Banking Promises Broken

Aug. 9, 2009

Random Thoughts
Banking Promises Broken
Robert Downes 8/10/09


Banks have been given billions of dollars over the past year to help lower the mortgages of homeowners in danger of foreclosing. But, as noted in the financial news last week, those funds aren‘t being used as intended. And while banks are making record profits and dishing out billions in bonuses to their employees, the pain in Main Street, America continues.
Take the case of William, a 41-year-old single dad who bought his home near East Bay in Traverse City three years ago for $145,000.
Last week, William (that‘s his middle name) saw his dream of home ownership threatened when his house went up for a foreclosure auction in a sheriff‘s sale.
The good news for William is that no one bid on his house, partly, he says, because mortgage holder, Wells Fargo, tacked on $15,000 in interest as well as fees and penalties for an asking price of $164,000, pricing the modest house out of the market. Now, he says, the home goes back to the note-holder and will be relisted by a realtor friend of his. William‘s parents plan to buy the home and sell it back to him in a year or so when he‘s back on his feet.
Complicated? Yes. Unnecessary? Probably, considering William‘s eight-month struggle with Wells Fargo to try lowering his 9.9 percent mortgage.
Instead of being able to work through the local offices of Wells Fargo, where he might have developed a good working relationship face-to-face, William says he had to deal with negotiators over the phone at some unknown location.
“They wouldn‘t even tell me where their office was,“ he says, adding that he believes he spoke with employees at the company‘s mortgage department in Des Moines, Iowa.
“It‘s been a roller-coaster ride that never seemed to be in good faith,“ he says. “Every time you‘d go to talk with someone there, you‘d end up with someone else.“
He admits to being part of the problem to agreeing to a bad deal in the first place. Three years ago, he was selling used cars with a local dealer when he agreed to a variable ARM mortgage with a local lender.
“My mortgage was bought and sold a couple of times,“ he says. Eventually, it landed with Wells Fargo at 9.9 percent and a monthly payment of $1,100.
“When I was making money, that was fine,“ he says. But then, like so many other Americans, he lost his job.
Last year, he entered into a pre-foreclosure agreement with Wells Fargo. William says he was promised that if he made his mortgage payments for 8 months, the firm would modify his mortgage to a rate of 6 percent.
But William says the firm reneged on the deal and refused to lower his interest rate to 6 percent. Instead, they offered him a “fixed ARM“ at the same 9.9 percent rate, putting him in an impossible situation.
Nor would the company allow him to “short sell“ his home for less than his unpaid mortagage, which is viewed by some as a positive alternative to foreclosure. Although the lender takes a loss in a short sale, it avoids the more costly process of foreclosure.
Instead, William says, the company insisted on sticking him with the 9.9 percent mortgage.
Please note, Wells Fargo received $25 billion in TARP funds from the Bush administration, which was supposed to go toward modifying loans to American homeowners. But, according to an article in USA Today, the company has modified only six percent of its loans to date.
In other words, we taxpayers pumped billions into bailing out U.S. banks, who then refused to lower the mortgage rates of those in the most peril for foreclosure.
“I qualified for all of the Obama administration programs, but the government didn‘t make any demands when they gave Wells Fargo and the other banks the bailout money,“ William says. “It‘s all voluntary, only if the banks want to go along with lowering their rates.“
An article in the Aug. 10 issue of The New Yorker confirms that banks are continuing to drag their feet on helping American homeowners.
Meanwhile, there have been nearly two million foreclosures filed this year alone.
“Last year, Congress enacted the cruelly misnamed Hope for Homeowners program: its restrictions are so tight that, in its first three months of existence, it got applications from barely 300 homeowners,“ writes James Surowiecki in The New Yorker. “The Obama Administration has done better, rolling out a $75 billion mortgage-modification program, which offers mortgage servicers financial incentives to renegotiate loans. So far, it’s managed a couple of hundred thousand mortgages, but that’s been dwarfed by the rising number of foreclosures.“
That $75 billion was supposed to help 36 lenders modify the mortgages of homeowners in danger of foreclosure. But according to a U.S. Treasury report issued last week, only 9 percent of eligible homeowners have had their mortgages lowered under the program.
Surowiecki adds that it would seem to be common sense that banks would want to lower mortgate rates to save the hassle and expense of foreclosing on a home, having it sit empty, and selling it at a bargain-basement price.
But that‘s not the way things have turned out. Instead, banks have learned that 30 percent of borrowers “self cure“ themselves after missing a payment or two and go back to paying their high mortgage rates. Another 30-45 percent of people who have their mortgages modified end up going to foreclosure anyway.
“In both cases, modification leaves the bank worse off,“ Surowiecki writes. “Reluctance to modify mortgages isn’t always a matter of obstinacy or ineptitude. It’s a matter of profit: banks are doing what makes sense for their bottom line.“
The banking lobby also killed a plan last year which would have allowed bankruptcy judges the power to reduce the principal on troubled mortgages. It‘s the same sort of lobbying influence and footdragging you see on the part of the insurance industry, trying to derail health care reform, while getting their cut of taxpayer dollars.
William says his credit rating has been wrecked by the experience of trying to renegotiate his mortgage.
“It‘s stressful when you‘re a single dad and out of work and have all of these other things going on in your life,“ he says. “It‘s like a magic carpet ride when you add in dealing with the banks and how they screw you over.“
One bright spot is that he‘s going back to college for a degree in computer science. He hopes to purchase his home back from his parents when he gets on his feet.
Does he ever feel like saying to hell with it and bailing out on his home entirely?
“No, because it‘s a wonderful neighborhood two blocks from the beach, and my daughter is going to school here this fall and I‘m going to the college right next door. I‘m here for the long term.“