With home values continuing a steep decline, little change in the unemployment rate, and 26% of Illinois residents owing more than their home is worth, little has been done to buoy confidence that an economic recovery is at hand. A settlement of the investigations surrounding last year’s robo-signing scandal that, among other things, achieves widespread principal reduction commitments from major servicers, could change that — but only if done carefully.
During the past four years, Illinois communities have experienced the worst decline in housing prices and the greatest wholesale neighborhood disinvestment that we have observed in our organization’s nearly 40-year history. Struggling homeowners would clearly benefit from the modest gains in equity, affordable payments, and local housing market stabilization that effective servicer oversight and principal reduction could provide. If settling the robo-signing investigations now means better outcomes for homeowners who are still (barely) hanging on to their homes, we think that is a cause worth pursuing. The wealth of communities is, to a large extent, tied directly to housing. Sustainable housing options, economic mobility and retirement security all suffer when residents lose their homes, can’t move for a new job, or can’t sell to finance their retirement.
At the Woodstock Institute, we look forward to a settlement that restores some of this lost neighborhood wealth. But to do any good, the settlement should include mandatory, widely applicable principal reductions targeted to homeowners who were the hardest hit. It should include heightened loss-mitigation standards that are a significant improvement over the complicated, frustrating and unfair process that has characterized the process to date. It should include a forbearance program to help unemployed homeowners, and it must be implemented by a third-party administrator designated to enforce the settlement terms.
Finally, it should provide retroactive relief to homeowners who wrongly lost their homes. These key provisions are directly related to the harm caused by fraudulent document preparation, the unjustified foreclosures of countless homeowners, and the resulting loss of community wealth. If these commitments can be secured, releasing banks from liability for robo-signing claims would be well worth it. A settlement that provides immediate, substantive relief to homeowners in exchange for releasing banks from future liability for just one piece of the foreclosure puzzle would require banks to take measures to stabilize communities that they have been largely unwilling to try, despite repeated entreaties from homeowners and advocates.
Across the board, banks have demonstrated their reluctance to reduce mortgage principals — the single best way to restore modest equity, reduce payments and keep borrowers in their homes. Instead, they have chosen to force local housing markets into an uncontrolled tailspin rather than accept known, but heretofore unrealized, losses.
The proposed commitments outlined above would force banks to reluctantly accept some losses in return for stabilizing local housing markets and keeping homeowners in their homes. Widespread reckless practices, not just related to the robo-signing scandal, caused the ongoing financial and foreclosure crisis, and these practices deserve careful consideration.
At Woodstock, we expect close investigation of the securitization, fair lending and other claims at both the state and federal level. But settling the robo-signing investigations, getting immediate relief for struggling homeowners and putting local housing markets back on track to stabilization should be policymakers’ top priority.
Rand is president of the Woodstock Institute, a Chicago-based nonprofit research and policy organization focused on fair lending, wealth creation and financial systems reform with a focus on lower-wealth and minority communities.