Lessons from Past Mortgage Settlements Should Guide Department of Justice Settlement with JP Morgan Chase

October 22, 2013– Amid reports of Department of Justice negotiations of a multi-billion dollar settlement with JP Morgan Chase for securitizing faulty mortgages, 18 California organizations are calling for all future mortgage and foreclosure settlements to meet the needs of local communities and consumers most affected by unscrupulous practices.

Past agreements — especially the Independent Foreclosure Review — and their implementation have left behind homeowners and communities bearing the greatest losses from bank wrongdoing.

“The mortgage and foreclosure crisis have devastated families and communities,” said Kevin Stein, Associate Director of the California Reinvestment Coalition. “Banks must be held accountable to provide meaningful relief to those hardest hit by bad practices, to halt all preventable foreclosures, and to help stabilize neighborhoods.”

Although a substantial portion of the settlement with JP Morgan Chase will go to investors harmed by Chase’s alleged misdeeds in packaging and selling mortgage-backed securities, meaningful homeowner relief is possible.As such, these 18 community groups call for all future settlement agreements, including any agreement with JPMorgan Chase, to include:

1. Relief commensurate with harm caused. Financial institutions have yet to be forced to pay for the total harm caused by predatory mortgage lending and improper foreclosure practices that have drained wealth from working families and their neighborhoods. Only counting 2012, over $192 billion in housing wealth was lost due to foreclosures, with the highest concentration of losses in predominantly minority communities, according to a report by the Alliance for a Just Society.

2. A priority on keeping people in their homes and first lien principal reduction. Countless predatory and unsustainable mortgage loans were made over the last several years, leading to hundreds of thousands of unnecessary foreclosures as servicers failed to follow federal and state rules designed to encourage loan modifications. Banks entering into settlement agreements must halt all foreclosure activity to ensure that no improper foreclosure is processed before impacted borrowers can claim settlement relief or servicing protections to which they are entitled. Likewise, Californians need first-lien principal reduction loan modifications so they can return to being above water and sustain homeownership. While the National Mortgage Settlement (NMS)provides significant first-lien principal reduction relief, a greater amount of relief was provided via short sales where homeowners must leave their homes.

Maeve Elise Brown, Executive Director of Housing and Economic Rights Advocates, explained, “In designing this settlement, the Department of Justice should remember the Independent Foreclosure Review with its $2billion consultant price-tag but only $300 or $500 for homeowners. The Department of Justice must prioritize reducing principal on first-lien mortgages, a strategy that is most effective at keeping people in their homes.”

3. Support for housing counselors and legal service lawyers. Nonprofit advocates have helped California families navigate a Byzantine loan modification process and keep their homes. But funding for these groups is dwindling and consequently they can serve fewer people. These groups, whose sole focus is on their clients, are the only real competition for the steady stream of loan modification scam artists who gladly charge families thousands of dollars while doing nothing to save their homes. The National Mortgage Settlement was scheduled to deliver over $400 million to the state of California, much of that potentially going to support nonprofit housing counselors. But, almost all of these funds were taken by the Legislature and Governor to back-fill a budget deficit.

4. Best practices and strong standards going forward. Stronger servicing standards have been put in place by the California Homeowner Bill of Rights (HBOR), the National Mortgage Settlement, and the soon to be effective rules of the Consumer Financial Protection Bureau. But an April 2013 CRC survey of over 80 housing counselors in California found that large servicers were routinely violating key provisions of HBOR and NMS.The NMS Monitor found some of the same issues; almost half of the nearly 90,000 complaints made to his office were related to problems with a bank not providing a responsive, capable Single-Point-of-Contact or apparent dual track violations. Besides compensating victims, settlements must end harmful practices.

5. Support for affordable housing. The foreclosure crisis has not only harmed homeowners, it has exacerbated an already desperate affordable housing crisis. Families displaced from their homes by foreclosure are now competing for housing with tenants in a heated rental housing market. These families are also competing with Wall Street investors who pay all-cash for homes, beating out first-time home buyers and then renting the houses back to some of the same people originally displaced by the Wall Street-generated economic crisis.

During the Savings and Loan crisis, banks were required to support the development of affordable housing through programs such as the Affordable Housing Program (AHP). Tying a percentage of settlement dollars to providing a source of funding for affordable housing is a logical mechanism to help mitigate the broader harm caused by improper mortgage and foreclosure practices, and can begin to address a growing need as the loss of redevelopment agencies in California and other factors have created a new crisis in affordable housing finance

Amie Fishman, Executive Director of the East Bay Housing Organizations explains, “We’ve had a triple whammy in California of the foreclosure crisis which contributed to pushing rents sky high, alongside the draconian cuts to funding for affordable housing with the elimination of redevelopment agencies and federal sequestration cuts. As a result, too many California families are doubling up with relatives and using half or more of their paychecks to try and keep a roof over their heads. Targeting some of this funding to affordable housing would be a necessary step to addressing this crisis.”

6. Transparency and data reporting to ensure relief is distributed fairly. Most of the recent settlement agreements have for the most part allowed the offending parties to determine how to distribute relief. This has contributed to a feeling that the hardest hit communities have been ignored. The California Attorney General did well to negotiate a separate California agreement as part of the NMS that created incentives for servicers to provide relief in hard hit counties. But even this provision didn’t ensure that relief reached the hardest hit communities. And the National Mortgage Settlement agreement did not require that servicers report the race,ethnicity, gender and income of borrowers and neighborhoods where relief was provided. All future agreements must require this level of transparency to ensure fair housing and fair lending laws are honored.

7. Strong enforcement and monitoring. A settlement agreement is not worth the paper it is written on if the terms are not clear and meaningful, and if the oversight and enforcement is lax to the point of inviting banks to ignore their obligations. The California Monitor (oversees the National Mortgage Settlement in CA) has been a positive force in resolving homeowner complaints and changing servicer behavior, but subsequent reports from the Monitor indicate there is still room for improvement.

Similarly, the ability for victimized homeowners to sue their bank, included in California’s Homeowner Bill of Rights, is a good step forward, but more needs to be done to protect homeowners from unnecessary foreclosures and to protect tenants from illegal evictions. Any settlement agreement must put in place both a credible and strong monitor empowered to ensure banks honor the settlement, as well as a mechanism for affected families to secure relief and assert their rights.

The following organizations signed onto this statement:

Alliance of Californians for Community Empowerment
California Coalition for Rural Housing
California Reinvestment Coalition
Courage Campaign
East Bay Housing Organizations
HomeStrong USA
Housing and Economic Rights Advocates
Korean Churches for Community Development
Law Foundation of Silicon Valley
Montebello Housing and Development Corporation
Neighborhood Housing Services of the Inland Empire
Neighborhood Housing Services of Los Angeles County
Neighborhood Housing Services of Silicon Valley
Public Counse
lRural Community Assistance Corporation
Shalom Center for T.R.E.E. of Life
Thai CDC
Unity Council

Additional Background:
Wasted Wealth Report (May 2013): LINK
CRC Survey of 84 Housing Counselors and Nonprofit Attorneys (April 2013): LINK
National Mortgage Settlement Monitor Complaints (through June 2013): LINK