Banks Find More Wrongful Foreclosures Among Military Members
By JESSICA SILVER-GREENBERG and BEN PROTESS
The
nation’s biggest banks wrongfully foreclosed on more than 700 military
members during the housing crisis and seized homes from roughly two
dozen other borrowers who were current on their mortgage payments,
findings that eclipse earlier estimates of the improper evictions.
Bank of America, Citigroup, JPMorgan Chase and Wells Fargo uncovered the foreclosures while analyzing mortgages as part of a multibillion-dollar settlement deal
with federal authorities, according to people with direct knowledge of
the findings. In January, regulators ordered the banks to identify
military members and other borrowers who were evicted in violation of
federal law.
The analysis, which was turned over to regulators in
recent days, provides the first detailed glimpse into the extent of
wrongful foreclosures amid the collapse of the housing market. While
lenders previously acknowledged that they relied on faulty documents to
push through foreclosures, the banks claimed borrowers were rarely
evicted by mistake, including military personnel protected by federal
law.
That
thesis, which underpinned the government’s response to the financial
crisis, helps explain why homeowners languished for years without
relief. The revelations of more pervasive harm could provide fresh
ammunition for Wall Street critics and prompt regulators to adopt a
tougher stance.
Housing advocates say the findings also underscore
the broader flaws with the settlement. In the latest negotiations,
according to people briefed on the talks, the banks secured favorable
terms for doling out some aid, a deal that could diminish the relief to
homeowners.
Dan Petegorsky, national outreach manager with an
advocacy group, the Campaign for a Fair Settlement, described the terms
as a “step backwards” for homeowners.
“Our initial reaction was stunned disbelief,” he said.
Complaints
that active military personnel and National Guard members were losing
their homes while deployed in war zones set off national outrage and
prompted Congressional hearings in 2011. The case of Sgt. James B. Hurley,
a disabled veteran whose home outside Hartford, Mich., was sold two
months before he returned from Iraq, dragged through the courts for
years, highlighting the devastating effect of foreclosures.
In
2011, JPMorgan settled claims that it inappropriately foreclosed on 18
military service members and overcharged 6,000. Bank of America and
Morgan Stanley also struck a pact with the Justice Department to settle
claims they foreclosed on 178 military members between 2006 and 2009.
Sergeant Hurley has since reached a settlement with Deutsche Bank in his
case.
But the problems are more extensive than the wave of cases indicated.
When
regulators forced them to take a close look at their loans, JPMorgan,
Wells Fargo and Bank of America, the largest loan servicers, each
discovered about 200 military members whose homes were wrongfully
foreclosed on in 2009 and 2010, according to the people with direct
knowledge of the findings. Citigroup had at least 100 such foreclosures.
The foreclosures violate the Servicemembers Civil Relief Act, a federal law requiring banks to obtain court orders before foreclosing on active-duty members.
“It’s
absolutely devastating to be 7,000 miles from your home fighting for
this country and get a message that your family is being evicted,” said
Col. John S. Odom Jr., a retired Air Force lawyer in Shreveport, La.,
who represents military members in foreclosure cases. “We have been
sounding the alarms that the banks are illegally evicting the very men
and women who are out there fighting for this country. This is a
devastating confirmation of that.”
The banks note that the
wrongful evictions make up a fraction of the foreclosures under review.
Bank of America analyzed more than 1.2 million loans, and JPMorgan
assessed roughly 900,000.
The banks also said they had taken steps
to protect service members. “Wells Fargo is honored to serve the needs
of the men and women who defend our country, we take our
responsibilities under the Servicemembers Civil Relief Act very
seriously and we regret any hardship that has been caused,“ said Vickee
Adams, a bank spokeswoman.
A spokeswoman for JPMorgan, Kristin
Lemkau, said the bank had instituted “very generous programs for the
military, including awarding homes, forgiving principal and hiring more
than 5,000 veterans.”
“We have remediated these errors and plan to appropriately compensate anyone whom we made a mistake with,” Ms. Lemkau said.
