The sweetheart foreclosure deal that is drawing the ire of onlookers is now being understood to give banks credit for things they already do, further deepening the worry that the deal will in no way prevent another foreclosure crisis or sufficiently reprimand those responsible for the last one.
The $25 billion foreclosure abuse settlement between the government and five major banks announced last month denotes $17 billion in assistance to borrowers who have the intent and ability to stay in their homes. However, language in the settlement will allow for spending in areas that will not stop foreclosures, some of which is already common practice:
For example, the banks can wipe out more than $2 billion of their obligation by donating or demolishing abandoned houses. Almost $1 billion can be used to help families that have already defaulted move out.
“The $17 billion is supposed to be the teeth of this settlement,” said Neil M. Barofsky, the former inspector general for the Treasury’s bank bailout fund known as the Troubled Asset Relief Program. “And yet they are getting all this credit for practices that they do every day.”
Only 60 percent of the $17 billion designated for borrowers, or $10.2 billion, must be used to reduce principal for borrowers who owe more on their mortgages than their homes are worth — though banks can do more if they choose.
In some cases that money can be used for bulldozing homes instead of saving them. In the interest of cutting down foreclosure’s frequent legal limbo and eliminating hazards that depress property values, some banks favor knocking over houses rather than helping people stay in them.
Patrick Madigan, an assistant attorney general in Iowa who was instrumental in constructing the agreement. Just because the banks are doing some of those things already, he said, does not mean they are doing them enough.
“There are lots of ways to help homeowners and helping a person stay in their home is the primary one, but it’s not the only one,” Mr. Madigan said. “There are all kinds of damage that is done by inadequate loan servicing. And it’s not just the people who live in those homes, it’s also their neighbors — that’s the really insidious thing about foreclosures.”
Experts say the settlement will be ineffective because of its bank-friendly language.
But the problem, say some academics and former regulators, is that the settlement has less bite than advertised.
“It accomplishes remarkably little in the form of real relief for homeowners because it gives the banks credit for far too much,” said Adam J. Levitin, a law professor at Georgetown.
One example of credit for business as usual is the provision allowing banks to satisfy $1.7 billion of their obligations for waiving “deficiency judgments,” the amount a borrower still owes if a house in foreclosure is sold for less than the remaining mortgage debt. Banks are permitted to go after homeowners to recover the shortfall in 41 states.
But some foreclosure defense lawyers say that the five major banks included in the settlement virtually never go after homeowners for that type of debt. Ally Financial does not pursue deficiency judgments at all, according to Gina Proia, a spokeswoman for the bank. Other banks declined to disclose their policies.
But last month, Bank of America let Marcos Triana walk away from the $140,303 debt he owed after he lost his home in Winter Haven, Fla. Mr. Triana, a 36-year-old fiber-optic technician, could not catch up on his mortgage payments after his wife’s business was torpedoed by the recession. “I was really happy to just be able to get this off my head,” Mr. Triana said.
In a case like this, Bank of America could claim $14,000 in credit, or 10 cents for every dollar of debt waived.
Perhaps most disheartening in this entire scenario is that banks are offering up large numbers of properties for donation or demolition with no regard for the impact on homeowners.
Under the settlement’s antiblight provisions, banks get credit for donating, demolishing or forgiving debt on abandoned homes, the last of which is intended to encourage the owner to return. They receive 100 cents on the dollar for each demolition and donation and 50 cents for debt forgiveness.
JPMorgan Chase has donated roughly 3,300 homes to nonprofits or municipalities since 2009, according to a bank spokesman. Last year, Citibank donated 205 properties, and Bank of America agreed to pay for the demolition of 100 abandoned homes in Cleveland, 100 in Detroit and 150 in Chicago. William K. Black, a law professor at University of Missouri and former senior deputy chief counsel at the Office of Thrift Supervision, said he worried that banks might overstate the fair market price of the homes donated.
The credits over all, Mr. Black said, “are a pretty sweet deal for banks since it gives them a pat on the back for what they are already doing.”