Virginia Holwell doesn’t know how she is going to keep the Peoria Heights house she has called home for the past 10 years. Holwell worked for the state of Illinois for more than 30 years, as a social worker and then training and supervising social workers. After she was laid off last July, she began having trouble paying her bills. Before she missed a payment, she tried to renegotiate the terms of her mortgage to possibly get a lower interest rate or smaller payments to bridge the time until she found another job. She got some help from her friend, Dawn Dannenbring, an organizer at the community advocacy group Illinois People’s Action. “Without assistance, I don’t think people could do this process themselves. … It’s not a language normal people speak,” Holwell says.
She recounts having to send in the same forms over and over to her bank because copies were lost or mishandled. She once received a letter seven days after the date on it, which meant she only had a week to respond. In the end, she couldn’t reach a deal, even though she says she was never late with a payment. “They said, ‘You don’t make enough money [for new terms on a loan].’” She says with a laugh that she told them, “That’s why I’m coming here.” The last she heard from the bank, she was told to sell her home. “The bureaucracy — it’s frustrating when you work in one. But when you have to be beholden to one, it’s even worse.”
Many Illinoisans faced with potential foreclosure are confronted with similar uncertainty and frustration as they deal with a bureaucratic system that was unprepared for such numbers.
Loan industry shortfalls, among them a process called robo-signing, have resulted, in part, from an overwhelming number of Illinoisans losing their homes. Such questionable practices are now undermining efforts to keep people in their houses under renegotiated loans. The failures in the system affect not just the homeowners but Illinois banks, investors — including the state’s employee pension funds — and the sluggish housing market, which experts say is dragging down the economy in Illinois and nationwide.
The problem arose in companies known as mortgage servicers, which collect homeowners’ payments. Lenders bundled mortgages and sold them off to investors. Investors then hired other companies to handle the collection of payments or a foreclosure if the debtor can no longer pay. JPMorgan Chase, Bank of America, Wells Fargo, Citigroup and what was once GMAC, now known as Ally Financial, service more than half of mortgages nationwide. Many homeowners are not aware that it is often a servicer, and not their bank, making important decisions such as potentially renegotiating their loans.
As more and more homeowners defaulted on their loans, servicers went from the fairly simple task of collecting payments to the more demanding process of foreclosure. And on the whole, the biggest servicers in the industry began applying sloppy practices.
Companies servicing mortgages are tasked with protecting the interests of their investors, who get a cut of the payments. Sometimes, it is best for everyone involved if the terms of a loan can be renegotiated — a practice referred to as a loan modification — so borrowers can stay in their homes and investors can continue to receive payments, even if the checks coming in are smaller. Since the housing market has deteriorated, the alternative is often leaving homes to sit vacant because property values have dropped or there are no potential buyers.
However, those closest to the process say dealing with servicers overwhelmed with foreclosures is beyond challenging. “For many, many, many people … it’s just like pulling teeth. It’s like pulling a full set of teeth, including the wisdom teeth, to move these things through,” says Dan Lindsey, a supervisory attorney with the Legal Assistance Foundation of Metropolitan Chicago, who tries to help borrowers stay in their homes through the federal Home Affordable Modification Program. He says of the servicers: “They don’t have the staffing and the person power and the will power. … [Negotiating loan modifications can be] so complicated; it’s many times easier just to say no.”
Lindsey says he has seen several cases where a homeowner has had the relief of being told he or she can work out new terms on a loan only to receive notice later that plans are in the works to sell the home. In most cases, it’s miscommunication because the servicing company hasn’t stopped the process of foreclosure while working on a loan modification, but it is indicative of the chronic lack of organization in the system. “It’s two different tentacles of the octopus not communicating with each other. Except the octopus has about 1,000 tentacles,” he says.
Service companies have little monetary incentive to keep borrowers in their homes because they collect fees from investors either way. “They have figured out every single legal thing that they can charge to make money… and because they don’t have skin in the game, they don’t have the incentive to work it out,” says Dannenbring, who has helped Illinoisans facing foreclosure for the last three years as an organizer and before that as a volunteer.
When home values drop, some servicers just walk away from them, creating community blight and confusion over who is responsible for the property. A recent study shows that in Chicago, that happens most frequently in low-income communities that have already taken a serious blow in the recent recession.
Servicers are responsible for upkeep on vacant homes until they can be resold. That can become costly while houses sit on the market, so some companies abandon the properties before completing the foreclosure process. That creates a problem for city officials when there are code violations or crimes at a vacant property, with no clear way to contact the owner about the problem. It also creates potential dangers for residents in neighborhoods that are often already high-crime areas.
“Servicers see in certain really distressed communities the property values have declined. … They’re just trying to find a way to cut their losses,” says Geoff Smith, one of the authors of a study on vacant homes in Chicago conducted by the Chicago-based Woodstock Institute.
Deborah Hagan, chief of the Consumer Protection Division under Attorney General Lisa Madigan, says lenders targeted minority and elderly homeowners in Chicago with telemarketing, often persuading them to refinance their homes on very unfavorable terms. In some cases, borrowers were eligible for better loans. “Certain groups were targeted; African-Americans and Latinos had proportionally more bad loans than whites, and more expensive loans. … I think there were a lot of bad loans written, and they were targeted to people in certain communities.”
