[Vision2020] Still No Justice for Mortgage Abuses

[Art Deco]

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September 1, 2012
Still No Justice for Mortgage Abuses

It has been six months since the big banks settled with state and federal
officials over evidence of widespread foreclosure fraud, promising to
provide $25 billion in mortgage relief in exchange for not being sued over
past foreclosure abuses.

At the time, it looked like a sweet deal for the banks. The fines were
paltry compared with the damage done to homeowners and the economy. And
much of the relief the banks were obliged to provide could be met by
continuing more or less with business as usual.

It still looks like a sweet deal.

The Office of Mortgage Settlement Oversight, the monitor of the settlement,
released a preliminary report last week showing that 138,000 homeowners had
received some form of relief from March 1 through June 30. That is roughly
the number that would have been expected under various aid programs in
effect before the settlement. Worse, with some three million borrowers now
in or near foreclosure, according to Moody’s Analytics, it is nowhere near
the level of relief needed to fix the housing market.

The type of relief provided — mostly short sales, in which a bank allows a
homeowner to sell for less than is owed on the mortgage — had become
increasingly common before the settlement.

Short sales are better than foreclosures, in part because they prevent
vacancies that depress house values. But they are not punishment for
wrongdoing in any meaningful sense; rather, they allow banks to get higher
prices for underwater properties than they could have gotten in foreclosure
sales.

Nor do they fulfill the settlement’s main purpose: to keep underwater
borrowers in their homes by reducing the principal on their mortgage loans.
According to the monitor’s report, $8.7 billion of debt has been written
off in short sales versus only $750 million of principal reduction from
loan modifications.

The settlement was not, of course, intended as a cure for the housing bust.
And future progress reports will no doubt show many more homeowners
receiving big loan modifications. But, based on the banks’ performance so
far, it also seems likely they will be able to structure the required
relief in ways designed to tidy up their balance sheets, rather than to
save as many homes as possible.

Even the relief that is provided may turn out to be less than meets the
eye. That’s because much of the debt forgiven in short sales and loan
modifications will be counted as taxable income to the borrowers, creating
huge tax bills they will not be able to pay.

Mortgage debt that is forgiven is exempt from taxation under current law,
but only if the debt was used to buy or improve the house. The law does not
exempt debt forgiven on many home equity loans, even though the foreclosure
settlement envisions billions of dollars in modifications to such loans.

Several bills in Congress call for extending the law, which is set to
expire at the end of the year. But what is obviously needed is a broader
law shielding all forgiven mortgage debt from tax.

Meanwhile, an investigation into the mortgage abuses that led to the
financial crisis, promised by President Obama in January, has been slow to
produce results. The settlement left open the possibility of civil and
criminal suits on mortgage securitizations and other practices that
inflated the bubble. The aim is to produce deeper accountability and larger
fines with which to provide even more mortgage relief, but no suits have
yet been filed.

The economy will not recover and justice will not be done unless and until
the mortgage mess is resolved.




-- 
Art Deco (Wayne A. Fox)
art.deco.studios at gmail.com
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