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</o:shapelayout></xml><![endif]--></head><body lang=EN-US link=blue vlink=purple><div class=WordSection1><p class=MsoNormal style='margin-bottom:12.0pt'><a href="http://www.nytimes.com/2013/02/18/opinion/the-second-mortgage-shell-game.html?ref=todayspaper">http://www.nytimes.com/2013/02/18/opinion/the-second-mortgage-shell-game.html?ref=todayspaper</a><o:p></o:p></p><div id=article><div><h1><span style='font-family:"Georgia","serif"'>The Second-Mortgage Shell Game<o:p></o:p></span></h1><p><span style='font-size:14.0pt'>I<span style='color:black'>n</span> January, federal regulators announced an $8.5 billion <a href="http://www.federalreserve.gov/newsevents/press/bcreg/20130107a.htm" title="Board of Governors of the Federal Reserve System, Jan. 7, 2013 press release">agreement</a> with 10 mortgage servicers to settle claims of foreclosure abuses, including bungled loan modifications and the wrongful evictions of borrowers who were either current on their payments or making reduced monthly payments. <o:p></o:p></span></p><p><span style='font-size:14.0pt'>Under the deal, announced by the Federal Reserve and the Office of the Comptroller of the Currency, the mortgage servicers will pay $3.3 billion to borrowers who went through foreclosure in 2009 and 2010 and an additional $5.2 billion to reduce the principal or the monthly payments of borrowers in danger of losing their homes. <o:p></o:p></span></p><p><span style='font-size:14.0pt'>Those numbers might look impressive, but the deal is far too modest to be a credible deterrent to reckless foreclosure practices. <o:p></o:p></span></p><p><span style='font-size:14.0pt'>Consider the last big mortgage settlement. Last February, the federal government and 49 state attorneys general reached a <a href="http://www.nytimes.com/2012/02/09/business/states-negotiate-25-billion-deal-for-homeowners.html">$25 billion deal</a> with the country’s five largest mortgage servicers — Bank of America, JPMorgan Chase, Wells Fargo, Citibank and Ally Financial (formerly GMAC). They promised to help <a href="http://www.ag.ny.gov/press-release/ag-schneiderman-secures-136-million-struggling-new-york-homeowners-mortgage-servicing" title="NY Attorney General Eric T. Schneiderman, Feb. 9, 2012.">save homeowners</a> from unnecessary foreclosure. <o:p></o:p></span></p><p><span style='font-size:14.0pt'>A year later, it’s clear that the settlement hasn’t worked as planned. Banks have dragged their feet in modifying first mortgages, much less agreeing to forgive part of the principal on homes that are underwater. In fact, the deal contained a few flaws. It has allowed banks to push homeowners into short sales, an alternative to foreclosure whereby the distressed homeowner sells the property for less than the debt that is owed. Not all short sales are bad — some homeowners are happy to walk away with the debt cleared — but as a matter of social policy, the program has failed to keep people in their homes. <o:p></o:p></span></p><p><span style='font-size:14.0pt'>A lesser-known but equally grave problem is that banks have been given a backdoor mechanism to continue foreclosures at the same pace as before. <o:p></o:p></span></p><p><span style='font-size:14.0pt'>The problem involves <a href="http://furmancenter.org/files/publications/Essay_Sticky_Seconds_--_The_Problems_Second_Liens_Pose_to_the_Resolution_of_Distressed_Mortgages.pdf" title="Link to Furman Center essay on second mortgages, Aug. 2012">second mortgages</a>, which millions of homeowners took out during the housing bubble. It’s estimated that as much as a quarter of all mortgage debt in the United States is in the form of second mortgages. Some of these loans were taken out to finance home improvements; others were part of a subprime product known as an “80/20 mortgage,” in which 80 percent of the purchase price was covered by a first, adjustable-rate mortgage, and the remainder by a second mortgage, often with a much higher interest rate. <o:p></o:p></span></p><p><span style='font-size:14.0pt'>The second mortgages have given the banks a loophole: each dollar a bank forgives goes toward fulfilling its obligation under last year’s settlement. But many lenders have made it a point to almost exclusively modify secondary loans while all but ignoring the troubled, larger primary mortgages. <o:p></o:p></span></p><p><span style='font-size:14.0pt'>It’s a real problem: when it comes to keeping your home, it’s the first mortgage that counts. <o:p></o:p></span></p><p><span style='font-size:14.0pt'>Take Tiberio Toro, a Queens resident who took out an 80/20 mortgage in 2006 when he purchased his home, and who now owes far more to the bank than his house is currently worth. Recently, Wells Fargo told him that it completely forgave his second loan. But at the same time, it declined to