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Aftermath of an eviction in Baltimore, 2007 (mireille / Flickr)
Evicted: Poverty and Profit in the American City by Matthew Desmond Crown Publishers, 2016, 418 pp.
Chain of Title: How Three Ordinary Americans Uncovered Wall Street’s Great Foreclosure Fraud by David Dayen New Press, 2016, 400 pp.
To understand how the housing market really works, we need to hear the stories of those who have been pushed out. Two essential new books shine a spotlight on those stories, and illuminate much more in the process.
Of all the ways market logic has colonized our thinking, the way it has distorted our understanding of the housing market has to be one of the most dangerous. The notion that housing is naturally like any other market has not only informed the way we think about the houses we rent and the mortgages we can take, it’s led us to believe that the city itself wields a kind of economic instrumentalism in how it sorts those who inhabit it. People naturally end up where they are most productive and useful, and any housing problems will be both quickly and smoothly rectified by the market.
This is a lie. Markets are not natural but created, and this is especially true of housing. It takes the violent disruption of expulsion for this to become clear. Two new books dive deep into housing expulsion to illuminate the social creation of these markets.
In Evicted: Poverty and Profit in the American City, Harvard sociologist Matthew Desmond does more than paint a haunting picture of the poverty and instability created by housing insecurity. He tears past market ideology to show the power of landlords and the way they decide who the city will work for and how. And in Chain of Title: How Three Ordinary Americans Uncovered Wall Street’s Great Foreclosure Fraud, financial writer David Dayen goes beyond documenting the systemic fraud perpetrated by Wall Street. He shows how ordinary people were able to blow the lid off the mortgage machine and document the lack of evidence for finance’s claims they owned the debts that they claimed to own. Those claims, in turn, forced the government to cover up the fraud in order to preserve the myth of the market.
By listening to the stories of the foreclosed and the evicted, those most vulnerable to the violence of the housing market, we can learn how housing really works—how it fails us as a society, and ultimately, how we can do better.
In his 2002 essay “Scrutinizing the Street: Poverty, Morality, and the Pitfalls of Urban Ethnography,” the sociologist Loïc Wacquant warned that the latest wave of sociological ethnographies of the urban poor, books that were becoming blockbuster staples among the educated class, didn’t challenge the conditions they described. They instead sanitized their subjects by downplaying certain facts, glamorized their work skills and personal deeds to make them passable by middle-class norms, and divided the poor into good and bad, decent and “street.” They did this to make their subjects morally acceptable to the public policy punditry, and to attempt to find a triangulating role for sociology to push back against the brutality of rising neoliberalism. They failed.
Matthew Desmond’s masterpiece of sociological ethnography, Evicted, doesn’t fall into any of these traps. A lot will rightfully be written about his work following the lives of eight families in Milwaukee, split between the black ghetto on the city’s North Side and a white trailer park on the South Side. He tells their stories in a way that is both moving and respectful.
But the reason the book works is because there’s an additional character, one who is the real star: the eviction process itself. Desmond’s ethnographic technique is designed not to focus on a specific place, or even a specific group of people, but instead on how evictions take place. By telling the story of these families through their relationship to that process of state-sanctioned violence, his book places the suffering of these families in a broader context.
It certainly makes the abstract data on the sheer volume of evictions more real. But collecting and presenting that data is itself another accomplishment of the book. Desmond’s ethnography is complemented by a large-scale investigation into reams of Milwaukee municipal data. Statistical models are run using large datasets of everything ranging from renter surveys to 911 nuisance calls to building code violations to court judgments.
The conclusions he draws from these numbers are striking, and the trends he sees in Milwaukee are representative of the country as a whole. The majority of poor families who rent in America spend more than half of their income on housing, with almost a quarter spending 70 percent. Between 2009 and 2011 more than one in eight Milwaukee renters experienced a forced eviction. Across the nation, in rich cities and poor, vacancies in low-cost units have fallen to single digits, to below 6 percent in 2011, while affordable rental stock is disappearing.
This is particularly true for black women. In Milwaukee’s poorest black neighborhoods, one female renter in seventeen was evicted through courts—that’s twice as many as men in the same neighborhoods, and nine times as many as women in the city’s poorest white areas. Desmond concludes that “if incarceration had come to define the lives of men from impoverished black neighborhoods, eviction was shaping the lives of women. Poor black men were locked up. Poor black women were locked out.”
The straightforward storytelling of the text belies its theoretical depth, with many of the essential points explained in endnotes. Desmond’s focus on the eviction process helps us understand the world and mindset of evicted households in a way we otherwise wouldn’t. Housing insecurity creates a special kind of exhausting poverty, one that threatens the very security of one’s family. It breeds depression. In addition to their homes, the evicted lose their possessions, their neighborhoods, their official address for interacting with the state and businesses, their very sense of self and liberty.
