Just when it seemed that this country's home-foreclosure crisis couldn't get any worse, Bank of America made a stunning announcement on Oct. 1: The nation's largest consumer bank was halting foreclosures altogether in 23 states (later expanded to 50) after reports came out that it and other banks had "robo-signed" thousands of affidavits confirming that they had the legal right to foreclose on homes, without actually reviewing the paperwork. JPMorgan Chase and Ally Financial's GMAC Mortgage followed in the footsteps of Bank of Ameria with their own freezes, out of fear that homeowners might have been foreclosed on improperly, and states launched probes into fraud by mortgage companies.
A week later, the debacle led President Barack Obama to refuse to sign a bill quietly passed by Congress that would have made it easier for improper foreclosures to go through. However, his administration refused to go as far as calling for a nationwide moratorium on all foreclosures, as some consumer advocates have called for. Meanwhile, less than three weeks after its original announcement, B of A claims that it has already reviewed 102,000 foreclosures and is set to go back to seizing and selling off properties on Oct. 25. U.S. Department of Housing and Urban Development Secretary Shaun Donovan said this week that the government won't interfere with B of A's decision. What gives?
Given that home foreclosures disproportionately affect blacks, who were more likely than whites to be given subprime loans regardless of income or credit scores, The Root decided to put that question to the nation's top housing official. Donovan shared his reasoning with us in an interview that also covered the government's efforts to revitalize communities hit hardest by foreclosures, and his rationale for saying earlier this week that you "can't save every neighborhood" in Detroit devastated by the economic downturn.
The Root: You have called for a comprehensive review of the foreclosure crisis. What will that entail?
Shaun Donovan: Just to be clear, this is a review that has been going on long before these recent issues that have come up with affidavits and whether people are being wrongly foreclosed on. Broadly, we're coordinating 10 different federal agencies that are looking at a range of problems that have been raised in servicing the foreclosure process and particularly whether loan servicers and bankers are doing enough to keep people in their homes. … Those agencies include the Justice Department, which is coordinating the fraud task force.
The president, right when he came into office, set up the most comprehensive effort that any president has set up to go after fraud in the mortgage process. We've done a lot of work before around these scam artists who were making these bad loans in minority communities. They're now coming back and claiming they're going to help people out of foreclosure. … That same task force is now looking at whether there was fraud in the foreclosure process itself by some of these banks or some of the contractors they hired.
At FHA (which is part of HUD), we are in fact an incredibly important source of financing nationally, but particularly for minorities and minority communities. To give you a sense of that, last year 60 percent of all African Americans who bought homes used FHA financing. … That will tell you very clearly that we need to make sure FHA lenders are doing right by homeowners. We require them early on in the process, if somebody goes delinquent, to reach out to that homeowner, to follow a set of specific steps, and give them a set of options to be able to stay in their home and choose the one that makes the most sense for that homeowner. We call it loss mitigation, and we have very clear standards about that. Right when the president came into office, what we realized was that the prior administration wasn't doing any checking on those loan servicers to make sure that they were following our requirements around keeping people in their home.
We put together a comprehensive report, and what we saw was, while some servicers were doing what we required of them, there were others that had far fewer efforts to keep people in their homes; so we started, last May, an in-depth review of our five largest servicers. That review is just about complete. What we're finding is substantial differences across servicers. Our next step is to present those findings to the banks, to give them due process to respond to us, but then to go to the next step, which is to enforce against them [which includes bringing] fines.
TR: That being said, you have declined to call for a nationwide moratorium on foreclosures, saying there are no "structural problems" to the system that would warrant it. What would it take for you to call for a nationwide moratorium?
More importantly … we have many African Americans waiting to buy [foreclosed] homes, and they're in communities that have been particularly hard hit by foreclosures, many using FHA financing. [If you freeze foreclosures] those homeowners are now in limbo and basically waiting for this to be resolved so they can buy a home. Many of these homes are vacant by the time they get to foreclosure. … If you stopped this process everywhere in the country, what you would see is vacant homes sitting in those communities, continuing to drag down everyone's property values.
The president has put $7 billion into buying up and renovating foreclosed homes so that we can help minority communities start to recover, and there's the risk that if we're stopping the process, even where no problems have been found, that we're going to hurt the very communities that we're trying to help.
The moratorium that has been proposed is focused on the very end of the process, the affidavit process. Once a foreclosure is complete, the last step is to go into court in these 23 states where they have judicial foreclosures, and this affidavit is presented to the court as a final review document to say, here's what we've found. If there are problems with that affidavit, it's shameful. Absolutely they should be stopping those processes; but where there aren't problems, what we've seen starting to happen is that loan servicers are shifting [workers] … to the back end of the [foreclosure] process to do reviews of the affidavit process. Because it's so late in the process, many of the homes are vacant at that point. It's much less likely that you're going to catch somebody and save them from foreclosure.
I think there are real consequences of having a one-size-fits-all approach, because then we've hurt African-American homeowners and African-American communities, and what we should be focusing on is holding folks accountable. If servicers and banks are foreclosing on people, they shouldn't be. We're going to bring the full force of the law to make sure that we not only correct it, but help those homeowners and get them consultation. We also ought to be making sure that we're doing everything we can for those who haven't yet been foreclosed on to keep them in their homes.