Brent Adams, secretary of the Illinois Department of Financial and Professional Regulation, agrees that the initial predatory practices of lenders share a large part of the blame for the current crisis. “Several years ago, there was just this flurry of mortgages being issued. … We have seen this pile of mortgages work its way through the system and essentially create havoc at every step,” Adams says. (For a comprehensive look at the housing crisis see Illinois Issues, June 2009, page 16.)
Nationally, foreclosure numbers hit their peak last September, spiking at more than 100,000 for the month. About the same time, news outlets began reporting that in some cases, foreclosure documents were not up to snuff. Employees have admitted under oath to signing off on hundreds of foreclosure files a day without verifying important information, such as how much borrowers owed. This rushed process has come to be known as robo-signing.
“The nation’s overburdened foreclosure system is riddled with faked documents, forged signatures and lenders who take shortcuts reviewing borrower’s files, according to court documents and interviews with attorneys, housing advocates and company officials,” the Washington Post reported on September 23.
Before the housing crisis, foreclosures typically represented a small part of servicers’ business. However, in 2010, Illinois saw 151,304 foreclosure filings, and had the ninth-highest rate of foreclosures in the nation and the fourth-highest total number, according to RealtyTrac, a firm that specializes in foreclosure sales and tracks national statistics.
“Thus, as the boom in the housing market mutated into a boom in foreclosures, banks rushed to move delinquent borrowers out of their homes as quickly as possible, leading, apparently, to procedures of which the best that can be said is that they were sloppy and cursory,” said a November report of the Congressional Oversight Panel, which reviews foreclosures.
In mid-September, GMAC temporarily halted evictions and foreclosure sales across the country. Several other servicers followed suit with temporary freezes on parts of the process, such as evictions and sales of seized properties.
Servicers and banks characterized the problem as simple clerical errors that could be cleared up after review and prevented in the future with tweaks to internal policy. A written statement from GMAC described the problems as “procedural error ... in certain affidavits” and also said, “We are confident that the processing errors did not result in any inappropriate foreclosures.”
The Congressional Oversight Panel spelled out the potential consequences of robo-signing in its report. “In the best-case scenario, concerns about mortgage documentation irregularities may prove overblown. In this view, which has been embraced by the financial industry, a handful of employees failed to follow procedures in signing foreclosure-related affidavits, but the facts underlying the affidavits are demonstrably accurate. Foreclosures could proceed as soon as the invalid affidavits are replaced with properly executed paperwork.”
The report goes on to describe a far more devastating potential course of events. “The worst-case scenario is considerably grimmer. In this view, which has been articulated by academics and homeowner advocates, the ‘robo-signing’ of affidavits served to cover up the fact that loan servicers cannot demonstrate the facts required to conduct a lawful foreclosure. In essence, banks may be unable to prove that they own the mortgage loans they claim to own. If documentation problems prove to be pervasive and, more importantly, throw into doubt the ownership of not only foreclosed properties but also pooled mortgages, the consequences could be severe. Clear and uncontested property rights are the foundation of the housing market. If these rights fall into question, that foundation could collapse.” The panel also warned that banks could be open to potential lawsuits from homeowners who were mistakenly targeted for foreclosure or subjected to an improper administration of the process.
Illinois pension dollars, as well as pension funds from several other states across the country, are invested in banks tied to the controversy. In early January, the directors of the Illinois State Board of Investments and the Illinois State University Retirement System — along with administrators of pension funds in Connecticut, New York, Oregon and North Carolina — sent letters to Bank of America, JPMorgan Chase, Wells Fargo and Citigroup demanding that the banks conduct an external audit of their foreclosure procedures.
“As shareholders … we want these banks to be able to show us that they have aggressively and adequately internally reviewed their processes. … They have fiduciary responsibility [to their shareholders]. So we’re basically calling them on that,” says William Atwood, executive director of the Illinois State Board of Investments.
Adams says, “We certainly have seen it affect our state’s financial institutions.” Last year, Illinois had the third-highest number of failed banks among the states.
As Illinois embarks on what Hagan says will likely be the worst year yet for foreclosures, federal and state regulators, including Madigan, are launching investigations and looking to sort out the mess. The state Department of Financial and Professional Regulation issued a nine-point plan to improve the paperwork process. Adams and Hagan say national standards for servicers are under discussion. “Many of the companies state that they would prefer a … national set of requirements,” says Adams. Madigan is working with the attorneys general of the other 49 states, as well as state and federal regulators, to negotiate separate settlements with the top five national servicers. “The main discussion that we’ve been having with them was what were their problems … because all of those banks have admitted in one way or another that they had some problems,” says Hagan.
Adams says the need for intervention has grown now that servicers have lifted their self-imposed foreclosure freezes. “We are proceeding and prepared for it to get worse,” He says. “Time is of the essence in this matter. … People are being foreclosed on now.”
Dannenbring says the settlement will only be meaningful if it requires servicers to work harder on loan modifications. “Our big push is for a real settlement. The banks are used to paying money. It can’t just be a fine.” She says people such as her friend Holwell, who have never missed a payment but find themselves out of a job because of the recession and unable to get new terms on their loans, will be the next wave of homeowners being foreclosed upon in 2011.
Holwell has no plans to sell her home. She has some jewelry she can sell to bring in cash as she continues to look for work. And if she can’t find any, she says she will “figure out a way to get rid of one bill — like food.”
Illinois Issues, March 2011
