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1.2.5.4 How Poor Servicing Fed the Crisis

Origination abuses were not the only cause of widespread foreclosures. Distressed homeowners were encouraged to ask their loan servicer for help negotiating a workout that would avoid foreclosure or resolve a default. But the servicers were unprepared and overwhelmed. They often failed, refused, or felt they were unable to modify the terms of the mortgage due to various constraints—real and perceived. When loans had been securitized, servicers seemed particularly unsure as to their authority and often gave consumers inaccurate information. Servicers also had financial incentives from lenders and the trustees of securitized trusts that weighed against spending the time it would take to work with homeowners.173 In order to encourage servicers to engage in workouts with homeowners and to prevent foreclosures, President Obama launched the federal Home Affordable Modification Program (HAMP) in 2009.174 Later the Department of the Treasury created additional HAMP niche programs, such as the Second Lien Modification Program, Home Affordable Unemployment Program, Home Affordable Foreclosure Alternatives, Making Home Affordable Refinance Program, and the Treasury/FHA Second Lien Program.175 As foreclosure filings declined the programs were phased out, and December 31, 2016 was the last day that the HAMP program accepted new applications for loan modification.176 Even at its peak, HAMP and its related programs assisted far fewer homeowners than initially projected177 due to complexity, poor design, and mortgage servicers’ ongoing problems with implementation. As a replacement for HAMP, Fannie Mae and Freddie Mac created a new “Flex Modification” home loan modification program.178 Flex Modifications not only replace Fannie Mae and Freddie Mac’s version of HAMP, but also the “standard” and “streamlined” modification programs that Fannie Mae and Freddie Mac offered in the past. Flex Modifications are now the only modification program offered by servicers of a mortgage loan owned or guaranteed by Fannie Mae or Freddie Mac. Loan modifications are discussed in NCLC’s Mortgage Servicing and Loan Modifications treatise.179

Servicing abuses unrelated to loan modifications also precipitated defaults and foreclosures. The attorneys general of forty-nine states and the District of Columbia, the federal government, and five of the largest mortgage servicers (Bank of America, JPMorgan Chase, Wells Fargo, Citi, and Ally/GMAC) reached an agreement in February 2012 to settle claims regarding loan servicing abuses. The settlement included monetary sanctions, mortgage servicing reforms, assistance to existing and former homeowners, creation of programs to refinance homeowners in loans that are underwater, and money to the states to fund foreclosure-related services. The settlement became effective April 5, 2012.180

Footnotes

  • 173 {173} See generally Diane E. Thompson, Foreclosing Modifications: How Servicer Incentives Discourage Loan Modifications, 86 Wash. L. Rev. 755 (2011) (describing these constraints and incentives in detail). See also Kathleen C. Engel & Patricia A. McCoy, The Subprime Virus: Reckless Credit, Regulatory Failure, and Next Steps 129–133 (2011); Adam J. Levitin & Tara Twomey, Mortgage Servicing, 28 Yale J. on Reg. 1 (2011).

  • 174 {174} U.S. Dep’t of Treasury, Making Home Affordable, www.treasury.gov. See also Kathleen C. Engel & Patricia A. McCoy, The Subprime Virus: Reckless Credit, Regulatory Failure, and Next Steps 127–128 (2011) (describing the initiation of HAMP and its purposes).

  • 175 {175} National Consumer Law Center, Mortgage Servicing and Loan Modifications § 6.7 (2019) (describing these programs in detail), updated at www.nclc.org/library.

    Fannie Mae and Freddie Mac implemented their own versions of HAMP. National Consumer Law Center, Mortgage Servicing and Loan Modifications § 7.3.3.1 (2019), updated at www.nclc.org/library.

  • 176 {176} U.S. Dep’t of the Treasury, Making Home Affordable Program, Program Purpose and Overview, available at www.treasury.gov.

  • 177 {177} Compare U.S. Dep’t of Treasury, Making Home Affordable Program Performance Report Through Third Quarter 2016 at 4 (Dec. 9, 2016), available at https://www.treasury.gov (showing that 2,081,557 first lien permanent modifications had been started under the program to date, along with another 161,444 2MP modifications), and Office of the Special Inspector General for the Troubled Asset Relief Program, Quarterly Report to Congress (Oct. 26, 2016), available at https://www.sigtarp.gov (only 1.6 million homeowners received permanent modifications, far short of the projected 3–4 million permanent modifications; over 4 million homeowners that applied for HAMP were denied and about 500,000 homeowners have fallen out of the program), with Murray Jacobson, Obama’s Foreclosure Program Slammed Anew for Ineffectiveness, PBS Newshour (Mar. 2, 2011) (reporting that the Administration projected the program would prevent three to four million foreclosures). See also MFY Legal Services, Inc. & Am. Civil Liberties Union, Here We Go Again: Communities of Color, the Foreclosure Crisis, and Loan Servicing Failures 27 (Feb. 2015), available at https://www.aclu.org (reviewing complaints of New Yorkers filed with the Consumer Financial Protection Bureau between July 1, 2012 and May 31, 2014 about mortgage servicing and loan modifications by community type; finding “complaints about types of servicer misconduct that increase the likelihood of home loss make up a larger share of complaints from communities where people of color live than from predominately white communities”).

  • 178 {178} This program is described in National Consumer Law Center, Mortgage Servicing and Loan Modifications § 7.3.1 (2019), updated at www.nclc.org/library.

  • 179 {179} National Consumer Law Center, Mortgage Servicing and Loan Modifications Chs. 6–10 (2019), updated at www.nclc.org/library.

  • 180 {180} Information about this settlement may be found in National Consumer Law Center, Mortgage Servicing and Loan Modifications Appx. C.6 (2019), updated at www.nclc.org/library.