months is the foreclosure crisis," Moody's economist Mark Zandi told me last week.

With Congress no longer interested in acting to ease the foreclosure crisis -- or, it seems, the jobs crisis -- this settlement is perhaps our last shot at stabilizing the housing market. The big thing that advocates are looking for is "principal modification": a process in which borrowers who are underwater on their homes would see the amount they owe to the bank reduced. That looks to be in the proposed settlement, but the devil is in the details -- how much does the principal get reduced by, and under what circumstances? But if you can get those details right, a lot of experts think they could provide substantial relief. "I do think principle writedown would be very effective. If you could get $20 billion in a fund, you could provide half a million in very solid modifications," Zandi says.

Top Stories

The government's proposed foreclosure settlement has leaked, report Brady Dennis and Dina ElBoghdady: "Last week, state attorneys general, joined by a handful of federal agencies that included the Justice Department and the new Consumer Financial Protection Bureau, submitted a 27-page term sheet obtained by The Washington Post of proposed changes to five of the nation's largest banks as its opening bid in what is expected to be a series of intense negotiations beginning in coming days. The proposals attempt to address wide-ranging complaints about the servicing process. One would require the servicers to provide a single point of contact for borrowers looking to modify their loans. Another would require them to develop a portal that would allow borrowers to submit and track documents electronically in real time.The document also spells out the conditions under which servicers should consider principal reductions for certain borrowers...everal attorneys general acknowledged that differences of opinion remain among various stakeholders on two key issues - how to structure a feasible modification program and the precise amount of penalties that should be levied on the banks, some of which could go toward principal reductions for borrowers."

Read the draft settlement: http://tinyurl.com/4bp92je (pdf)

Read the summary from The American Banker: http://bit.ly/fIEjWB

Moderate Senate Democrats may not sign on to Harry Reid's proposed budget, report Shira Toeplitz and Scott Wong: "The Senate has yet to hold a vote on the latest budget proposals, but Majority Leader Harry Reid already has a problem on his hands with a group of politically rattled moderates. Several Democrats facing tough re-election races next year are not saying whether they will support the package of $10.5 billion in cuts backed by Democratic leaders. Key budget votes could happen as early as Tuesday. 'I feel strongly that the cuts are not large enough, but there are some cuts, so I don’t know whether I’ll be for it or against it,' Sen. Claire McCaskill (D-Mo.) told reporters Monday night. 'But I know it doesn’t go as far as we need to go.'"

The anti-deficit 'Gang of Six' is taking their campaign public, reports Lori Montgomery: "While Washington bickers noisily over cutting a small slice of the federal budget, Sens. Mark Warner, a Virginia Democrat, and Saxby Chambliss, a Georgia Republican, launched a campaign Monday to convince the public that merely cutting spending will do little to tame the $14 trillion national debt....In addition to Chambliss and Sen. Tom Coburn (R-Okla.), who are personal friends of House Speaker John A. Boehner (R-Ohio), the Gang of Six includes Sen. Mike Crapo (R-Idaho), a close adviser to Senate Majority Leader Mitch McConnell (R-Ky.); Kent Conrad (D-N.D.), the chairman of the Senate Budget Committee; and Richard J. Durbin (D-Ill.), the No. 2 Democrat in the Senate and a close Obama ally. Warner is the former governor who famously balanced the Virginia budget....The group has been meeting weekly, while about 30 other senators are watching from the sidelines to see whether the talks produce a politically viable deficit-reduction plan they can back. "

Speaking of deficit reduction, Alan SImpson says the darndest things: http://politi.co/gNUuMg

Wisconsin's Democrats are not folding yet, reports Michael Fletcher: "A chance to end the legislative standoff that has paralyzed the Wisconsin government for weeks seemed to slip away Monday after Gov. Scott Walker (R) accused the leader of the state Senate Democrats of blocking negotiations to end the impasse. After some of the 14 Senate Democrats who fled the state to block a vote on the governor's proposal to sharply curtail collective-bargaining rights for government workers in Wisconsin signaled their possible willingness to return, Walker called a news conference at which he accused the legislators of being the biggest impediments to ending the stalemate. The governor said members of his staff seemed to be making progress in negotiations with some of the absent Democrats, only to have Senate Minority Leader Mark Miller stand in the way."

Dubstep interlude: James Blake plays "Unluck" live.

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Still to come: The White House is pushing for a free-trade pact with South Korea; a group of Senators is pushing Obama to name a new Medicare administrator; the GOP needs a health-care plan -- and fast; John McCain and James Inhofe reach a deal on earmarks; Congressional Democrats want Obama to open the Strategic Petroleum Reserve; and a tiny lotis hold a tiny umbrella.

