Journalism in the Public Interest

As Foreclosure Crisis Drags On, So Does Flawed Government Response

A look at the government’s response as the foreclosure crisis enters its seventh year.

At ProPublica, we're tracking whether the government is keeping its promises about compensating victims of the foreclosure crisis. (File, David Zalubowski/AP Photo)

As the sixth year of the foreclosure crisis comes to an end, the percentage of loans in foreclosure remains a staggering eight times higher than it was in 2005. About 5.3 million homeowners — about 11 percent of all borrowers — are behind on their payments.

But 2012 was also the year that home prices hit a bottom and have started to very slowly climb. The number of new homeowners falling behind on their payments has dropped substantially since the peak. The government also took a dramatic step: a $25 billion settlement with the five biggest mortgage servicers.

Earlier this year, ProPublica focused on one homeowner — Sheila Ramos, who lost her home in Florida and ended up living in a tent in Hawaii — to pull together all the threads of the crisis and give readers a single story that explains the causes of the crisis, the bumbling response by the big banks and Washington, and the human toll exacted by the whole debacle. It is also available as a Kindle Single, which includes extra material.

We've also been keeping a close watch on whether the government is keeping its promises about compensating victims of the crisis.

The largest program is a review overseen by federal regulators covering more than 4 million loans. It launched back in 2011, but as of mid-December, no homeowner had received any compensation. Office of the Comptroller of the Currency spokesman Bryan Hubbard said regulators had been "working toward beginning compensation for a limited number of people [this month] with reviews and remediation continuing through 2013."

The program — called the Independent Foreclosure Review — has been beset with questions about its fairness, transparency and integrity since it launched. At least partly due to those problems, many borrowers aren't even bothering to apply for compensation. As of November, only 315,000 borrowers have sent in forms requesting to be reviewed, according to the OCC's Hubbard, about seven percent of people eligible to apply. The final deadline to apply is at the end of this month.

Federal regulators designed the program to work like this: Each of the banks would hire an "independent consultant" (approved by the regulator) to conduct reviews of the bank's foreclosure cases. The bank was supposed to foot the bill, but the consultant, not the bank, was supposed to decide which of the bank's customers deserved compensation and how much.

But ProPublica has revealed evidence that the banks themselves are heavily involved in the reviews, calling their independence and integrity into question. After our story about Bank of America's involvement in its review, the bank and its consultant changed their review process. Bank of America also engineered a de facto appeals process; if the consultant decided a BofA customer deserved compensation, the bank could provide more information that it wasn't at fault. Borrowers have no such ability to appeal.

To lead its role in the review, JPMorgan Chase installed an executive named by the Justice Department for allegedly facilitating a scheme to defraud Fannie Mae and Freddie Mac. She declined to comment for our story.

In a telling irony, it seems likely the review will end up steering far more money toward the consulting companies hired by the banks than will go to harmed homeowners.

Finally, some banks have been shockingly slow to begin their reviews. Regulators have ordered Goldman Sachs and Morgan Stanley to conduct reviews of their former mortgage servicing subsidiaries, for instance, but they still haven't begun. The process covers loans that were in foreclosure in 2009 or 2010, but the review won't get going until at least 2013. That seems likely to further deter harmed borrowers from applying for compensation.

A Federal Reserve spokesperson said a company, Navigant Consulting, had been selected to conduct the review for both servicers, but the contracts had not been finalized. It's unclear when the review would begin.

The government's other big reaction to the foreclosure crisis, the National Mortgage Settlement, has also had its disappointments. The deal involved 49 states, the federal government, and the five largest mortgage servicers. The headline number was $25 billion, but only $5 billion of that is actually cash that the big banks would pay out. The other $20 billion is composed of "credits," awarded when the banks take steps to avoid foreclosures, for instance by offering loan modifications that cut the amount homeowners owe.

Of the cash, half — $2.5 billion — was to go to states to address the foreclosure crisis. But as we've reported, almost $1 billion of that is actually being used to patch state's ailing budgets. (See our state-by-state breakdown here.)

$1.5 billion will be sent to borrowers who lost their homes to foreclosure, with each borrower receiving only about $1,000-$2,000. That process has finally gotten underway, and the deadline for borrowers to make a claim to receive that payment is early next year. (See more info about this in our FAQ.)

As for the $20 billion in credits, the banks appear to be in the process of fulfilling those obligations, but there are plenty of questions about how much good it's doing. Some credits are for actions banks were taking already (like demolishing abandoned homes). And although government officials touted the agreement as a way to boost the number of modifications that reduced borrowers' debts, much of the banks' activity hasn't focused on keeping borrowers in their homes. Rather, the number of short sales — an agreement by the bank to sell the home for less than the amount owed — has been far higher.

As the foreclosure crisis and the government's sputtering response enter their seventh year, ProPublica will be keeping watch.

