Are Homeowners in Default to Blame for Foreclosure Crisis?

Reuters notes that Wall Street types are complaining that coverage of the current foreclosure crisis — in which banks might have taken houses away from homeowners without the proper documentation — elides the fact that the defaulters are in fact in default.

“If you didn’t pay your mortgage, you shouldn’t be in your house. Period. People are getting upset about something that’s just procedural.” said Walter Todd, portfolio manager at Greenwood Capital Associates. [...]

“Everyone’s responsible for following the law. If we all don’t have to pay our mortgage, should we just stop paying taxes, too?” said Anton Schutz, president of Mendon Capital Advisers. “Your mortgage didn’t get to a robo-signer by accident, it’s because you’re not paying.”

John Carney has a smart and more nuanced post on the topic as well, here. I actually don’t disagree with these points. But I would also note that servicers have in many cases resisted helping homeowners in foreclosure with principal write-downs, modifications or other solutions. The system did not work to keep families in homes. It worked to process foreclosures as fast as possible.

To get a sense of how that happened, I spoke with April Charney, a lawyer at Jacksonville Area Legal Aid, a non-profit clinic that helps low-income Floridians. The interview is lightly edited for clarity.

TWI: Some, including J.P. Morgan Chase chief executive Jamie Dimon, are arguing that this is a paperwork problem, and the homeowners undergoing foreclosure were in default.

April Charney: There is a contract that Fannie and Freddie applies to all its home loans, a customer service, of sorts, that you pay for in your mortgage. It is hundreds of pages online and it’s called the “single-family loan servicing guideline.” There’s a section just for default loan servicing — for servicing loans when the homeowner is in default — and it lays out requirements of the servicers. Any servicer of a Fannie- or Freddie-backed loan, when a borrower goes into default, the servicer has to give the borrower this very special customer service to try to avoid the foreclosure.

It never happens. The servicers just push the loans into foreclosure. They’re missing that entire legal step. We have a complete and utter failure of default loan servicing — a contractually required step in the process that’s there to help homeowners in default. It is preexisting, far preexisting this crisis. And it’s in every contract, and every servicing agreement. The servicer is supposed to be bound to those best practices.

So I’m sick of hearing — they’re in default! They’re not paying their mortgage! They’re delinquent! The servicers have whole books of rules about what they’re supposed to do to aid the homeowner in that case. And they haven’t done any of it.

TWI: Are these guidelines, or are they actually obligated to do it?

AC: No, it’s a breach of contract. And it’s also in the pooling and servicing agreements [for mortgages that have been sold to investors, rather than being held by the mortgage-originating bank]. That’s a breach of contract, as far as the servicers and the investors are concerned.

TWI: And what were the lenders doing, rather than servicing the loans properly?

AC: The servicers were moving homeowners into foreclosure as quickly as possible. Basically, they were paid up to twice as much to finish the foreclosure. And their agreements [with investors] required them to do it within four months of default. Plus, they weren’t staffed up, they weren’t careful, they had absolutely no intention of providing the proper services to the homeowners. They were rubbing their hands, and licking their lips, and foreclosing as fast as possible, and getting paid.

Look, they agreed to service the loans! And there were regulations in place to keep families in their houses. You show me a family that goes through 30 years on a loan without a problem, and I’ll show you somebody who walks on water!

TWI: And what should they have been doing to keep families in their homes?

AC: There’s an entire process — it’s almost like an out-of-court bankruptcy plan, when you work through the guidelines. You can modify the loan, you can change the payment schedule. There’s all sorts of alternatives.

TWI: And so it’s unfair to push homeowners into foreclosure, then blame them for the foreclosure crisis?

AC: There was such a demand for securitized mortgage products, these loans were artificially appraised — appraised for much more than the homeowners could afford or the houses were worth. So, they’re liar loans in more than one sense. We have no appraisal system that’s functioning in this country. We have no title insurance system that’s functioning in this country. And we have no lending system that is functioning in this country. So we should probably stop the foreclosure system, that’s functioning too well, until we have that sorted out.

And I’ll note, these problems aren’t just in residential mortgage loans. These problems are in commercial loans, and credit cards, and student loans, and all sorts of other kinds of debt. There are a lot of shoes that are going to drop.