Written by Jessica Silver-Greenberg & Ben Protess and Originally Published in The New York Times on March 3, 2012
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 Service members 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.