Wonderful, Paul.
Just wonderful work.
You are a marvel, a gift.
Without you, this entire fiasco would be largely hidden by the bailed-out banks that got their money instantly. All the while deriding us - their customers - as deadbeats conniving for ‘free houses’ and so on.

So we wait and scamble for….$1,000. At most.
Or not.
{If we are lucky and survive the $BAC internal appeals process.}
This experience has turned me from a healthy skeptic to a bitter cynic.
Watching two presidents and their GS henchmen open the Treasury to banks while ignoring the plunder of homeowner worth has been a new low for me, and a memorable one.
Thanks for hanging in, Paul.
Good on ya.

Soon the people who chastise the foreclosed will be along- so for now I want to point out that since I bought a house in 06, I have put $300,000 into it, and now my equity is -$100,000. Fannie Mae owns it, and I own zero. So much for people wanting free houses.

Thank you Paul for your continued heartfelt reporting on what is not being reported by the mass media. It is very much appreciated. Thank you.


Jan. 1, 2013, 9:58 p.m.

Huge action on this story as reported by the NYT late Sunday night and then later on Huffington Post; seems the OCC is in settlement talks proposing $10 Billion for a blanket alternative to the OCC’s order of independent reviews.
As one of those bilked homeowners who went through the process spending considerable time, effort & treasure in submitting the request for a review, I’d like someone to tell me how it’s okay to move the goalposts in the middle of the game.  Especially when the reason given is it’s costing the banksters too much to comply.  Just when the hell is the government going to accomodate homeowners instead of crooks?

Here’s another bilked homeowner who also invested considerable time, energy, research and effort (never mind the financial outlay) preparing my first submission to the Independent Foreclosure Review, which included a couple of hundred pages of documentation to verify my claims of damages. I also submitted a lengthy second “supplemental” application, after having a discussion with a Russ Consulting employee who helped me understand that the original application needed to be organized according to a very specific format that was not revealed in the original application materials. Paul Kiel asked me to scan the documents and forward them to him, but I don’t have a scanner (have to cut corners somewhere) and, not sure if he would appreciate receiving a scan with over 500 sheets of documentation, exhibits and confidential financial information about myself. Here’s hoping the Office of the Comptroller doesn’t ditch the entire process. But then again, who knows what is left of my original exhibits - after Wells Fargo “reviewed” the file. I just want my state legislature to repeal the legislation they passed preventing distressed homeowners who lost their home through server errors and replace it with new legislation that will allow former distressed homeowners the right to sue the lenders who submitted fraudulent court documents, fraudulent affidavits and basically committed perjury and fraud against the courts, the now former homeowner, and society at large. Anyone in Washington State need memos from Freddie Mac directing servicers to file foreclosures in their name, not the name of the beneficiary? (RCW 61.24.005 requires the beneficiary of the loan to initiate the foreclosure, not a servicer posing as the beneficiary of the loan). Just do a google search for 2009 and 2010 Freddie Mac or Fannie Mae memos to loan servicers. And if that’s not enough to make you catch your breath, Wells Fargo alone received 21.6 billion in tax subsidies for 2011. Source for my data is the Center for Tax Justice. The U.S. Treasury, the Office of the Comptroller and the 49 Attorneys General owe us an explanation for what is happening.

Whoops. correction. I deleted part of a sentence regarding the state legislature. In 2010, under Washington state law, homeowners who lost their homes to a wrongful foreclosure had three years to file a lawsuit to recover damages in the event of fraud. In 2011,our thoughtful state legislature adopted legislation shortening the time to file a lawsuit to recover damages or possession of our homes to 2 years. It appears that campaign contributions from the banking industry are more important than allowing distressed homeowners recover damages for wrongful foreclosures. Every time I turn around, the banks are receiving additional gifts from government.

Thank you for sharing this post.
<a >Questdial</a>

Ronald Williams

Jan. 10, 2013, 12:11 p.m.

As a retired law enforcement officer I say this: allowing the banks to audit their own fraud is allowing a bank robber to investigage the bank robbery committed by the robber. The reason there has been no-one sent to prison in all of this is the fact that our investigative and prosecutorial agencies have stood idily by ignoring complaints made to them, while the higher government agencies play these mortgage service audit games. Not only is law enforcement more equipped and trained to investigate these mortgage servicer fraud complaints, by the nature of them, law enforcement should be the investigator.

This article is part of an ongoing investigation:
Foreclosure Crisis

Foreclosure Crisis: Banks and Government Fail Homeowners

Banks and the government have fallen short in helping homeowners in danger of foreclosure.

The Story So Far

Systemic failures at the country’s banks and mortgage servicers have exacerbated the most severe foreclosure crisis since the Great Depression, and government efforts to limit the damage have fallen short. ProPublica created an unrivaled database of homeowners who have faced foreclosure, opened a Facebook page to encourage homeowners to share their stories, wrote profiles of some of them, and incorporated their experiences into our reporting. We also provided a comprehensive rundown of the numbers behind the crisis.

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