An Update on Foreclosure Initiatives

By David Kelston

When President Obama took office, the economy was in crisis, major financial institutions teetering, and foreclosures exploding. The crisis has been toned down, the banks are generally doing great – but homeowners in crisis have been helped little by the federal government.

The Emergency Economic Stabilization Act was enacted under President Bush, including the Troubled Asset Relief Program (“TARP”), which went on to provide almost a trillion dollars in loans to financial institutions. Included in TARP was a requirement that the Secretary of the Treasury implement a plan to minimize foreclosures. The result was the Obama Administration’s “Making Homes Affordable Program (“HAMP”), under which the banks are given financial incentives to reduce monthly mortgage payments for homeowners either in default or, based on various criteria, likely soon to be in default. The goal of HAMP was to provide relief – and foreclosure protection – to 4 million homeowners. In fact, the participating banks have restructured mortgage payments for only a fraction of that number (about 600,000 homeowners), while many more applicants have been denied relief (740,000).

The problems with HAMP lie in the legislation and in its implementation. The statute itself is written with requirements to guarantee that homeowners accepted for a trial period mortgage restructuring, assuming (in main part) that they make their reduced payments for three months, will be enrolled in the program long-term. But a “catchall” provision appears to allow the banks, even after a homeowner has been accepted for the trial period and fulfilled his/her obligations, not to extend restructured payments for that homeowner, and horror stories abound of banks, including Bank of America and Wells Fargo, actually foreclosing on homeowners who are in restructuring programs. More fundamentally, banks are not required to participate in HAMP, suffer no penalty if they do not, and the program does not address the fundamental problem of homeowners whose mortgages exceed the value of their homes, since it does not provide for reduction of principal.

As to implementation of HAMP, the best we can do is direct you to some of the lawsuits filed by state attorneys general, which describe in detail the egregious conduct of Bank of America and others in staffing their HAMP programs inadequately, delaying, stalling, repeatedly losing homeowners’ applications, and generally engaging in practices (and policies) that have led the attorneys general to allege knowing and intentional violations of their state consumer protection statutes. See, e.g., Nevada v. Bank of America, Dist. Ct. of Nevada, Clark County, Case A-10-631557-B; Arizona v. Countrywide Financial Corp. and Bank of America Corp., Sup. Ct. of Arizona, Maricopa County, Case No. 2010-33580.

In sum, while the banks have been saved and prosper, the administration’s efforts at foreclosure protection have been both ineffective and resisted by the banks. And as reported to the New York Times on March 8, 2011, the program may soon be overhauled through some kind of settlement agreement between all 50 attorneys general (and the federal government) and the major mortgage servicers. The prospective settlement would likely include a settlement fund ($20 billion perhaps) and some restructuring of the HAMP program. But we cannot yet expect serious relief for those millions of homeowners still facing foreclosure, until the banks, which made millions of dollars in profits by engaging in and covering up predatory loans, are required to restructure those home loans by reducing the principal amount to accurately reflect the true current market value of a property.

David Kelston serves on the NLG Board of Directors and is a law partner at Adkins Kelston & Zavez.