Mortgage Fraud Settlement Talks Should Support Foreclosure Mitigation Efforts | NewAmerica.net

Mortgage Fraud Settlement Talks Should Support Foreclosure Mitigation Efforts | NewAmerica.net
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Mortgage Fraud Settlement Talks Should Support Foreclosure Mitigation Efforts
Author(s):Reid Cramer
Published: May 20, 2011
Issues: Financial Crisis Financial Services Homeownership Ownership & Assets

At this point, it is common knowledge that widespread fraud by lenders and servicers played a role in the housing crisis and has led to foreclosures that should have and could have been avoided. This is the backdrop for a set of ongoing talks between the big banks and state attorney generals to reach a settlement that avoids future litigation. The banks and their servicers appear to be on the hook for some serious cash. The question is how much.

A recent offer of $5 billion was reported in the press but that is much below the $20 to $30 billion we thought that the attorney generals were pushing for. Law professor Adam Levitin recently argued that the figures could be even substantially higher since there are estimates that the mortgage servicers saved at least $25 billion by failing to comply with the law. Issuing a fine for this amount would only be a “disgorgement” (great word!) of wrongful profits and not include an actual penalty. And while this would represent the largest consumer fraud in U.S. history (according to the law professor), there is a case for a higher amount which could extend the settlement to fund principal reduction mortgage modifications.

While the sides appear to remain wide apart, I suspect that the banks will realize that it is in best interest to reach a settlement. Once they do, the next issue will be how to spend the money. There are plenty of actors that have been victimized here. People have been kicked out of their homes, states have had their property tax base erode, and communities are facing difficulty in meeting the basic services. Some of the money should help pay back the victims. But I think it also makes sense to make sure the situation does not get worse. I am strongly in favor of principle reductions because it brings mortgages in line with market conditions and will help stabilize communities and families alike. But there are a number of other approaches that can be pursued simultaneously.

This is where foreclosure mediation comes in. We have been highlighting this idea in the past and the work of our colleague Alon Cohen, housing policy advisor at the Center for American Progress, because it turns out the mediation is an effective tool for keeping people in their homes. Mediation allows homeowners and lenders to sit down together in the presence of a neutral third party to discuss if a mortgage modification is feasible and would offer both sides a better outcome than foreclosure. Not only can this help homeowners facing foreclosure but it can be good for housing markets nationwide.

It turns out that a number of states have created and recently expanded foreclosure mediation programs. But one of the major hurdles to continue to do so is funding. Even successful programs are being curtailed by limited resources. Once the settlement talks generate a final dollar amount, it would be a very good idea for a significant portion of these funds to be explicitly earmarked to support the creation and maintenance of state foreclosure mediation programs.

The settlement funds could fill in some of the funding gaps and greatly magnify an intervention that has a proven track record of success. It’s one of the reasons why the attorney generals should not settle prematurely but make sure they get the best deal for the taxpayers and the citizens they represent. And the banks should appreciate that part of the money they turn over can be used to minimize additional losses they might incur if an unabated wave of foreclosures continues to unfold. Although it may initially be hard for the banks to agree to release these funds, states can make sure that becomes money well spent.