Can the Mortgage Settlement Create a Path to Greater Equality in Homeownership?

Editor’s note: The National Council of La Raza, the National Urban League, and National CAPACD hosted an event,“The Attorneys General Settlement and Communities of Color: Exploring the Challenge and Promise of Principle Reduction,” Wednesday at New York University’s Constance Milstein Center in Washington, D.C. The following is a reflection on the event, the National Mortgage Settlement, and its impact on communities of color.

Judging by the audience’s response to the keynote speaker at Wednesday’s event, the implementation of the National Mortgage Settlement leaves a lot to be desired. The audience, in large part consisting of housing advocates from such diverse and reputable institutions as the Center for Responsible Lending and the National Urban League, enthusiastically engaged the speaker, whom many see as the public face of the settlement’s slow and unsatisfactory implementation process. The keynote speaker, Joseph Smith, the court-appointed monitor at the Office of Mortgage Settlement Oversight and the individual charged with fulfilling the expansive promises of the settlement, was met with tough questions from advocates whose daily work is the securing of fair mortgages for financially troubled families in their communities. Despite his defensive position, he took the criticisms generously, because, he explained, the very purpose of these events is not only to allow community stakeholders and housing advocates to hear about the progress of the settlement, but also to allow the monitor to hear from concerned community members about problems of implementation in the field. To this extent, the event was a success.

Yet the most forceful criticisms of the settlement’s implementation will not easily be addressed, and it remains to be seen whether the monitor will be able to deliver all that is expected of the settlement as a tool for fair housing policy. Indeed, the very reason Oklahoma, the only state whose attorney general declined to join the settlement, refused to participate in the settlement last year was because of its administration’s philosophical disagreements about the legitimacy of the federal government’s supposed overreach by regulating “through litigation instead of legislation.” Smith acknowledged this criticism, though by pointing out the deficiencies in litigation’s ability to reform, rather than by highlighting its potential for substantial impact on policy, as Oklahoma’s administration has done. He acknowledged that the relief available to individuals is limited under the terms of the settlement, and that the broader capacity to reform the entire mortgage industry is even more constrained. The settlement does not settle fair lending; for that, he suggests, we need legislation. 

Perhaps the only lasting policy-level impact the settlement does have is its provision to authorize oversight in the servicing of distressed loans, a systemic issue for all loans, both those that will be negotiated in the future and those closed in the past. Yet even this provision is of limited usefulness in the pursuit of mortgage equality. It is unreasonable to assume that the entire enforcement of fair lending could safely fall on one committee whose only legal authority derives from a legal settlement. Moreover, Smith made clear that the only way to enforce the terms of the settlement is to set up metrics by which to measure banks’ performances, yet the data for those metrics ultimately come from the banks themselves via the state attorneys general. The settlement is not an adequate tool for correcting most of the worst abuses in mortgage lending such as rampant foreclosures and short sales, unfair servicing standards (for example, allowing banks to modify the second mortgage but not the not primary), and the widespread disproportionate impacts on communities of color. 

The reason the settlement may not be an appropriate tool, it turns out, is twofold. First, the settlement monitor does not collect any kind of granular data, in some instances not even at the state level, so there is no disclosure as to which communities are receiving settlement funds in the first place. Aracely Panameño, director of Latino Affairs at the Center for Responsible Lending, shared stories of the hollowing out of her own Virginia neighborhood, which at one point was the zip code with the highest foreclosure rate in the nation. As she pointed out, we cannot know whether the settlement is providing any meaningful help to the very communities that were disproportionately harmed by the foreclosure crisis. Over half of the equity lost in the recent crisis (over $2 trillion in total, according to Panameño) was lost by African American and Latino communities, but as Smith pointed out, the settlement does not require allocation of funds in any particular way (except for the usual restrictions pursuant to the Fair Housing Act), so it may not be particularly well-suited to serving the needs of these communities. 

