The Crisis Continues…

news1-1Foreclosures may increase in 2012

Despite the nationwide legal settlement announced last month between 49 state attorney generals and major banks over fraudulent foreclosure practices, and despite a downward trend in the number of homes entering the foreclosure process both locally and statewide compared to this time last year, the damage done by the collapse of the housing market continues in Santa Cruz County. More than 100 Notices of Default and 120 Notices of Sale are issued (on average) by banks each month.

Although reports show that foreclosures are beginning to slow in California, an estimated one in 354 homes in Santa Cruz County received a notice of foreclosure in January (compared to one in 265 homes statewide), and roughly a third of homeowners are still underwater, or owe more on their homes than they are worth in the current market, according to ForeclosureRadar.

Almost four years after its inception, and without one major bank official brought to trial, the foreclosure crisis has piqued the anger, energy and outreach of the Occupy movement across the country. Led by Occupy Santa Cruz’s Foreclosure Working Group, a March To Stop Foreclosures took a tour of major bank branches in Downtown Santa Cruz, drawing a crowd of roughly 200 protestors, without incident, on March 11.

 “The stipulated agreement is a beginning, a down payment, for past fraudulent banking practices.” says Steve Pleich, an organizer of Occupy Santa Cruz. “There must be, and will be, much more to come if the economic balance between lenders and homeowners is to be restored.”    

With Notices of Default across California down 11.9 percent in the fourth quarter of 2011 compared to the fourth quarter of 2010, Sean O’Toole, CEO of ForeclosureRadar, wrote on the company’s website, “January’s numbers should put to rest any notion that we will see a wave of foreclosures in 2012, at least in Western states that we cover.”

But that optimism is not shared by Daren Blomquist, vice president of RealtyTrac, Inc. Blomquist said federal and state probes into fraudulent foreclosure practices last year, exemplified by the “robo-signing” scandal, slowed down foreclosures in 2011. Now that major banks have settled on their liability for illegal practices and the rules of foreclosure are clearer, a new wave of foreclosures is ensuing.

“The settlement will accelerate the foreclosures that are happening this year and it will accelerate the process of lenders catching up on the backlog of foreclosures,” Blomquist told the Associated Press last month. RealtyTrac predicts foreclosures will increase by 25 percent nationwide in 2012 to roughly 1 million homes, compared to the 804,000 homes lenders took back last year.

“California communities and families are being devastated by the mortgage and foreclosure crisis. We must ensure the deceptive practices that caused it never happen again,” Attorney General Kamala Harris said in a press release last month announcing a raft of legislation labeled the “California Homeowner Bill of Rights,” legislation required to implement the bank settlement. Harris played a major role in getting the best deal for California throughout more than a year of intense negotiations with the banks, resulting in California receiving $18 billion out of the $25 billion settlement. About $10 million of the total is earmarked for loan principal write-downs on first and second loans for homeowners who are underwater and behind on their payments.    

Moody’s Analytics released a report last month that states,  “Bank of America, Wells Fargo, J.P. Morgan, and Citigroup have each publicly disclosed the settlement will have little or no additional effect on the banks …. loan loss reserves mostly cover the related costs.” The report highlights, however, that banks received no immunity from further prosecution for highly leveraged gambling with mortgage-backed securities that caused the financial collapse in 2008.

Local Responses

Especially when it hits a friend or neighbor in his district, County Supervisor John Leopold says the foreclosure crises is “a very heavy weight I carry around.”  Leopold has taken a lead in what the county can do to reduce the number and the damage done by foreclosures on both his constituents and the county budget. With property values dropping roughly 30 percent since 2008, property tax receipts to Santa Cruz County government decreased by roughly $10 million in the 2009-10 fiscal year alone, according to Auditor-Controller Mary Jo Walker.  

Leopold looked across the country for examples of what other jurisdictions have tried, and is discouraged. Providence, R.I., for example, passed an ordinance requiring good-faith negotiations prior to a foreclosure, overseen by a third-party housing counselor, and was promptly sued by a group of local banks. The court allowed the mediation program, but ruled against the city’s authority to block transfer of ownership unless approved by the mediator, according to Leopold.

Leopold is particularly frustrated by a state law that apparently precludes counties or cities from initiating their own, more stringent mortgage mediation requirements prior to foreclosure, or, as advocated for by the Occupy Foreclosure Working Group, mandating a moratorium on foreclosures until the legality of foreclosures is certain.

Hailed as emergency assistance at the height of the financial crises in 2008, SB 1137 required a minimum of mediation efforts by banks prior to foreclosure. These basic requirements were characterized by Leopold as “incredibly wimpy … in some cases simply requiring nothing more than a phone call and a point of contact.” Particularly egregious to Leopold is that this state law preempts local jurisdictions from requiring anything more from banks before they foreclose.    

 “It’s clear to me it was the influence of money from financial institutions that blocked meaningful regulation of this process,” Leopold says. “The idea that they prevented local communities from doing more to help their citizens speaks for everything that is wrong with our legislative system. It’s no surprise to me that the Occupy movement has blossomed when citizens see that the system is not really geared to help them.”

Kamala Harris, the ‘Hole’ in the Bank Settlement, and Edward DeMarco

On one hand, the bank settlement has been dismissed as a “back-door bailout” for the banks by Loren Steffy, a business columnist for the Houston Chronicle, and, on the other hand it was criticized as a “shakedown” of the banks by state attorneys general in a Wall Street Journal editorial by David Skeel. The jury of public opinion is still out on whether the settlement is adequate restitution for the damage done by fraudulent foreclosures, and the exact terms of the settlement were filed in Federal court this week.  

The major obstacle in negotiations has been encouraging banks to write down the principal owed by underwater borrowers as a loss for the bank, which banks have been extremely reluctant to do in previous federally funded foreclosure prevention programs, such as the Home Affordable Modification Program (HAMP).  

The bank settlement requires more than $10 billion in principal reductions by the five banks who settled, but does not include any action be taken on the part of Fannie Mae or Freddie Mac, so-called Government-Sponsored Enterprises that purchase mortgages from banks and own more than 60 percent of home mortgages in California. Excluding Fannie Mae- and Freddie Mac-owned mortgages has been called a “gaping hole” in the bank settlement by several advocates for foreclosure prevention.   

This “gaping hole” has led to a very public confrontation between Kamala Harris, the California Congressional delegation and Edward DeMarco, the acting director of the Federal Housing Finance Agency (FHFA), which administers Fannie Mae and Freddie Mac. Despite pressure from the Obama administration, DeMarco has been adamantly opposed to expanding principal reductions for Fannie Mae and Freddie Mac loans.

U.S. Representative Sam Farr wrote to GT in an email, “Economists and housing experts have repeatedly called for targeted write downs of principal balances of underwater mortgages as the surest way to ease the housing crash and rebuild our economy. Yet despite these calls, Mr. DeMarco has refused to allow Fannie Mae and Freddie Mac to work towards those ends. The bottom line is that if he can’t get it done, it is time to appoint someone who can.” 

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