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What’s missing in mortgage settlements?

Too many homeowners are falling through the cracks

urban neighborhood

Imagine you are a homeowner, on the verge of losing your home. You receive a letter from your servicer, notifying you that under a settlement, you’re eligible for a principal reduction of $150,000, which would help keep you in your home. There’s just one problem- the offer is in a language you don’t understand. 

This is a true story about a homeowner in East LA who nearly missed out on this principal reduction modification until he worked with a housing counselor from the East LA Community Corporation, who spoke his language. While this story has a happy ending, we’re concerned that too many other homeowners are falling through the cracks.

The Department of Justice just completed a settlement with Citigroup related to soured mortgage securities sold by the bank, while negotiations with Bank of America continue. Similar to the JPMorgan Chase settlement, the Citigroup deal includes money dedicated to homeowner relief. While the Citibank agreement references certain relief being targeted for hardest hit communities, we remain concerned that too much discretion is left to the bank to determine how to meet these obligations, and it’s also unclear what type of data the bank will release about these efforts. The lack of transparency has not been good for homeowners, in fact, the Home Defenders League visited U.S. attorney offices last week, asking where the relief from the Chase settlement has gone. We believe the Department of Justice can and should address this problem through these settlements.

A simple way to create greater access and transparency would be to require banks to publicly disclose data about which communities and homeowners are helped under a settlement. Banks should report on the census tract, race and ethnicity of homeowners who asked for help, and what type of relief the banks provided — or didn’t provide — similar to data required to be collected and reported for mortgage lending, pursuant to the federal Home Mortgage Disclosure Act.  This transparency is important because while some of the most predatory mortgages were targeted to poorer neighborhoods and communities of color, the homeowners in these communities are now receiving less help to avoid foreclosure.

In a 2011 report on HAMP modifications in California that CRC co-authored with Urban Strategies Council, our analysis suggested that white borrowers were receiving better modifications versus what was offered to African-American, Latino and Asian homeowners.  While approximately 45% of white borrowers received modifications that resulted in a more than 20% reduction in their front-end debt to income ratio, only 33% of Asian borrowers, 32% of Latino borrowers and 37% of African-American borrowers saw the same amount of decrease. These differences are important because a modification will likely fail if a homeowner’s payment isn’t reduced enough for them to afford the modified mortgage payment.

In February this year, the Government Accountability Office released their analysis of nonpublic HAMP data from four large servicers wherein they found potential fair lending issues. The GAO found statistically significant higher denial rates for trial modifications, cancellations of trial modifications and in the potential for re-default for African American, Latino and other homeowners who are protected by fair lending laws. The GAO notes further analysis of the data is needed to see if other factors are at play.

In addition to research, people who work directly with homeowners also believe that help from foreclosure prevention programs and mortgage settlements are not reaching all communities. Over half of the housing counselors we recently surveyed believe that communities of color and homeowners with limited English proficiency receive worse outcomes when they seek help to avoid foreclosure from their mortgage servicer. Counselors point to some banks and servicers refusing to translate written materials, as well as challenges created by incompetent interpretation services.

The uneven access to help will have long-lasting impacts on low-income communities. Vacant, foreclosed homes create blight, meanwhile depressed property values mean lower tax revenues for cities that are being asked to take on additional costs related to maintaining foreclosed homes. Health issues are also problematic, including health risks for neighbors living near foreclosed homes, and likely links between foreclosures and the increase in suicides from 2005-2010. 

Unequal access to relief and resulting foreclosures also exacerbate our nation’s already large racial wealth gap since housing wealth is a smaller percent of total assets for whites, who are more likely to own retirement accounts. According to the Pew Research Center, inflation-adjusted median wealth of African-American families fell 53% from 2005 to 2009, while Latino families lost 66% of their wealth, and Asians lost at least 31%, depending on which Asian groups are included. In comparison, white households saw a 16% drop in their median household wealth during the same time period. 

Banks may protest that this increased transparency would come with an increased price tag or that they’re not sure if they have the capacity to release this data.  However, Bank of America has already demonstrated that it has the capability to report this type of data — and we applaud them for it. In its application to the City and County of San Francisco in response to its Request for Proposal for banking services, Bank of America provided the type of foreclosure data we believe should be provided under this settlement. If a bank is willing to provide this data to win municipal business, isn’t it reasonable to expect it to do the same as part of a legal settlement?

When banks were required to publicly report on their lending (or lack thereof) under the Home Mortgage Disclosure Act, it created a new tool for banks, bank regulators, advocates, and the general public to see if there were lending disparities. This increased transparency was an effective “nudge” to banks to more conscientiously engage with communities they had historically ignored. In the same way, we believe that if banks had to publicly report on the help they’re providing, it would not only increase transparency, but could also push banks and servicers to be more conscientious in their approach to working with homeowners from all communities.   

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