Banks Use Punishment to Ditch Troubled Loans: Mortgages

Photographer: John Adkisson/Getty Images

A man uses a Bank of America ATM in Charlotte, North Carolina. Close

A man uses a Bank of America ATM in Charlotte, North Carolina.

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Photographer: John Adkisson/Getty Images

A man uses a Bank of America ATM in Charlotte, North Carolina.

Banks that agreed to help troubled borrowers as part of a settlement with regulators over foreclosure misdeeds are spending most of the promised aid on sales that displace homeowners and forgiveness that erases home equity loans from their books.

Bank of America Corp., JPMorgan Chase & Co. (JPM), and three other banks in last year’s $25 billion foreclosure-abuse settlement spent $19.5 billion through the end of 2012 approving so-called short sales that let homeowners sell for less than they owe on their mortgages, Joseph Smith, the settlement’s monitor, said today. By comparison, the banks spent $6 billion reducing borrowers’ principal to help them stay in their homes, an increase from $2.6 billion at the end of the third quarter.

While the banks are stepping up efforts to help borrowers stay in their homes, they are still spending most of the settlement on short sales and forgiveness of home-equity loans that allow them to take bad loans off their books. Profits from new lending are increasing even as regulators enforce penalties for modification missteps and foreclosures pursued with fraudulent or missing documents. Last year, mortgage revenue at the four largest lenders -- Bank of America, JPMorgan, Wells Fargo & Co. (WFC), and U.S. Bancorp --surpassed the amount they spent on consumer settlements and investor demands they buy back faulty loans.

“The banks have shown a knack for sidestepping government attempts to have them redress their role in the foreclosure crisis and keep people in their homes,” said Arthur Wilmarth, a law professor at George Washington University in the nation’s capital. “A lot of these efforts end up helping the banks, not the homeowners.”

High-Maintenance

Short sales rid banks of high-maintenance borrowers as they stretch to implement more than a dozen new servicing regulations imposed by the settlement with the federal government and 49 state attorneys general. The harm done to consumer credit scores by short sales is about the same as going through a foreclosure, according to Fair Isaac Corp., inventor of the so-called FICO system of ranking risk.

Short sales “are a real relief provided to the borrower, and consumer relief is the premise of the program,” said Rick Simon, a spokesman for Charlotte, North Carolina-based Bank of America. Amy Bonitatibus of JPMorgan in New York, Tom Goyda of Wells Fargo in San Francisco, and Sean Kevelighan for Citigroup in New York declined to comment.

The banks spent $11.3 billion extinguishing home equity loans that in many cases stood behind delinquent primary mortgages.

In the settlement, reached Feb. 9, 2012, Bank of America, JPMorgan, Citigroup Inc. (C), Wells Fargo and Ally Financial Inc. (ALLY) settled federal and state allegations of fraud and other misconduct without conceding guilt, receiving immunity from state civil prosecution. The pact created the Office of Mortgage Settlement Oversight now supervised by Smith, the former North Carolina Commissioner of Banks.

More Money

This year, 13 banks including Bank of America, HSBC Holdings Plc (HSBA) and Morgan Stanley (MS) settled with regulators over similar charges including so-called robo-signing, the fraudulent endorsement of affidavits used in foreclosures. The collective $9.3 billion of agreements free them from complying with a 2011 order by the Federal Reserve and the Office of the Comptroller of the Currency mandating they pay for and provide documents for independent reviews of foreclosures in which borrowers claim bank malfeasance.

“The decision to pursue a settlement allows more money to go to more consumers much more quickly than would have occurred had the independent foreclosure review run its course,” said Bryan Hubbard, director of public affairs at the OCC.

The banks will pay $3.6 billion to borrowers who were foreclosed on in 2009 and 2010, with everyone receiving something, whether they lost their home through the use of fraudulent documents or their case was pursued legitimately. The regulators will appoint a payment agent to decide the amount of money each borrower receives. In the new restitution system, as in the one it preempts, the banks will provide the information to document their conduct.

Rising Profits

Wells Fargo, JPMorgan, Bank of America and U.S. Bancorp reported $24.4 billion from home lending in 2012, according to data compiled by Bloomberg.

Combined profits for all commercial banks in the U.S. rose to a record $130.2 billion last year, beating a 2006 peak of $128.1 billion, according to Hamilton Place Strategies, a Washington consulting firm. Net income was helped by an increase in mortgage lending, particularly loan refinancings, said Patrick Sims, the firm’s director of research.

“Banks are paying big mortgage settlements -- it’s definitely a big expense for them -- but they have set aside reserves for that,” Sims said. “With the improvement in the economy and less troubled loans, banks now can take their capital and apply it to more profit-making activities.”

Trusting Banks

“How can anyone say we’ll trust the banks, after their mistakes got us into this situation in the first place?” said Ira Rheingold, executive director of the National Association of Consumer Advocates.

There are no provisions in the newest settlements to cap the number of short sales banks can use to meet their $5.7 billion of promised mortgage assistance, according to the OCC’s Hubbard. Cases in the midst of third-party evaluations to determine if there was wrongdoing were dropped as part of the settlement. If aggrieved borrowers object, they should go through the banks’ internal complaint processes, the Fed said in a January statement.

“They wrecked the economy, many people lost their homes unfairly -- the amount of the payouts falls way short of the amount of harm they have done,” said Alys Cohen, staff attorney for the National Consumer Law Center. “So far, the banks are getting off really easy.”

A growing number of people who say they lost homes because of bank fraud have decided to put their faith in the courts, instead of regulators’ deals. Since last year’s settlement, more than two dozen suits seeking class-action status have been filed by borrowers against banks for wrongful foreclosure.

In the prior 12 months, there was only a handful, according to a nationwide search of court dockets. Class action suits allow a group of borrowers to seek redress using lawyers who don’t get paid unless they win.

To contact the reporter on this story: Kathleen M. Howley in Boston at kmhowley@bloomberg.net.

To contact the editor responsible for this story: Rob Urban at robprag@bloomberg.net

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