Knock on a Few Doors and You'll Find Loans Still in Crisis

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The financial crisis, at bottom, was about houses.

Lewis Ranieri, the messianic bond trader who ran the Salomon Brothers mortgage desk in the 1970s, invented mortgage-backed securities to free up capital so that banks could lend to more homebuyers. Angelo Mozilo, the co-founder of Countrywide Financial Corp., embraced subprime mortgages, he claimed, because they made it possible for lower-middle-class Americans, who had long been shut out of homeownership, to buy a house. When mortgage companies began pushing subprime refinancings, using no-document or interest-only loans, the collateral for those loans was — what else? — the house, something too many homeowners didn’t focus on until it was too late. In 2008, when the financial system came close to collapse, reporters like me could find lots of causes: greedy Wall Street executives, conflicted credit-rating agencies, mortgage-backed securities stuffed with toxic subprime mortgages, and on and on. But we passed over one key element: houses.

This insight hit me hard me two years after Lehman Brothers Holdings Inc. had declared bankruptcy, when I went to Jamaica, Queens, to interview Lilla Roberts, who was then a 73-year-old retired physical therapist facing imminent foreclosure. By 2010, the financial crisis had morphed into the foreclosure crisis, with millions of people with adjustable subprime mortgages paying a far higher penalty than any Wall Street trader had during the financial crisis. No longer able to refinance — and unable to pay their mortgages as the monthly payments rose — they were losing their homes.

Making my way to Roberts’s house, accompanied by her lawyer, Elizabeth Lynch, I found myself gazing in amazement at the houses in the neighborhood. These were not McMansions or new developments — the sorts of foreclosed homes you usually saw on the television news. This was old housing stock, often too small for the families who lived in them, and usually run down and in need of repair. Every third or fourth house was empty, the result of a foreclosure. I thought to myself: This is the kindling that lit the blaze that became the financial crisis? These were the houses whose mortgages were bundled into all manner of exotic Wall Street derivatives like collateralized debt obligations? Yes, they were.

On Wall Street, it was convenient to believe that those who were losing their homes had only themselves to blame. They shouldn’t have inflated their income to get those “liar loans.” They should have realized that they would be in trouble once the adjustable rate began to rise. They should have resisted the impulse to take advantage of the moment to pull cash out of their home. There was very little sympathy on Wall Street for Main Street’s woes.

But in Queens, you heard stories that made you realize that that scorn was misplaced. There were elderly couples, their mortgages paid off, who were convinced by a broker that if they didn’t refinance to fix their roof, the city would condemn their home. There were non-English speakers who didn’t understand they were getting an interest-only loan with an adjustable rate that would skyrocket in a few years. And there were people who could afford their mortgages but were always one financial setback away from trouble.

That, in fact, was Lilla Roberts’s situation. She had refinanced her home in 2007 to make needed repairs. Between her pension, her Social Security and the $900 a month she got from a renter, she could afford her $1,700-a-month mortgage. But then her renter stopped paying — and, taking advantage of New York’s pro-renter laws, refused to move out — meaning Roberts could no longer make ends meet. She made her first request to Bank of America for a mortgage modification in March 2008. By the time I went to visit her in late 2010, she had been through hell: hounded by a law firm that specialized in foreclosing on poor people, given a series of short-term payment agreements that never led to a modification, and denied a straightforward story about what was preventing her from getting a new mortgage she could afford.

And she was hardly alone. As I wrote at the time, “She is one of the many Americans, mostly poor and lower-middle class, who have been devastated by a system that is as rapacious, uncaring — and sloppy — in tossing people out of their homes as it once was in foisting predatory mortgages on them.”

As it turns out, Roberts was able to keep her home, largely because once I started making phone calls to Bank of America and Fannie Mae, which had taken over the mortgage and was foreclosing on her, the companies decided that maybe she wasn’t such a bad candidate for a modified mortgage after all. In the end, she got a loan with affordable monthly payments — though with a big balloon payment 40 years or so down the road. She hasn’t missed a mortgage payment since.

I wrote a lot about the foreclosure crisis from 2010 to 2012. I wrote about servicing companies with financial incentives that pushed homeowners toward foreclosures rather than modifications. I wrote about the “robo-signing” scandal, in which law firm employees signed foreclosure documents without knowing whether the house was actually eligible to be foreclosed on. I even put that law firm that went after Roberts out of business, when someone leaked me photographs of its Halloween party, showing employees dressed as people who had lost their homes. But eventually I turned my attention elsewhere, and the foreclosure crisis seemed to fade away.

