Big banks are giving billions of dollars to distressed California homeowners through a landmark mortgage settlement — but mostly to get people out of their homes rather than help them stay.
Short sales, which allow underwater borrowers to sell their homes for less than they owe, have become the dominant type of relief offered in California by the big banks, according to a report on the settlement expected to be made public Monday.
Under the settlement, banks were required to give homeowners aid in the form of principal reduction, short sales and other modifications. Banks get credit for both principal reductions and short sales under the agreement, but must give 60% of the relief nationally through principal reduction to families who keep their homes. Consumer advocates had hoped the deal would serve as a test case for widespread principal reduction, particularly in the hardest-hit parts of California.
Short sales should be reserved for homeowners who couldn't afford to live in a home even with a lower principal or for people who need to move, said UC Irvine law professor Katherine Porter, who was appointed by the state attorney general's office to monitor the deal.
"I am pushing hard to make sure that … short sales are being used for families for whom other options are really not available," Porter said.
Porter's assessment is expected to coincide with another report, also expected Monday, by the monitor of the national settlement. The nation's biggest banks this year signed a landmark $25-billion mortgage settlement with 49 of the nation's state attorneys general and certain federal agencies. The settlement arose from revelations that banks improperly foreclosed on homes. It led to major servicing reforms, including requiring banks to offer a single contact for troubled borrowers and the restricting of dual tracking, in which banks pursue foreclosures and loan modifications simultaneously.
The preponderance of short sales in California may change, Porter said, as banks begin delivering other types of mandated relief, namely principal reduction. In California, the three biggest mortgage servicers — Wells Fargo & Co., Bank of America Corp. and JPMorgan Chase & Co. — promised to contribute $12 billion worth of homeowner aid. Bank of America is on the hook for the biggest portion of that agreement, $8 billion.
Through Sept. 30, the three banks had provided $8.4 billion, according to data from Porter's office, putting them well on track to fulfill their obligations. About 68% of that money went toward providing short sales for homeowners. Principal reductions on first and second mortgages made up the rest of the California aid.
"I am a little surprised that the percentage for short sales are still high," said Kevin Stein, associate director of the housing advocacy group California Reinvestment Coalition. "Our hope and expectation was that principal reduction for first lien loans would be the bulk of it."
Porter's report raises concern that Chase's aid, most of which came through short sales, did not reach enough of the state's hardest-hit counties. In an interview, Porter said she believed some of the families who received a short sale may have preferred principal reduction.
"We are committed to keeping people in their homes," Chase spokeswoman Amy M. Bonitatibus said. "When that's not possible, a short sale is a better solution for the family and the neighborhood than a foreclosure."
The majority of the state report concerns efforts by Bank of America.
The report notes that the bank will receive credit for $682 million in principal reduction or forgiveness on first mortgages. Banks get extra credit if they reach homeowners in certain hard-hit counties within the first year of the settlement. The bank has also written down $794 million in second mortgages in the state. But BofA has given out far more aid in the form of short sales — about $3.4 billion in California. As the bank moves forward, it will extend more principal reduction, bank spokesman Dan B. Frahm said.
By signing on to the settlement, California waived a litany of allegations it could have brought against the banks, including unfair or deceptive business practices and violations of general consumer protection statutes that applied to wrongdoing in the loan modification and foreclosure process. California retained some allegations that other states gave up, including fair-lending cases.
If the banks don't fulfill the $12-billion guarantee, they will have to make cash payments of as much as $800 million directly to the state, a provision that is enforceable in California court, instead of federal court in Washington, where the rest of the deal is covered.