Economy

The White House is pushing once more for a free trade pact with South Korea, reports Elizabeth Williamson: "U.S. Trade Representative Ron Kirk on Monday appealed to congressional leaders to begin work 'without delay' toward ratifying a free-trade deal with South Korea, even as Republican leaders continued to press to link such action with movement on trade pacts with Colombia and Panama. In a letter sent Monday to leaders of the House Ways and Means and Senate Finance committees, Mr. Kirk asked Congress to begin a process that would lead to a vote on the Korea pact this spring. His letter didn't address pending trade-opening deals with Colombia and Panama, which prompted criticism from House Ways and Means Chairman Dave Camp (R., Mich.)."

The IMF is rethinking its whole macroeconomic approach, reports Howard Schneider: "'Before the crisis, we had converged on a beautiful construction" to explain how markets could protect themselves from harm,' said Olivier Blanchard, an economics counselor at the International Monetary Fund. 'But beauty is not synonymous with truth.'...The economists driving the policy discussion, however, say they are far from developing a new playbook."

Banks are leading a last-minute push to gut new debit card rules: http://nyti.ms/hVD7Vq

Commerce Secretary Gary Locke will become Ambassador to China, report Anne Kornblut and Ed O'Keefe: "President Obama will nominate Commerce Secretary Gary Locke as the next U.S. ambassador to China, senior administration officials said late Monday, continuing a game of musical chairs that has shuffled top administration officials at the start of the second half of Obama's term...Although Locke has not emerged as a star in the Obama orbit, he is Chinese American and well-regarded in the Chinese business community. He was Obama's third choice for the Commerce position, after the nomination of Bill Richardson was pulled over ethics concerns and Sen. Judd Gregg (R-N.H.) withdrew over policy disagreements."

GOP cuts will fall heavily on poor children, writes Tanya Somanader: "Rather than bolster the safety net beneath this staggering number of children, House Republicans took their budget scissors to it in the continuing resolution they passed last week. By drastically slashing programs including Head Start services and the Nutrition program for Women, Infants, and Children (WIC), the GOP cut off thousands of children from vital food packages; 218,000 children from comprehensive health, educational, and family support; 975,000 low-income students from academic support; 5 million children from access to anti-poverty services; and leave 'in the lurch thousands of families who rely on child care assistance to work.'... Republicans are adding impoverished children to the list of those who must sacrifice in order to reduce a deficit they didn’t cause."

The US could learn a lot from the tiny island nation of Mauritius, writes Joseph Stiglitz: http://bit.ly/htQVHU

Republicans' budget intransigence endangers entitlement reform, writes Bruce Bartlett: "It’s hard to see how the House and Senate are going to agree on a budget resolution for 2012; funding for 2011 is still in flux. Though the White House plays no formal role in the congressional budget process, the fact that the Senate is still controlled by Democrats means that House Republicans, who often talk as if they control the entire government, need to compromise...Unless Congress comes together on a budget resolution, it’s almost impossible to make significant progress on cutting entitlement programs such as Medicare and Medicaid. The reason? A completed budget resolution is necessary to enable a special legislative procedure called reconciliation."

Adorable primates being adorable interlude: A slow lotis holds a tiny umbrella.

Health Care

A group of Senators wants Obama to name a new Medicare and Medicaid administrator, reports Robert Pear: "Members of Congress, including Democrats, have urged the Obama administration to search for another Medicare chief after concluding that the Senate is unlikely to confirm President Obama’s temporary appointee, Dr. Donald M. Berwick. Dr. Berwick’s principal deputy, Marilyn B. Tavenner, has emerged as a candidate to succeed him. Lawmakers of both parties said Monday that Ms. Tavenner, a former Virginia secretary of health and human resources with extensive management experience, could probably be confirmed. In a letter to the White House last week, 42 Republican senators urged Mr. Obama to withdraw the nomination of Dr. Berwick to head the Centers for Medicare and Medicaid Services."

Proposals to repeal health care reform's tax reporting provision could hurt the middle class, reports Brian Beutler: "Health care reform advocates are wise to the hidden middle-class taxes that passed the House last week, and are doing their best to kill them. The groups Families USA and Center on Budget and Policy Priorities have argued publicly against the proposal, and House and Senate Democrats have circulated memos on the Hill to raise awareness of the impact the proposal will have. As explained here, the penalties are designed to offset the cost of repealing a tax requirement on businesses...Under the House plan, if families get even modest compensation bumps after qualifying for health insurance subsidies, they can be required to reimburse the IRS with thousands of dollars."

