This article first appeared in the St. Louis Beacon, Oct. 19, 2010 - Homeowner Craig McIntosh of St. Louis, who fought for more than a year to win a mortgage modification from his lender, isn't surprised by the latest twists and turns in the nation's foreclosure mess, as banks have come under fire for "robo-signing" thousands of documents without verifying their accuracy or authenticity.
"What I understand of this story is that, as with the modification programs, these companies were simply unprepared for the tidal wave of troubled mortgages they had to deal with. That they did it poorly is no surprise to one as unimpressed with American business ethics as I am," McIntosh says. "I'm pleased that the government and other watchers have drawn attention to this. We learn slowly and usually at some cost. This will be no different."
McIntosh considers himself very fortunate to have navigated the federal government's Home Affordable Modification Program, eventually cutting his monthly payments by $800 a month. He attributes his success to the fact that he is an educated consumer who was determined and kept meticulous records.
McIntosh has tall stacks of paperwork documenting 13 months of phone calls and correspondence with his bank. It is a case study in homeowner frustration: repeated requests for documents already submitted; contradictory notices, sometimes sent on the same date, assuring him that his modification was proceeding, on one hand, and threatening legal action on the other.
"I'm very lucky to have come out as well as I have," he says.
Last week's announcement by the state attorneys general that they were launching a joint investigation into the foreclosure filings of the nation's lenders -- and the decision by some banks to suspend foreclosures temporarily -- raised questions about the ultimate effect on financially struggling homeowners and the national housing market.
The story continued to unfold Monday as Bank of America, the nation's largest mortgage servicer, announced that it would resume foreclosure sales in the nation's 23 so-called judicial states, including Illinois, where foreclosures require a court process. In a statement, the bank said that it had started preparing affidavits in 102,000 foreclosure actions that are awaiting judgment and expects to resubmit them by Oct. 25.
The bank said it is continuing to review its process in the 27 non-judicial states, including Missouri.
"We anticipate, over the course of this pause, less than 30,000 foreclosure sales will have been delayed," the bank said. "As was the case for our judicial state review, our initial assessment findings show the basis for our foreclosure decisions is accurate."
In the second of a two-part series, the Beacon continues its look at the fallout on the housing market and options open to homeowners.
- Eric Madkins, senior housing director, Urban League of Metropolitan St. Louis
- Juli Niemann, a financial analyst who is executive vice president of Smith Moore and Company in St. Louis
- Kevin Cottrell, co-founder of Kelsey Cottrell Realty Group in Ballwin
- Rusty Reinoehl, a St. Louis attorney who represents homeowners in foreclosure case
Does this legal tangling suggest any real, lasting relief for homeowners facing foreclosure?
Despite the legal wrangling, homeowners trying to stave off foreclosure should remain active in negotiating with their lenders, said Madkins.
"I would definitely urge them not to become complacent at all," he said. "The Bank of America customer -- or any customers, regardless of their bank -- should, still continue with the process. Still contact their lender if they're having financial difficulties. Don't say that, 'OK, well, since the moratorium is on, I'm just going to wait.' "
Madkins, who has been counseling financially troubled homeowners since 2006, is not surprised by the rising foreclosure numbers; his office still gets 30 to 40 calls from new clients every week.
He urges homeowners to seek assistance through a HUD-certified housing counseling agency because the services are free.
"They're already going through hard times, they don't need to be paying an exorbitant fee like so many places charge," he said.
Madkins urges homeowners who haven't worked with a housing counselor to try that route even if their lenders have already denied their requests for a modification. Counselors have established networks they can tap into, including contacts with lenders, and in a worst-case scenario might help negotiate a "soft" landing for homeowners, such as a short sale or deed-in-lieu.
"We might be able to advocate for you," he said. "We know the formulas and the models and can make the case to the lender for you."
Madkins said it is too early to gauge the impact of the moratoriums or how long it will take to untangle all of the current legal challenges.
"We still don't know the enormity of the situation," he said.
In the meantime, the moratoriums may slow the foreclosure process in Missouri, a non-judicial state that has one of the quickest turnaround times in the nation, Madkins said.
Reinoehl suggests that homeowners in default talk to an attorney to see whether they have any legal options.