modify his first mortgage — an adjustment Mr. Toro needs to get his monthly payment to a level he can afford. <o:p></o:p></span></p><p><span style='font-size:14.0pt'>Why would a bank forgive a second mortgage completely but move forward with foreclosure on the first mortgage? <o:p></o:p></span></p><p><span style='font-size:14.0pt'>Surprisingly, such a tactic often makes sense for banks. When a lender forecloses on a first mortgage, the house in question is typically sold at auction. If the house is worth less than the loan amount, the bank gets only part of its money back. But after the sale, of course, there’s no asset left to pay off <em>any </em>of the second loan. The holder of that second loan — which has lower priority than the holder of the first — gets nothing. <o:p></o:p></span></p><p><span style='font-size:14.0pt'>So a lender can forgive a second mortgage — which in the event of foreclosure would be worthless anyway — and under the settlement claim credits for “modifying” the mortgage, while at the same time it or another bank forecloses on the first loan. The upshot, of course, is that the people the settlement was designed to protect keep losing their homes. <o:p></o:p></span></p><p><span style='font-size:14.0pt'>The five banks covered under last year’s settlement are wiping out second mortgages in record numbers. In New York State, for example, during the first six months of the settlement period, three times as many homeowners received <a href="https://www.mortgageoversight.com/wp-content/uploads/2012/11/Continued-Progress_11.19.12.pdf" title="Office of Mortgage Settlement Oversight, Nov. 19, 2012">second-mortgage forgiveness</a> (2,933) as received permanent modifications on first mortgages (967). <o:p></o:p></span></p><p><span style='font-size:14.0pt'>In New York State, 36.2 percent of the banks’ credits under the settlement have been related to second loans, compared with only 18.2 percent for first mortgages. <o:p></o:p></span></p><p><span style='font-size:14.0pt'>In 2011, the five banks that are subject to last year’s settlement sent 230,678 pre-foreclosure notices to New York State homeowners, according to data I obtained from the Finance Department through the Freedom of Information Law. <o:p></o:p></span></p><p><span style='font-size:14.0pt'>As is well known, many of those at greatest risk of losing their homes are African-American or Latino. Under the settlement, banks get more credit for forgiving mortgages that they own (“portfolio loans”) than those they sold to Wall Street and currently only service. These portfolio loans are largely conventional loans; those sold to Wall Street were subprime. It was these notorious subprime loans that were <a href="http://cityroom.blogs.nytimes.com/2007/10/15/subprime-mortgages-concentrated-in-citys-minority-neighborhoods/" title="The New York Times, Oct. 15, 2007">marketed</a>, often through <a href="http://www.nytimes.com/2012/10/15/business/aclu-to-sue-morgan-stanley-over-mortgage-loans.html" title="The New York Times, Oct. 15, 2012">predatory lending</a> practices, to <a href="http://www.nytimes.com/2012/07/13/business/wells-fargo-to-settle-mortgage-discrimination-charges.html" title="The New York Times, July 12, 2012">black and Latino borrowers</a> during the housing bubble. <o:p></o:p></span></p><p><span style='font-size:14.0pt'>There is a lesson to be learned from the deficiencies of the National Mortgage Settlement. And the new deal reached by the Fed and the comptroller of the currency provides an opportunity to get right what the 49 attorneys general got wrong. At a Senate Banking Committee hearing on Thursday, Senator Elizabeth Warren, Democrat of Massachusetts, called on regulators to take tough enforcement actions and not settle for negotiated agreements with banks. <o:p></o:p></span></p><p><span style='font-size:14.0pt'>To do that, the government must clearly require that relief be given in the form of first-mortgage modifications. In addition, the settlement should direct the banks to provide relief in the ZIP codes hardest hit by predatory lending. <o:p></o:p></span></p><p><span style='font-size:14.0pt'>Finally, we need real transparency to monitor the new settlement. That means that the public should easily be able to determine who is getting relief, and how. Until that’s done, as we’ve seen, banks are likely to keep playing the same old shell game. <o:p></o:p></span></p><p><span style='font-size:11.5pt;font-family:"Calibri","sans-serif";color:black'><o:p> </o:p></span></p><div><p><i><span style='font-size:14.0pt'>Elizabeth M. Lynch is a lawyer at <a href="http://www.mfy.org/about/about-mfy/">MFY Legal Services</a>, a New York City organization that provides free civil legal aid. <o:p></o:p></span></i></p></div></div></div><div><p class=MsoNormal><br><br>Sent from my iPad<o:p></o:p></p></div></div></body></html>