Republicans need a health-care plan, writes Ezra Klein: "It's put-up-or-shut-up time for Republicans. They managed to make it through the health-care debate without offering serious solutions of their own, and - perhaps more impressive - through the election by promising to tell us their solutions after they'd won. But the jig is up. They need a health-care plan - and quickly."

Domestic Policy

Sens. James Inhofe and John McCain want to allow funding for local pet projects, reports Manu Raju: "n an unexpected twist, longtime earmark apologist Inhofe has quietly scored McCain’s endorsement on a proposal that would allow home-state projects if they are first authorized by Senate committees. It’s a major coup for Inhofe, who has emerged as the most aggressive Republican battling to save earmarks in a year when Congress has effectively banned them. And it’s a striking development in an at-times turbulent relationship between two hot-tempered septuagenarians who have sparred bitterly over the years."

Senate Democrats are proposing a harmful education cut, writes Cindy Brown: "The Senate Democrats countered the Republicans’ slash-and-burn H.R. 1 with their own proposal, released Friday. The measure...shortsightedly cuts $150 million from the Teacher Incentive Fund (TIF)...The program catalyzes the kinds of reforms human capital systems in our schools need. For instance, it requires participating states and districts to develop comprehensive and aligned approaches to attracting, evaluating, and developing educators. This alignment is particularly important because recent research supports the view that compensation reforms that are not combined with and aligned to other district reform strategies...are not likely to improve teacher practice or student achievement."

Nature being terrifying interlude: Kilauea, one of the volcanoes making up Hawaii's Big Island, erupts over this past weekend.

Energy

Congressional Democrats want Obama to open up the Strategic Petroleum Reserve, reports Steven Mufson: "Is $100-a-barrel oil a national emergency? Some Democratic lawmakers say yes, and assert that now is the time for the United States to dip into its Strategic Petroleum Reserve, which is brimming with 727 million barrels of crude. "We encourage you to consider utilizing the Strategic Petroleum Reserve (SPR) now," Rep. Edward J. Markey and two other House Democrats said in a letter sent to President Obama on Monday... 'From my perspective, it certainly would make sense for the president to begin selling oil from the SPR,' Senate Energy and Natural Resources Committee Chairman Jeff Bingaman (D-N.M.) said Monday, citing soaring prices and fighting in Libya."

The Energy Department's loan guarantee program is under fire: http://nyti.ms/hFXsou

Energy efficiency measures could backfire, writes John Tierney: "A growing number of economists say that the environmental benefits of energy efficiency have been oversold. Paradoxically, there could even be more emissions as a result of some improvements in energy efficiency, these economists say. The problem is known as the energy rebound effect. While there’s no doubt that fuel-efficient cars burn less gasoline per mile, the lower cost at the pump tends to encourage extra driving. There’s also an indirect rebound effect as drivers use the money they save on gasoline to buy other things that produce greenhouse emissions, like new electronic gadgets or vacation trips on fuel-burning planes...In some cases, the overall result can be what’s called 'backfire': more energy use than would have occurred without the improved efficiency."

Closing credits: Wonkbook is compiled and produced with help from Dylan Matthews and Michelle Williams. Graph credit: Calculated Risk.

You may know by now that American Banker has uncovered the 27-page term sheet that could form part of a global settlement between state and federal regulators and mortgage servicers. The term sheet describes a host of actions to which the servicers would have to conform, most of which reflect current law with a couple that go a little bit further.

I’m a slight bit late to discussing this term sheet, so I’ll refer you to some other worthy commentators and analysts for the details. Cheyenne Hopkins at American Banker has a nice synopsis of the terms, as does HuffPo’s Shahien Nasiripour. Georgetown Law Professor Adam Levitin finds the terms to be strong, while Felix Salmon finds any settlement of this type to be doomed, mainly because of the lack of strong enforcement for non-compliance.

Here’s what I can add to this. This morning, there just so happens to be a field hearing of the House Oversight Committee in Baltimore. In fact, it just started at 9am ET. Rep. Elijah Cummings, who represents the area, called the hearing, which will feature the mayor of Baltimore and the Governor of Maryland, among others, to examine the foreclosure crisis and the abuse carried out by mortgage servicers. I got a chance to talk with the star witness yesterday.

