If you haven’t seen The Big Short, the movie version of Michael Lewis’s fascinating book about the explosion of the housing bubble,you should see it for the entertainment value alone. The film tells an important story with humor, relative accuracy and strong acting. It is so good that it has been nominated for an Academy Award for best picture. But the film largely ignores the experiences of the homeowners who signed notes and mortgages that backed the securities and derivatives that the film describes. A decade later, millions of working-class homeowners are still suffering from results of the greed and recklessness so well documented by the movie.
Another recent film about the housing crisis, 99 Homes, released last spring to far less acclaim, details the pain and humiliation many suffered as their lives unraveled trying to make the payments on the predatory mortgage loans that backed those bonds. Payments on loans that never made sense became even more unsustainable when the Wall Street bubble caused housing values to crash, leaving many people with “under water” mortgages in which they owe more on their homes than they were now worth In my law practice, I try to help under water borrowers as they painstakingly work to piece their financial lives back together, stabilize their housing situation, and create a better future for their families.
The next time you walk your dog around the block in Las Vegas, Cleveland, Chicago, Daytona Beach, Toledo, or Jacksonville, keep in mind that it’s likely that the owner of every fourth house you pass probably owes more than the house is worth. Realty Trac reports that, as of the third quarter of 2015, 6,917,673 American homeowners owners are under water. In the Cleveland area, where I live and practice law, 27.2% of homes are worth less than the balance of the mortgage, the third highest rate in the U.S. Nationally, among homes in the foreclosure process, over 50% of distressed and delinquent properties are significantly under water. With wages stagnant (the Economic Policy Institute pegs wage rate increase at 1.8% since 2000) and no home equity, many homeowners who are not already in default are just one furnace repair or roof replacement away from foreclosure.
Ironically, federal government policymakers have contributed to the lingering problem of under water mortgages. The Federal Housing Finance Agency (which was created by Congress to regulate Fannie Mae and Freddie Mac after taxpayers bailed them out) still prohibits those two quasi-governmental agencies, which hold many of these mortgages, from reducing principal when they modify delinquent loans. Principal reductions are also prohibited on loans insured by the Federal Housing Agency (FHA), a division of the Department of Housing and Urban Development, or those insured by the Veterans Administration or the United States Department of Agriculture. If homeowners can’t renegotiate these loans as the value of their houses decreases, they are even more likely to end out under water.
The Federal Government’s latest solution is to allow Fannie Mae, Freddie Mac, and FHA to sell pools of seriously defaulted loans to hedge funds at a discount. While the new policy would allow the hedge funds to reduce the principal on loans that they acquire, the servicers working for these investors have shown little enthusiasm for these potentially lucrative but logistically challenging loan modifications. Instead, they have insisted on liquidating the properties that secure the mortgages.
Working-class homeowners seeking to modify their home loans have been further impaired by the shift of loan servicing rights from the major banks who agreed to clean up their business practices in the 2012 National Mortgage Settlement to smaller hedge fund backed loan servicers like Ocwen, Nationstar, Selene Finance, Fay Servicing, BSI, and others. These mortgage loan servicers operate on smaller margins with an often under-trained offshore workforce who fail miserably at properly re-underwriting distressed loans.
New regulations to the Real Estate Settlement Procedures Act ( RESPA and the Truth in Lending Act (TILA) promulgated by the Consumer Finance Protection Bureau set standards for mortgage loan servicing and create a private right of action for homeowners, and these policies may force servicers to become more responsive. So far, though, there’s little evidence that servicers will change their practices. Rather, the industry seems to treat the prospect of paying money to persistent homeowners and their lawyers just a cost of doing business.
For those who have been forced from their homes by foreclosure over the past decade, the prospect of being pursued for a deficiency judgment remains. Reuters reported in 2014 that Fannie Mae was among the most aggressive investors in suing former homeowners for the difference between the balance on their loans and the price obtained by selling the property at auction.
The bottom line for working-class homeowners is that the real life consequences of the Wall Street fraud and avarice exposed in the Big Short and poignantly portrayed in 99 Homes will be with us for years to come.
Marc Dann is Managing Partner of the Dann Law Firm. He specializes in representing clients who have been harmed by banks, debt buyers, debt collectors, and other financial predators, including a case that he recently argued before the Ohio Supreme Court. He has fought for the rights of thousands of consumers and brought class action lawsuits in both private practice and as Ohio’s Attorney General.