Banks favor short sales over debt forgiveness

WEST PALM BEACH — Florida homeowners have received more than $3 billion in mortgage relief and benefits from the nation’s five largest banks since a landmark settlement was signed in March to atone for foreclosure-related offenses.

But the majority of the banks’ debt forgiveness has come in the form of short sales, a gesture that homeowner advocates say doesn’t match the goal of the agreement, which was to keep borrowers in their homes.

More than $2.2 billion, or 63 percent of Florida’s total take so far from the settlement, has been in deficiency waivers for short sales, according to quarterly progress reports submitted this week to settlement monitor Joseph Smith.

A short sale is when a lender agrees to take less for a home than what the borrower owes on the mortgage. Banks can still pursue borrowers for that unpaid debt, unless they waive that right in the deal.

As part of the nationwide $25 billion agreement with Bank of America, Ally Financial, Citimortgage, JPMorgan Chase and Wells Fargo, forgiving short sale debt is one way lenders can meet their financial obligations.

Nationwide, about 60 percent of the debt forgiven through Sept. 30 has been through short sale deficiency waivers.

“We believed the intent and motivation for this settlement was to keep people in their homes,” said Laura Johns, a community organizer with the Home Defenders League, a national organization whose Florida base is in Orlando. “What we see happening in Florida is people being pushed out of their homes and the homes going to investors.”

The average borrower’s relief in Florida from the settlement has totaled $74,673.

About 5,110 Floridians have received an average of $10,850 in “transitional” money to leave their homes, while $6.9 million in debt has been forgiven to homeowners who have deeded their property to the bank rather than going through a lengthy foreclosure proceeding.

Johns said banks should be focusing more on primary mortgage principal reductions that will leave fewer homes underwater and make monthly payments more affordable.

While principal forgiveness on first mortgages has totaled $386.7 million in Florida between March and Sept. 30, it makes up just 11 percent of the overall relief so far. About 3,240 Floridians have received a first lien principal reduction, averaging $119,256.

Banks have forgiven $2.5 billion in first mortgage debt nationwide between March and September for 21,833 homeowners. The average forgiveness amount was $116,929.

“First lien principals are our highest priority as it’s the one program that has a clear ability to prevent foreclosure and keep people in their homes,” said Bank of America Senior Vice President Eric Telljohann. “We expect one-third of homeowner relief to come from first-lien principal forgiveness.”

Bank of America, which services about 900,000 mortgages in Florida, has provided $113 million in first lien principal reductions statewide to 830 borrowers. That’s compared to $1.2 billion in short sale forgiveness to 11,170 borrowers.

The settlement requires 60 percent of each bank’s total commitment to be met by first- and second-lien principal reductions. No more than 10 percent can be met by deficiency waivers.

Smith said in a press release the banks’ progress is “encouraging,” but cautioned that he hasn’t confirmed the lender reports. Lenders have until March 2015 to meet the settlement deadline.

“No credit will be awarded to a servicer until I, as monitor, am satisfied that the servicer has met its obligations,” Smith said.

Paul Baltrun, director of homeowner assistance at the Law Office of Paul A. Krasker in West Palm Beach, said he had a client receive a $390,000 reduction on a Bank of America first mortgage, dropping the balance to $231,000.

A second client had his entire second mortgage of $63,252 forgiven by JPMorgan Chase.

“The majority of our clients come in our door and don’t even know what the mortgage settlement is,” Baltrun said. “Sometimes they just don’t believe they can qualify because they’ve been turned down so many times for other plans.”

Homeowners whose loans are backed by Fannie Mae and Freddie Mac do not qualify for benefits through the National Mortgage Settlement.

In Florida, about $383 million in second mortgages has either been forgiven or canceled by lenders.

Lenders do not earn a dollar-for-dollar match on relief provided to borrowers. For example, for every dollar forgiven by a lender on a second mortgage, it receives only a 10-cent credit toward its required settlement amount. Lenders and servicers receive between a 20-cent credit and a dollar-for-dollar match on short sales depending on the kind of debt being forgiven.

Baltrun said he agrees with the criticism that too much is being forgiven through short sales.

“The whole point of the settlement is to keep people in their homes,” he said. “The vast majority of short sales we’ve completed in the past year and a half have come with a full deficiency waiver anyway.”