His name is Sgt. Kevin Matthews, and he served in Iraq in 2005-2006. He was wounded in the line of duty and returned to the US a disabled veteran. He bought his home in 2008 and then lost his job a year later. He exhausted all of his funds to keep up with the mortgage payments, but eventually went into default. In the second half of 2009 he sought a variety of modification packages with his mortgage servicer, USAA (GMAC Mortgage actually serviced the loan, but Matthews interfaced with USAA). “I basically got the runaround,” Matthews said.

In February of 2010, Matthews received the notice of intent to foreclose within 45 days, but by then he had been approved for disability from his injuries. He had a local housing agency put in for a modification for him, reflecting this new information, in April 2010.

The crucial piece of information here is that Matthews had a VA loan. “With a VA loan, foreclosure is supposed to be the last option,” Matthews explained. “By contract, they cannot foreclose until all options are exhausted: a modification, deed-in-lieu, or a short sale.”

But instead of reacting to the new information in the modification package received in April 2010, Matthews’ servicer simply ignored it, and made good on the foreclosure sale on May 21, 2010. Under the law governing federally-funded VA loans, the servicer was to rescind that sale date as they pursued a modification. “They got the package but never pushed back the sale date,” Matthews said.

Here’s where the story takes quite a turn. Matthews was away at school on June 8, 2010, and he returned home to find the locks changed on his house. The servicer had gone into the house and taken all of his belongings out, in preparation for the foreclosure sale. This violated Maryland law, because the servicer needed to file a writ of possession to remove Matthews from the home. “They stole my stuff, stole my kid’s stuff,” Matthews said. “They took everything in the house. They took my lawn mower.”

As it turned out, Matthews had a very unique situation. His legal defense, the Baltimore-based non-profit Civil Justice, discovered that his foreclosure affidavit was signed by none other than Jeffrey Stephan, GMAC’s infamous robo-signer. After months in court, GMAC dismissed the case against Matthews and rescinded the foreclosure sale. GMAC has the ability to re-file the case, but has yet to do so thus far.

Matthews has returned to the home, where he’s still trying to obtain a permanent loan modification. He’s also still trying to get his possessions back. His lawyer, Anthony DePastina, called the phone number made available to inquire about his belongings, but nobody ever answered. The servicer, in ransacking the house, also damaged it. They broke the hot water heater and cracked a drain pipe. They stuck Matthews with all the water bills, and he also wound up with a citation for overgrown weeds on the property. “In Maryland, if a citation is not remedied, it becomes a misdemeanor,” Matthews explained. “But how can I cut the grass, they stole my lawn mower!”

Now, why do I bring up this particular servicer horror story? Mainly because this was a VA loan. And therefore, a great many of the elements of the settlement term sheet are similar to how the servicer is required to deal with a VA loan. The VA Home Loan Program spells out specifically how their products are to be treated. And still, in this case, the servicer violated the guidelines. Not only that, but they stole everything in the borrowers’ home to boot. Additionally, in this case the legal system actually worked. Matthews got his home back because of faulty affidavits. But that has not helped him get back everything he owned.

The main point is this: you can make all the guidelines you want, and basically, the 27-page term sheet has most of them. You can demand a single point of contact for borrowers, an end to the dual track process of the servicer pursuing modifications and foreclosures simultaneously, specific mandates for modifications and all the rest. You can even set stricter guidelines for dealing with military families. All of those are in the term sheet, and many of those kinds of guidelines are in the VA Home Loan that Sgt. Kevin Matthews received. It didn’t matter. Neither did all the promises servicers have made to reform their systems going back to 2003. Servicers pretty much don’t follow the law. That’s why they were under investigation. A document that tells them to comply with the law, in language the banks are already using, doesn’t seem like it’ll make much of a difference.

Two more things. Without rigorous enforcement, the guidelines are approximately meaningless. State AGs and the Consumer Financial Protection Bureau would serve as the enforcement monitors under the terms of the agreement. And CFPB adds a new wrinkle to this. However, if servicers have been abusing their customers for this long, and the term sheet mostly reinforces the same laws that they broke all this time (with a couple additional strictures), who’s to say that they won’t simply treat the Kevin Matthewses of the world the same way again?

The final issue is this. The term sheet sets the basic standards for conduct in the servicing industry that servicers should have followed all along. But this is supposed to be a sanction, for violations of law. So now the penalty for failing to follow the law is having to sign an agreement saying you’ll really follow the law this time? We don’t know what monetary penalties or quotas for principal mods will come along with this yet. But we do know this. Kevin Matthews had all his possessions stolen from him, and nobody under this agreement will go to jail for that theft.

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