When five giant mortgage firms signed a landmark $25 billion mortgage settlement last year, officials hailed debt forgiveness as the primary strategy to preserve homeownership.
The banks hoped to avoid further enforcement action over widespread foreclosure abuses; federal regulators and state attorneys general aimed to prevent even more foreclosures. “This isn’t just about punishing banks for their irresponsible behavior,” Housing and Urban Development Secretary Shaun Donovan said. “It’s also about requiring them … to help homeowners stay in their homes.”
Advocates for borrowers took such comments to mean that the banks would prioritize debt write-downs on first mortgages, which banks resisted before the settlement. Now, with nearly all the promised relief handed out, it is clear that the banks had other ideas. The vast majority of the aid to borrowers, it turns out, came in the form of short sales and forgiveness of second mortgages. Just 20 percent of the aid doled out under the national settlement went to forgiveness of first-mortgage principal, the kind of help most likely to keep troubled borrowers in their homes. In terms of borrowers helped, just 15 percent of the total received first-mortgage forgiveness.
The five banks collectively delivered twice as much aid using short sales, in which owners sell their homes for less than the amount owed and move out, with the shortfall forgiven.
In all, the lenders sought credit for nearly $21 billion related to short sales and $15 billion related to second mortgages. That compares with $10.4 billion in write-downs on first mortgages.
Bank officials said the high volume of short sales in part reflected an enormous backlog of borrowers who, before the settlement was announced, already had failed to qualify for various loan modification programs. Other borrowers decided not to keep their homes, they said, for such reasons as divorce or a job offer in another city.
“The decision to pursue a short sale versus a retention option rests with the homeowner and not with the servicer,” Wells Fargo said in a statement released by Tom Goyda, a bank mortgage spokesman. Some foreclosure-prevention counselors and officials at advocacy groups nonetheless expressed disappointment that more first-mortgage debt was not eliminated.
“We all wish there had been more principal reduction, which is what is most helpful in keeping people in homes,” said Kevin Stein, associate director of the California Reinvestment Coalition, a 300-member alliance that lobbies on behalf of low-income and minority neighborhoods. Still, Stein said, the program set a good precedent, demonstrating that debt forgiveness can benefit lenders and borrowers alike without causing a wave of intentional defaults, as critics had warned.