"The way I fight foreclosure is by attacking the chain of title of the loan itself," he said. "Basically the loan was sold through the Mortgage Electronic Registration Systems into securitization, and we really don't know who the holder of the note is. A lot of times you'll see that people had a Wells Fargo or a Bank of America loan, but it's often the servicer doing the foreclosing. But they are not the note-holder so they technically don't have the right to foreclose."
The cost of such a legal action depends largely on how much work it takes to unravel the mortgage's ownership history. A title report could provide enough information in simple cases, but more complex cases might require hiring experts to conduct forensic audits.
Reinoehl said that, in general, fighting foreclosure is more expensive in Missouri than in Illinois, which is a judicial state. In Missouri, the homeowner must sue the lenders and will shoulder the burden of proof. In Illinois, the homeowner is the defendant, and the lender must prove the case by showing proper documentation.
What does this mean for the housing market?
The fallout from the current legal tangles will not affect the St. Louis housing market to the same degree as other areas because foreclosures and short sales amount to less than 10 percent of local real estate listings, said Cottrell.
On the other hand, the effect could be huge on such markets as Las Vegas, or Orlando, Fla., Miami or Phoenix, where foreclosures account for 50 to 70 percent of the listings, he said.
Cottrell expects more of a psychological effect on the St. Louis market, with some homebuyers seeing foreclosures as less desirable alternatives.
"You have a shift in the psychology of buyers," he said. "They call us all the time interested in foreclosures. Then they come to find out they're in poor shape and don't want to pursue them. Now, they've got the stigma of potential title problems or not being able to close."
Cottrell said that short sales are increasing at a faster pace than foreclosures but are having most of their impact on home prices above $400,000 because there are fewer sales in that price range.
What are the long-term ramifications for the economy?
Madkins says that until the economy improves and people go back to work, he expects to see more homeowners at risk of defaulting on their mortgages.
"It's going to continue to be rough," he said. "When you have those two factors -- unemployment and housing -- it's going to be tough."
Niemann believes that banks will continue to be under pressure because of the numbers of bad loans they still have on their books -- and that they have yet to address the problem in an efficient manner.
"The Dow's moved ahead, but the financials aren't joining in the fun. There are many more bad loans coming down the pike. Are they staffing up to do this in an orderly fashion?" she said. "They're going to do this when they're forced to. The government has to force them to staff up, take the necessary precautions, organize the process, recognize the bad loans and do it in a systematic way."
Niemann believes that banks need to establish crisis teams to evaluate their foreclosed real estate, market it and then clear it from their books.
"The banks are so bad in processing this stuff, that the entrepreneurs can't get the houses -- they can't buy them. Banks have become their own worst enemy," she said.
In the meantime, Niemann says, the housing market will continue to suffer.
"People are only going to buy a house when the price is right, and they have the job they feel secure about. There's this huge inventory of unsold houses, both used and new on the market, which means housing prices are still going to go down, and this is a long trend," she said. "The bottom of the housing market has not been hit yet. Is it going to plunge? No. It's going to erode."
The U.S. economy is in a state of transition now that consumers have pulled back on their spending, she said.
"They were using their houses as an ATM machine -- home equity loans, refinancing, taking equity out. That's where they got their money to go spend, and that's how we got into this situation: too much debt, too much spending. Can the economy recover without being led by the consumer? Yes, it can, but it's not going to be robust," she said.
Cottrell said he expects to see downward pressure continue on housing prices for the next 12 to 18 months.
"It might only be 3 to 5 percent in the hardest hit areas, and a lot of areas will just be flat," he said. "Without any stimulus from the government, we'll see flat pricing, and if you're in those upper price points where the volumes of short sale properties are going up in numbers, then you're talking about a slow absorption rate, and we may see more than 5 percent in downward pricing."
Although housing has led the nation out of the economic doldrums in recent years, Cottrell is looking for job growth to inspire consumer confidence this time around.
"You can't buy a house without a job," he said. "I think in this case it's going to have to be led by private sector job growth. People will feel a lot more confident when they start hearing about hiring and economic growth in jobs."
Cottrell doesn't see the situation getting appreciably worse, unless there is a huge dip in the economy.
"Until we get private sector job creation, we're going to be stuck in this sort of bouncing along the bottom," he said.