TR: Bank of America has gone back to foreclosing on homes. Are you confident that they've done everything they can in the short period of time to review all of the documents? How big do you think the problem of improper foreclosures actually is?
SD: Look, even a single person losing their home because of faulty paperwork is shameful. If banks expect homeowners to make their payments, homeowners should expect banks to live up to their responsibilities as well. It's a serious problem no matter what scale it is.
Any of these institutions, Bank of America or whoever, they have decisions they have to make. What I will tell you is this administration is going to hold them accountable. This is why we're cooperating closely with the states' attorney generals. All of these foreclosure processes are state processes, done under state law, and working with the states' attorney generals, we have the ability to hold every bank accountable to follow the right process to doing these foreclosures. That's why we've done the comprehensive review that I talked about, working with the 10 different agencies and the states' attorney generals. We're going to get to the bottom of this quickly. … We're not just going to take the banks' word for it. We're going to ensure that they're doing this right, and if they're not, there are going to be consequences.
SD: It's so important. The day that President Obama walked into the Oval Office, we already had housing prices dropping for 30 straight months, millions of foreclosures, and the biggest effort that the last administration had undertaken had helped a few hundred homeowners. … While I'm not satisfied the banks are doing enough, and we're going to keep pushing them to do more, we have made real progress.
There have been almost 3.5 million families around the country who have gotten [loan] modifications since April of last year, and on average those families are saving $500 a month, and foreclosure starts are down about 30 percent. The other thing I would point out is that while housing prices had been dropping for 30 straight months before the president came into office, we have now seen American homeowners' home equity grow by over a trillion dollars since April of last year. That's $14,000 a year, on average, for homeowners across the country. If you look at African Americans, because a larger share of their wealth has been tied up in their homes [and] because they were targeted by subprime lenders, they've gained more, on average, than [other] American homeowners from this reversal in the decline in home equity.
We recognize that at the same time we try to stop foreclosures, we also need to make sure we're doing something about communities where there have been lots of foreclosures already. So with $7 billion in Neighborhood Stabilization funding, what we're beginning to see in communities where it is being used most effectively is pretty dramatic results. We've seen communities where [foreclosure] vacancies have dropped, since the president came into office, by 50 to 75 percent.
I visited with Mayor Anthony Foxx in Charlotte [N.C.] and went to see an African-American neighborhood. It was a relatively new subdivision of about 85 homes. Half of all the homes had been in foreclosure two years ago. Today, by working closely with Mayor Foxx and Habitat for Humanity, through Neighborhood Stabilization, we've directly helped 13 homes in that subdivision be purchased, renovated and sold to African Americans who were first-time home buyers. Because of that investment, we've now seen private capital come in and other homeowners who are willing to come in and start buying. So that neighborhood is dramatically different today from what it was two years ago due to Neighborhood Stabilization.
TR: You recently backed the efforts of Detroit's Mayor Dave Bing to downsize the city, saying one "can't save every neighborhood." What did you mean by that?
SD: This is exactly what we've seen in Neighborhood Stabilization. Let's say you have a city that has been particularly hard hit, and if you take Neighborhood Stabilization and you do one home in every neighborhood, it's going to be very hard to have a significant impact. So what we've been working on with communities around the country is to target funding and concentrate it in the neighborhoods that have been hardest hit. By doing that, you're much more likely to be able to have a significant impact and to turn around those communities.
Political imperatives typically can end up having the impact of spreading money around on every block in every community, in such a way that it makes it much harder to have a lasting impact. Those are often difficult decisions on how to target [the money]. It takes real leadership to do that, and we want to support neighborhoods around the country through Neighborhood Stabilization dollars and, in doing that, make sure we are reaching the communities that have been hardest hit.
TR: You mentioned the loan-modification program, which has had some fits and starts. If you had it to do all over again, what would you have done differently from the beginning?
SD: Look, it's just the largest effort of its kind that has ever been tried. We've reached almost 1.4 million homeowners with trial modifications — about half a million of those are permanent now. There's no question that I'm not satisfied with the performance of banks under the program, but we should also recognize that we've helped a lot of people, and we've begun to change the landscape out there.
In terms of lessons learned, one of the things that is absolutely critical — and it's been confirmed by our experience — is that counseling is a critical part of making sure we help African Americans keep their homes, and help African-American communities. We fund HUD-approved housing counselors around the country. We've worked very closely with the Urban League and a range of others to make sure we have a strong set of housing counselors in African-American communities. What we're seeing is that it can make a big difference. … By having a housing counselor to help them, it's much more likely that [the borrower] will get a loan modification.
You know that it's a very tough budget environment out there. Despite that, the president asked for and got from Congress a one-third increase in our housing-counseling funding this year. And that is a critical lifeline to make sure we're reaching African-American borrowers and homeowners, and we're keeping them in their homes.
Sheryl Huggins Salomon is deputy editor of The Root.
Sheryl Huggins Salomon is senior editor-at-large of The Root and a Brooklyn, N.Y.-based editorial consultant. Follow her on Twitter.