We meet Scott, an ex-nurse drug addict whose powerlessness to leave the trailer park and find more secure housing creates the conditions for his consistent relapses, particularly as the trailer park is a ready source of heroin. Vanetta, a single mother, desperate from losing hours at the Old Country Buffet and living on the verge of eviction, is suddenly pushed by her boyfriend into robbing a couple to keep the lights on, and faces a long prison sentence as a result. Women go in and out of piecemeal sex work when housing becomes precarious. Others, looking for some sense of gratification and seeing no future to plan for, overspend. Rather than trying to explain these actions in moral, cultural, or individual terms, Desmond shows how these acts of desperation and despair are responses to the violence of eviction.
Evictions shred civil society, the building blocks of neighborhoods that in turn are capable of sustaining wider communities. “A single eviction could destabilize multiple city blocks,” Desmond writes, creating “perpetual slums,” as people take temporary homes they have no interest in building around, simply a place to stay until they can get their lives together. The tenants in the trailer park see themselves as “just passing through,” not there to put down roots, meet their neighbors, and build a community.
Making the eviction process the central ethnographic focus shows the wide constellation of actors the evicted encounter, each exerting different types of power, each capable of helping or harming the tenants. We meet the sheriff who knocks on the door and could give the tenant an extra day. We meet the movers who take the tenants’ stuff out and can store it, in warehouses that act like a “giant stomach, digesting the city,” for a large fee the evicted struggle to pay. We meet the judges in eviction court, too, who can radically change an evicted person’s future by forcing a settlement, or by allowing landlords to attach large, high-interest fees to the records of the evicted that can destroy their future income security. We meet extended families with financial security who face complex choices about how to help those perpetually in need; we encounter the spontaneous, disposable, and volatile ties created among the poor to try and mitigate the risks of eviction.
A central premise of markets is that people who can afford to pay the price will end up where they belong. According to this assumption, eviction is simply a correction made by the market, one where people simply end up in a cheaper house that’s better suited to their income. But this is not what happens. One important reason is because there are very small rent differences across the poorest and richer parts of the Milwaukee. “A mere $270 separated some of the cheapest units in the city from some of the most expensive,” writes Desmond. In the poorest neighborhoods, median rents for a two-bedroom were only $50 less than in the city overall. Meaning, people who are evicted aren’t automatically reshuffled by the market to cheaper housing, because such housing simply isn’t always available.
This is because prices don’t determine who ends up where, landlords do. Desmond writes, “landlords were major players in distributing the spoils. They decided who got to live where.” No matter what else the poor have in common, “nearly all of them have a landlord.” Rather than a facile notion that people end up where they best belong, we see that people’s respective power dictates where they end up, and in poor neighborhoods, landlords have the power.
Landlords make decisions heavily informed by race. White and black families live at opposite ends of Milwaukee, but they might as well live in different galaxies. The black families can’t find any landlords willing to work with them in the white parts of the city, rendering false the idea that they could simply move if they so wished. The white families, for their part, refuse to look in the black ghetto at all, and receive a location dividend based on their race.
The way landlords choose to screen tenants reshapes the housing market in fundamental ways. Having kids, for instance, usually means an instant rejection. This is particularly tough on single moms, who are often already in difficult economic situations, and the children themselves. Eviction means school connections and deeper community roots, essential for children, are impossible to sustain.
Landlords also reject prospective tenants based on a combination of poverty—including a record of previous evictions—and criminality, based on previous felonies. Excluding people who have both means that buildings where poor people go are buildings where people engaged in criminal activity go. The choices of landlords do more to intertwine poverty and criminality than any vague “cultural” explanation.
This is also how gentrification works. According to researchers, gentrification isn’t really about newer, richer residents pushing out established residents. What really causes neighborhoods to change so dramatically is that poorer residents can no longer afford to move into gentrifying areas. Poorer families are cut off from that mobility, with open housing going to richer families. Evicted shows how this kind of exclusion is vicious for those in desperate need of housing, and how it can thoroughly rework the demographics of neighborhoods.
The state plays an essential role in this process. It’s not just responsible for the violence deployed by the courts and sheriffs, who create and implement the terms under which people are forced out of their homes and the subsequent penalties they suffer. It’s also not just how the rapid increases in policing and mass incarceration have turned landlords into agents of those trends. “Nuisance property ordinances,” for example, penalize landlords for their tenants’ behavior. So when responding to 911 calls, for instance, police pressure landlords to evict the tenants in question, something that is particularly devastating for households suffering from domestic violence.
