Nearly a year and a half after news broke of widespread wrongful foreclosures at the hands of the nation’s five largest servicers, the federal government and 49 of 50 attorneys general have reached a solution that will deliver $25 billion in aid. This is a landmark victory for struggling homeowners that have been waiting desperately for justice, accountability, and meaningful relief. While there is much to celebrate about the settlement, one of the most important parts is that reducing principal loan balances and other compensation will be mandatory. This is the vital ingredient that has been missing from so many other federal programs.
There is widespread agreement that resuscitating the housing market is critical to our broader economic recovery. It is also essential for the micro-economies of individual households, and Latino households in particular. Hispanic families have lost two-thirds of their wealth in the Great Recession, the vast majority of which is due to foreclosure and declining home values. The states where many of them are concentrated have been among the hardest hit: Florida, Arizona, Nevada, and California. Most homeowners facing foreclosure find themselves there through no fault of their own. With unemployment among Latinos in the double digits for three years, it is no wonder that home loss has hit the community hard. Adding to the challenge of making a mortgage payment with less income is the fact that many of the loans sold to Latino homeowners were overpriced and unnecessarily risky. In its recent case against Countrywide, the Department of Justice uncovered a practice of steering—pushing creditworthy families into subprime loans to turn a higher profit.
With such extensive damage, many are wondering what kind of dent $25 billion can make. While it is not going to fix everything, the settlement is just what we need to jumpstart housing and household recovery. Here are five reasons this settlement is pivotal for Latino families:
Principal reduction is at the heart of the deal. Nothing is more frustrating than seeing a servicer refuse to reduce principal for a homeowner willing to make payments and eager to save their home, only to turn around and sell it for pennies on the dollar at a sheriff’s sale. When compared with this kind of loss, plus the costs of maintaining a property and the impact of abandoned properties on neighborhood home values, writing down principal is a fiscally responsible strategy for investors and homeowners alike. Thanks to the settlement, this solution will become more widely available. Just as important, data from these modifications could become the catalyst we need to bring Fannie Mae and Freddie Mac on board. Other financial relief will also be available in the form of compensation, new opportunities to refinance, and forbearance.
Servicers must put in place new, fairer practices. Going forward, the five servicers involved in the settlement must put in place commonsense practices to avoid the kind of wrongful foreclosures that characterized the robo-signing scandal. They must make foreclosure a last resort and refrain from foreclosing on a family while the mortgage is pending approval for a modification. Hopefully these standards are only the precursor to national standards—a job for the Consumer Financial Protection Bureau—so we can ensure all servicers are following the rules.
States will invest in housing counseling and legal aid. To the surprise of many, Congress eliminated $88 million dollars in 2011 for housing counseling, which has been proven to be one of the most effective foreclosure prevention programs available. While they restored half the funds for 2012, the amount pales in comparison to the need. In fact, smart policymakers should be thinking about how to incorporate housing counselors in the home-buying process. Families that get objective advice before they buy are also more likely to avoid industry traps.
Civil rights, homeowners' rights, and other legal rights have been preserved. The negotiators smartly preserved the ability of homeowners to bring their own claims against their servicer if fraud is uncovered. They also reserved the right to pursue additional federal origination and securitization claims. This means more enforcement and accountability to come.
The settlement is mandatory and includes a timeline. The deal negotiators have appointed a Monitor—Joe Smith, North Carolina's banking commissioner and a respected foreclosure-prevention expert—to ensure that the servicers are complying with the terms of the settlement. The Monitor has the power to impose penalties for noncompliance and must keep the public up-to-date on the deal's progress. The deal includes enticements to get relief out to families within 12 months and penalties if it takes longer than three years.
For many Latinos, this settlement has come not a moment too soon. However, this should only be the beginning for the administration and the AG powerhouses that have stood up for the rights of homeowners, such as California AG Harris, Nevada AG Masto, New York AG Schneiderman, and Massachusetts AG Coakley. For instance, the Department of Justice–Countrywide settlement is evidence of civil rights abuses that we know were not limited to Countrywide. And, the Fannie and Freddie overseer, FHFA Acting Director Ed DeMarco, continues to refuse families home-saving solutions. Our work is not done, but today's news is a victory worth celebrating.
Photo by niallkennedy via Creative Commons
Editor's Note: A version of this article appeared today on the Univision blog. Janis Bowdler, the director of National Council of La Raza’s Wealth-Building Policy Project, regularly blogs on Rooflines every first and third Monday of the month.