The second reason the settlement is not an appropriate tool for correcting the worst abuses in lending practices is the lack of an individual right of action to claim a portion of the settlement funds. No individual or class of borrowers has an affirmed right to a piece of the settlement; the disbursement of funds is at the discretion of the mortgage servicers, that is, the very entities that brought about the mortgage crisis. The inability to appeal a bank’s decision to deny a loan modification request by a distressed borrower is a situation Mark Seifert, the executive director of Empowering and Strengthening Ohio’s People, experiences routinely in his work. For whatever reason, a bank may refuse to modify or otherwise ameliorate the situation of a particular homeowner. Only in the aggregate are banks obligated to fulfill the terms of the settlement.

Accordingly, banks respond as they would be expected to:  by preserving as much of their capital as possible and working to minimize the economic impact of the settlement on their bottom lines. According to the monitor’s most recent progress reporton the settlement’s ongoing implementation, published last week, 43 percent of the total consumer relief from the settlement to date came in the form of short sales, “kissing cousins” to foreclosures, as they’re called. What makes short sales particularly suspect is that they are held out as forms of consumer relief, but, in Seifert’s experience, they really just leave a family homeless and allow investors to snap up the property. In high-cost locations like Hawaii, the problem is especially severe. Drew Astolfi, the executive director of Faith Action for Community Action, describes local families there who are displaced by faraway investors and speculators, which, in the short term at least, has a devastating effect on the community and leaves the neighborhood’s remaining families with reduced equity and assets. 

The problem of rampant short sales seems to have no immediate solution. Ironically, one of the stated purposes of the settlement was to limit the prevalence of this heretofore finaloption for salvaging a bad loan. The settlement, according to the monitor, was supposed to make principle reduction if not attractive for banks then at least a more commonly used option: “State attorneys general anticipate the settlement’s requirement for principal reduction will show other lenders that principal reduction is one effective tool in combating foreclosure and that it will not lead to widespread defaults by borrowers who really can afford to pay.” As it turns out, principle reduction accounts for only 5.2 percent of settlement funds nationwide, according to Panameño.  In fairness, there are opposing viewpoints to the perspective that short sales are always harmful to communities and borrowers in general, but many of them, like one published this week in American Banker, rely on arguments of a blame-the-victim type. They argue that many of these unsafe mortgages were taken out by consumers who purposefully sought out these “low-documentation” or “no-documentation” mortgages, full knowing that they otherwise would fail to qualify for a loan. As evidenced by the settlement and by the long history of racially discriminatory lending in this country, however, one can safely conclude that a large part of the blame for the recent flood of foreclosures and short sales resulting from unsafe loans must lie with the mortgage servicers.

The result to date of the National Mortgage Settlement, therefore, is at best unknown, and at worst decidedly harmful. A report out just this week by the Institute for Assets and Social Policy at Brandeis University confirmed the suspicions of many people in attendance at the event: homeownership accounts for a large amount of the racial wealth gap. As summarized Wednesday on this blog, homeownership alone among whites and among African Americans accounts for almost 30 percent of the total disparity, not counting household income, education, family financial support, or any of the other major factors. Much of the cause of the disparity is due to blatant racism in housing policy in the past at all levels of government and strong evidence for continuing racism in the accessibility to fair housing in the present. A story published yesterday in The Atlantic traces the history of this discrimination from the prejudices of individuals to its solidification in the policies of the Federal Housing Authority, most notably in its policy of redlining. If the National Mortgage Settlement is unable to provide targeted help to the communities of color that need the support most, rather than providing aggregate and whimsical loan relief to evidently arbitrarily selected individuals, it will fail to achieve its larger purpose of providing resources to the very groups who were most harmed by the unlawful and immoral acts of the big mortgage lenders. 

It is widely hoped that, based on the comments of the experts at Wednesday’s event, three things will change about the implementation of the settlement: 1) The monitor will provide granular data from banks to reveal which communities are being served by settlement funds and how banks are making determinations about which individuals are served, 2) Banks will begin offering principle modification options at greater rates than in the past and will reduce the rates at which short sales are being offered as the only option for distressed borrowers, and 3) The process of servicing distressed loans as a fulfillment of the settlement will be conducted more transparently to allow housing advocates and distressed homeowners to follow the reasoning of banks and to appeal the determination if necessary. These solutions alone will not solve all of the problems inherent in our current housing financing system, but they will make the implementation of the settlement fairer and provide a path for more distressed homeowners in communities of color to achieve greater equality through homeownership.