Regulators Must Bolster Homeowner Protections

Reports of a housing recovery do no good for the tens of thousands of American families currently in some stage of foreclosure. The laws, programs and bank settlements formed in the aftermath of the housing crisis have yet to get many homeowners the help they need, according to the results of a new survey of 66 housing counselors and legal service lawyers conducted by the California Reinvestment Coalition between February and April 2014. In addition to the survey results, our report includes the stories of eleven homeowners who worked with attorneys from the nonprofit housing law firm Housing and Economic Rights Advocates. Their declarations outline the many problems they encountered when they sought help from the servicers. Unreasonable delays, servicer miscommunications and botched modifications are still happening frequently, despite new initiatives intended to protect homeowners.

Some old problems have yet to be fixed, according to the survey. Homeowners continue to receive unequal access to housing assistance. Over half of housing counselors say that borrowers and neighborhoods of color and limited English proficiency experience worse outcomes when seeking loan modifications than other homeowners. These observations are supported by a February 2014 report from the U.S. Government Accountability Office. The GAO's analysis of non-public data from the Home Affordable Modification Program found that African-American borrowers and borrowers with limited English proficiency experienced statistically significant differences in the rate of denials and cancellations of trial loan modifications. The same was true of these groups' potential for re-defaulting on their mortgages.

This year's survey identifies several new problems as well. When banks sell their mortgage servicing rights to non-bank servicers, some borrowers are losing their loan modifications. Counselors and homeowners report working diligently to secure a loan modification only to see their loan transferred to a new servicer who may or may not have information about a modification that was already granted or is still in process. In some cases, the new servicer requires homeowners to reapply for modifications — a time-consuming and redundant process that actually makes it more likely that the servicer will be forced to foreclose rather than receive payments.

Communicating with a single point of contact to discuss troubled loans was a source of frustration for almost every single counselor. Counselors and borrowers complained of being unable to reach the single point of contact and leaving unreturned messages. The single point of contact at banks also changed frequently, according to counselors and borrowers. This is a national issue. Of the 55,081 complaints the National Mortgage Settlement Monitor received between July 2013 and December 2013, single points of contact were the number-one complaint.

Counselors report that widows and other surviving family members who inherit or have a legal interest in a home are continuing to face unreasonable obstacles and lengthy delays in trying assume and modify mortgages after the death of a loved one. One counselor explained, "The servicer keeps insisting that the widow or widower does not live there because the deceased borrower does not live in the property, so they say that it is not owner-occupied and that they don't qualify for the HAMP."

If a widowed spouse wasn't on the mortgage, servicers often refuse to speak to him or her, instead asking to speak with and sending mail to their deceased family member. In some cases, servicers require surviving family members to engage in costly and unnecessary procedures to gain access to their accounts. There is no need for these complications — especially since the Consumer Financial Protection Bureau, Fannie Mae, Freddie Mac and the Treasury Department developed rules and guidelines in 2013 in order to better protect these borrowers. Yet 87% of counselors responded that these problems persist.

To address the problems reported in the survey and by homeowner declarations, the California Reinvestment Coalition recommends that regulators and servicers take several steps.

First, regulators must focus on stronger enforcement of existing consumer protections like the single point of contact. This could go a long way toward increasing homeowners' access to relief. As banks sell their mortgage servicing rights, regulators must ensure that homeowners, especially those with in-process modifications, don't fall through the cracks.

Second, regulators that reach settlements with banks over mortgage lending and servicing practices should require the banks to dedicate a portion of funding for housing counselors and legal advocates who help homeowners navigate their options and avoid foreclosures. A number of homeowners' declarations attest to the fact that homeowners are significantly more likely to keep their homes when they work with counselors or legal services lawyers.

Regulators should also prioritize greater transparency in mortgage relief. Many homeowners and advocates in communities hit hardest by the housing crisis believe that promised relief has not been offered where it is needed most. The GAO report on the disproportionate cancellations and denials of trial loan modifications experienced by certain groups suggests these fears may not be unfounded. As the GAO notes, "By requiring its compliance agent to review the fair lending internal controls of loan servicers, or reviewing the data … servicers collect on the race, ethnicity, and gender of borrowers, Treasury could gain additional assurance that servicers are implementing the [Making Homes Affordable] program in compliance with fair lending laws as the servicers contracted to do."

Lastly, federal agencies must identify a solution for the widows, widowers and orphans who stand to lose their homes because of bureaucracy. Agencies including the CFPB, Fannie Mae, Freddie Mac and the Federal Housing Administration should investigate whether servicers are following successor-in-interest laws and issue enforcement actions in cases of violations.

The housing crisis is far from over. Affected homeowners and communities deserve better protection from unnecessary foreclosures.

Kevin Stein is the Associate Director at the California Reinvestment Coalition, and Divya Rao is a Cornell Legal Fellow serving at the California Reinvestment Coalition. The California Reinvestment Coalition is a coalition of over 300 organizations working to improve access to banking and other financial services for California's low-income communities and communities of color.