* * * * *

“Is your caseload as high as it was back in 2010 and 2011?” I asked Elizabeth Lynch as we drove to Jamaica a few days ago. “Maybe not as high as before,” she replied, “but it is still inordinately high. People think there’s this great recovery, but the recovery hasn’t come to everybody, and it certainly hasn’t come to this part of Queens.”

Since I had last written about her, Lynch had been promoted at Mobilization for Justice, her public-interest law firm; she was now the supervisory attorney in charge of its foreclosure practice. She had written several important white papers, including one detailing illegal practices at foreclosure firms. A few years ago, she had been named a “rising star” by the New York Law Journal. Mostly, though, she did the same thing she had been doing when I first met her eight years ago: trying to help people — almost all of them people of color — keep their homes.

I wanted to return to Jamaica to get some sense of what had changed, and what hadn’t, since I was there in 2010, so I asked Lynch to again be my tour guide. Our first stop, of course, was the Roberts home. It was one of those terribly hot September days, and Roberts has no air conditioning, so after a quick tour through her house, we sat outside by her garden, which was her pride and joy. “This garden keeps me alive,” she said. Looking at the house, she added, “I take care of this house. I fix things when something breaks. I love this place.” I was happy for her — but it made me wonder, not for the first time, how many people had found themselves in the same situation as Roberts, desperate for a modified mortgage so they could stay in their homes, but forced out because there was no journalist to write about their struggle.

Roberts’s granddaughter, who worked in Manhattan, now lived with her, and her monthly income more than covered her mortgage. When I asked about the balloon payment, Lynch told me that it had been erased. In settling lawsuits with various regulators, the big banks were given financial incentives to modify mortgages. Because of that, Bank of America had eliminated Roberts’s balloon payment. As a result, her heirs would truly own the house when she died, and would be able to sell it, free and clear.

Lynch also told me that the Home Affordable Modification Program — HAMP, it was called — which had been created by President Barack Obama’s administration, had made a big difference for many struggling homeowners. Back in the day, I had been highly critical of Obama’s efforts to prevent foreclosures. I was glad to hear that I was wrong about this program, though sad to hear it had recently expired.

Toward the end of the afternoon, Lynch guided me to the home of  a woman named Geta Gurung, 51. Like Roberts she had gotten an interest-only mortgage in 2005. But unlike Roberts, she was still trying to get a mortgage modification 13 years later.

She and her family were from Nepal. She worked in a nail salon. Her English was hard to understand; her daughter knelt by her side and translated for her. She kept saying over and over, “I want a 30-year fixed. I just wanted a 30-year fixed.” She told me she hadn’t realized her original loan was not a 30-year fixed mortgage until 2008, when the adjustable rate rose and the Gurungs could no longer afford it. Wells Fargo, Lynch told me, had given her a trial modification, which she had paid, but then the bank simply stopped taking her payments, suggesting that it was no longer interested in helping her get a modification.

Since at least 2010, the Gurungs have put aside the money they would have paid to the bank — it is now somewhere between $130,000 and $150,000. They have been in settlement conferences. They have applied for mortgage modifications. They have jumped through every hoop Wells Fargo has put up. No matter what they’ve done, Lynch told me, Wells Fargo has always found some new reason to deny them a modification. Now they are litigating, in the hope that that will get them back into a settlement conference that might result in a new mortgage.

“I need this house,” Gurung said. “My family really needs it. I am very worried.” Then she looked at me. “Please save my house,” she said — at which point I suddenly realized why Lynch had taken me to see her. Having gotten nowhere with Wells Fargo, her firm was hoping that my intervention might cause lightning to strike twice.

It was incredulous to me that after everything — all the settlements, the fines, the bad publicity and the passage of time — the process of trying to get a modified mortgage was still so Kafka-esque. How hard could it really be, to be straight with homeowners, to tell them whether or not they qualified for a modification, and why? Why did it take years — years during which the homeowner had no idea what the bank was thinking or doing? Why hadn’t this absurd process been fixed? It is hard to believe that someone who has put aside $130,000 isn’t a decent candidate for a modified mortgage.

On Wednesday evening, I got an email from a Wells Fargo spokesman. “We make every effort to help our customers and avoid foreclosure when they encounter financial difficulties,” he wrote. “Unfortunately, despite numerous modification reviews since the Gurungs fell behind in 2009, we have been unable to find an option that would allow them to remain in the home and have moved to foreclose.”

Sad to say, it looks like lightning isn’t going to strike twice after all.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Joe Nocera is a Bloomberg Opinion columnist covering business. He has written business columns for Esquire, GQ and the New York Times, and is the former editorial director of Fortune. He is co-author of “Indentured: The Inside Story of the Rebellion Against the NCAA.”

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