Chase's Foreclosure Disgrace

Here's the problem with the Obama Administration's approach to foreclosure prevention: it depends entirely on the banks voluntarily doing the right thing, even when homeowners have held up their end of the bargain to prevent a foreclosure.

Take the case of three homeowners in Queens, New York. Each one met
the requirements for a "permanent" modification of their
mortgages--which means a reduction of payments for five years--as laid
out under the Administration's Home Affordable Modification Program
(HAMP). They did so by making three months of trial modification
payments to JP Morgan Chase and verifying their incomes. They had
contracts with Chase and fulfilled their obligations under those
contracts.

So how did Chase reward them?

Permanent modifications denied. Delinquency reports to credit rating agencies issued. And the cherry on top--foreclosure.

These three homeowners-each working full-time, with at least one
job, working up to six days a week--are fighting back. With the help of
the Urban Justice Center, a non-profit legal services provider in New York, they filed suit last Tuesday against the bank in federal court in Brooklyn.

"We want Chase to live up to the contracts that they entered into
and give permanent modifications to these homeowners," said Ted De
Barbieri, an attorney at the Urban Justice Center. "If you're going to
sign onto HAMP, you have to follow the rules. These homeowners followed
the rules, and now it's time for Chase to."

A spokesman for the bank told the Wall Street Journalthat Chase would be "happy to talk with the customers, review their situations and see if we can help."

This official response stands in stark contrast to what the
homeowners have experienced in dealing with Chase up until now. De
Barbieri said that prior to filing the lawsuit, even with the help of
community-based HUD certified home loan counselors and the Urban
Justice Center, the homeowners had been unable to get an adequate response from Chase.

Here's a little more information about these three citizens who Chase--post-lawsuit--suddenly says it will try to help.

Shanaz Begum lives with her husband and two sons--one of whom is
headed to college in the fall--in a home they purchased in 2005. She
fell behind on mortgage payments in September 2008 after she lost her
job as manager of a retail business. Begum now works for the Department
of Transportation on weekdays, and on weekends as a server at Boston
Market. Her husband is a full-time taxicab driver. Begum has made trial
modification payments of $1576 on time for eight months.

Tamara Williams lives with her two sons in a home she purchased in
2005 and has made three on-time trial payments of $1,274 this
winter. She fell behind on her mortgage when she lost her job in
November 2008, and went into foreclosure four months later. She now
works doing post-renovation and demolition cleanup for a contractor and
also attends school.

The lawsuit alleges that Chase instructed homeowner Alex Lam to
deliberately miss mortgage payments in order to become eligible for a
modification. Lam bought his house in 2002 and refinanced in 2005. Lam
says he skipped payments in February and March of 2009 on the bank's
advice. Those are the only payments he has ever missed but he now faces
foreclosure. Chase says its Net Present Value (NPV) test--required by
HAMP to determine if the value of a modification is worth more to
investors than a foreclosure--is the reason Lam isn't receiving a
modification. The infuriating thing about the NPV is that HAMP doesn't
require banks to disclose the data they use for their analysis. Banks
don't exactly have a stellar record for good behavior where
transparency is lacking.

"The Obama administration's program was supposed to give people like
me a lifeline and a chance to save our homes. But if the banks won't
play by the rules, what else are we supposed to do?" said Williams.

That's why more and more homeowners are turning to the courts. Reporter Paul Kiel of ProPublica writes
that "at least 50 homeowners have recently filed lawsuits alleging the
servicer foreclosed with a loan mod request pending or even while they
were on a payment plan." De Barbieri told me, "We're part of an
advocate community that's representing homeowners who are in similar
situations around the country. There are [similar] lawsuits in Massachusetts, Ohio, California, and Washington State. It's one tool that advocates are using to do what's right."

As Kiel notes, there are still no penalties for servicers who don't comply with the rules. According to the Wall Street Journal
Treasury Secretary Timothy Geithner recently "threatened to crack down
on banks that don't 'hold up their end' of the bargain."

But Treasury was whistling that same tune at a hearing in
December. "We're putting them on notice, and then we will exact
penalties of them, and be publicly outspoken about who's performing
well and who's not," railed Herbert Allison, Assistant Secretary for
Financial Stability. "We're going to move to the point where we're
disciplining the banks if they don't perform better than they are
today."

Move when exactly? I'm not sure which planet the Obama
Administration is living on that they still believe the banks will do
the right thing simply because they are being asked to--or because they
are being offered a few carrots (a couple thousand dollars per
modification--not even a garnish for the banks). Here on Earth, where
the rest of us reside, we know that nothing will change until banks are forced to do the right thing.

For that reason, the House passed legislation that would allow
bankruptcy judges to modify the principal on people's mortgages--known
as a "cramdown"--for primary residences just like they are able to do
for rich people's vacation homes. It was defeated in the Senate. Why
haven't we seen one of President Obama's virtuoso performances
demanding that the weak-kneed Senate take it up again--perhaps even as
an amendment to the financial reform bill?

Representatives Raul Grijalva and Marcy Kaptur have also introduced legislation that would allow homeowners the right to rent
at fair market rental value for five years once they receive a
foreclosure notice. Not only would that allow homeowners time to find
alternative affordable housing, or new employment, it would give them
time to expose banks like Chase for any bad behavior. The right to rent
concept was initially proposed by Dean Baker,
co-director of the Center for Economic and Policy Research, and has
been embraced by individuals across the political spectrum.

Grijalva and Kaptur also signed a letter to Secretary Geithner along
with twenty-five House Democratic colleagues suggesting the
establishment of "a new federal entity" modeled after FDR's Home Owners' Loan Corporation
(HOLC), to be capitalized through remaining TARP funds. The letter
notes, "During the Great Depression, the government successfully
acquired, refinanced, serviced and sold more than a million mortgages,
accounting for one in every five non-farm dwellings in the United
States. Such actions prevented untold foreclosures, and even managed to
return a small profit to the Treasury."

Finally, in towns like Philadelphia, mandatory mediation has proven effective in foreclosure prevention. Rhode Island Democratic Senator Jack Reed has introduced legislation that would create an $80 million grant program to support those kinds of efforts.

A Treasury spokesman told me the Administration is very concerned
about moral hazard--rewarding people for taking out loans they never
should have taken. But clearly the most hazardous moral around is
continuing to cater to the banks' interests.

It doesn't matter whether someone is losing their home because of a
bad subprime mortgage, a lost job, or because they owe more on the
mortgage than the home is now worth. Every foreclosure decreases the
property value of a neighbor's home. Every dollar lost in property
value--and over $7 trillion in wealth has now been lost by American
households--reduces local and state revenues. As revenues are lost, so
are jobs and services. And the vicious cycle which devastates our
communities continues. A HAMP program that was supposed to help three
to four million homeowners has only made 230,000 permanent
modifications. March set a new monthly record with 367,056 foreclosure
filings, up nearly 19 percent from February, according to RealtyTrac,
which has been tracking foreclosure filings since 2005.

As John Taylor, president and CEO of the National Community Reinvestment Coalition, recently put it, "Everybody has a dog in this hunt when it comes to these foreclosures."

This week in Brooklyn, three Queens' homeowners took action. They
said to the banks, "No more," and the court is giving Chase until the
end of the month to respond.

The time for President Obama to show that kind of toughness with the banks is tragically overdue.