A
spokesman for Citigroup, Sean Kevelighan, said that the bank was
committed to meeting its obligations to military personnel, “in many
cases going beyond the requirements of law.” He added: “We have taken
several measures to enhance our processes and are working with our
regulators to ensure they have the information they need to
appropriately address these issues and provide restitution for those
affected.”
Other types of borrowers have been erroneously evicted, too.
The
banks uncovered about 20 borrowers who never missed a single mortgage
payment, but lost their homes nonetheless. The properties, according to
the people with direct knowledge of the findings, have since been sold.
The
banks also found a handful of foreclosures related to botched loan
modifications. In those cases, the people with direct knowledge said,
customers had successfully negotiated a permanently lower mortgage
payment, but the banks failed to honor those agreements.
Ms.
Adams, the Wells Fargo spokeswoman, said the bank identified only five
cases of foreclosure on borrowers “technically not in default.” She
noted, though, that the customers were “seriously delinquent” and the
problems may have been caused by mortgage payments made “close to the
scheduled foreclosure action.” Ms. Adams said in all but one case, “we
identified the issues ourselves in a timely manner and reversed them
immediately, so that the customers did not lose their homes.”
The revelation of wrongful foreclosures is the latest development in the long and tangled effort to clean up the mortgage mess.
In
2011, the Federal Reserve and Office of the Comptroller of the Currency
ordered the banks to hire independent consultants for a sweeping review
of foreclosures. The process of scanning loan files for flaws was
marred as some consultants farmed out work to contractors who had to
navigate a bureaucratic maze.
When problems emerged and relief was delayed, the regulators halted the review
in January, opting instead to strike a settlement with the banks. Under
the terms of the deal, banks will have to provide $3.6 billion in cash
and $5.7 billion worth of other assistance to 4.2 million homeowners.
At the time, regulators still did not have a full window into the flawed foreclosures.
When
the review was scuttled, consultants had identified scant instances in
which homeowners suffered wrongful foreclosures, according to
regulators. After completely reviewing just 104,000 loans, consultants
discovered errors in roughly 5 percent of the foreclosures, including
many smaller problems like excessive fees or failure to provide
sufficient notice before an eviction.
At the behest of regulators
in January, the banks combed through their foreclosures to spot the most
harmed borrowers. Using a complex model, they focused on military
members and homeowners who were current on their payments, along with
other illegal foreclosures.
The banks turned over the figures,
including those on the military members, to regulators last month. The
regulators have no plans to release the information publicly. The people
with direct knowledge cautioned that the numbers were not precise and
could underestimate the extent of the problems.
Rather than
further delay payments, regulators decided to spread the money among all
borrowers in the process. As a result, housing advocates say the most
aggrieved homeowners will most likely receive less money than they
deserve, while others will get unnecessary payouts.
Bank of
America, for example, will have to pay borrowers who were evicted for
running a methamphetamine lab, according to three people with direct
knowledge of the findings. People who lost second homes or fell behind
on payments will also collect checks, prompting some bank officials to
question the prudence of the payouts.
But regulators said they
were wary of taking additional time to assess individual loan files, a
process that would have delayed aid to everyone. The largest swath of
payments, the regulators said, will go to the most deserving borrowers
rather than extreme examples like drug dealers.
To help accelerate
the payments, regulators also gave the banks significant leeway in
handing out the $5.7 billion portion of the aid, potentially
undercutting the help to homeowners.
During negotiations late last
year, regulators declined to attach any conditions to the assistance.
The regulators, the people briefed on the matter said, were primarily
focused on extracting the $3.6 billion in cash relief.
Last month,
regulators pressed the banks to tighten the terms. But the banks
balked, the people said, objecting to the last-minute reversal.
Under
the settlement, banks receive credit for the size of the outstanding
loan balance, rather than the amount of actual assistance provided. For
example, if a bank cut a borrower’s $100,000 mortgage debt by $10,000,
the lender could then reduce its commitment under the settlement by
$100,000. In a previous foreclosure settlement, the banks received
credit only for the $10,000.