It’s that the state also determines how property itself is structured. The landlords Desmond follows gather at a special, Department of Justice–funded “Landlord Training Program” where, in addition to learning the maximum fees they can charge, they close by chanting “this is my property” over and over again. Yet for many of them, this wasn’t strictly true—each of their properties was safeguarded by a separate corporation that owned itself, a process created by the state to shield landlords from the liability of ownership, so they can maximize profits by driving their properties into the ground.
For many of the landlords, it is simply cheaper to deal with the costs of an eviction than to try and reduce rents, or even to maintain their properties. For Sherrena, a landlord Desmond follows, her worst properties were the biggest profit centers. As the fines on the properties for lack of upkeep piled up, Sherrena would simply stop paying taxes and let the city take the property in the tax foreclosure. The corporate structure shielding the property ensured her own liability was limited. The city would often just demolish them, in turn reducing the property stock further, and assuring competition for Sherrena’s other properties. Milwaukee has around 1,200 properties go into foreclosure this way each year.
Experts assume that there’s a simple tradeoff between housing conditions and costs. If the costs of a rental apartment are too high, people simply live in worse conditions. Desmond shows that the logic of slumlords ties these factors together: worse properties, by being driven into foreclosure and then taken off the market, can ultimately drive up, rather than down, housing costs.
The landlords we meet in Evicted do bad things to people in the pursuit of profits. Liberal commentators are already peppering their reviews of the book with elaborate hand-wringing over a poor person buying lobster with food stamps. Virtually none have mentioned the main landlord encouraging mentally and physically disabled people whose credit scores she helped rapidly increase to buy her properties through the Federal Housing Administration at the height of the bubble, only to watch them fall into distress later.
But one thing that stands out is the way that Desmond’s landlords seem like low-wage employers, and the case for rent control comes to resemble the new case for the minimum wage. One important reason why minimum wage increases don’t lead to higher unemployment is because low-wage employers have a tiny bit of monopoly power over jobs. Because of the difficulty workers have searching for jobs, and their desperation to find subsistence work, employers are able to set the price of labor rather than simply accept the price determined by the market, which gives them more power. A higher minimum wage pushes against this power.
The same logic applies to housing. Searching for housing is very difficult; some of the families Desmond followed looked at ninety properties before finding somewhere they could live. Sherrena notes how she can capture part of the value of housing vouchers by charging higher rents when they are used. This is similar to how employers capture part of the Earned Income Tax Credit wage subsidy, something that a minimum wage helps push back against.
A simple story tells us all we need to know about the power of landlords. Sherrena sees one of her tenants waiting for UPS to deliver a computer for his daughter. The landlord immediately laughs, “I got ’em. The rent’s going up . . . I don’t care. He can move.” Being able to raise rents simply because you think your tenant can pay more and you know they won’t just find another place without additional expense, is what economists call “economic rents.” Or what regular people just call “exploitation.”
The Great Recession was the result of the crash of a housing bubble, one that came with 6 million foreclosures. One of those foreclosures was initiated against a Florida nurse named Lisa Epstein. Epstein tried to negotiate with her mortgage company, Chase Home Finance, so she could keep paying. They said they couldn’t help without the permission of Wells Fargo, which was odd to Epstein as she had never interacted with them. When the foreclosure summons came, it stated her plaintiff was “U.S. Bank NA as trustee for JPMorgan Mortgage Trust 2007-S2,” two banks she had never had any contact with or even knew much about.
Thus begins a detective story that almost brought down Wall Street, as recounted in David Dayen’s Chain of Title. There are well over twenty books about the financial crisis and the housing bubble that preceded it. There are only a handful of what came next, even though researchers now believe the chaos of foreclosures and the large amount of bad mortgage debt have been the major factor in the weak recovery of the U.S. economy. Dayen’s book, detailing the massive fraud seeping into the mortgage and foreclosure process, is essential documentation of this sordid history.
It’s also a fascinating way of understanding how the state intercedes to create a private mortgage market. Beginning in the early 1980s, Wall Street pushed its way into the housing market, taking over from locally situated commercial banks through the extensive marketing of mortgage-backed securities. But this couldn’t be done without government action. Congress preempted state restrictions on privately issued mortgage-backed securities. It promoted ratings agencies as private market regulators of the system. The government created special tax laws to produce a “real estate mortgage investment conduit” (REMIC), allowing mortgages to be moved around without having to pay taxes.
In turn, Wall Street needed to follow careful rules on how to handle mortgages for this to work. For centuries, keeping track of who owned what land was one of the essential administrative tasks of the government, and here that responsibility was handed over to Wall Street. Because of how global and fast capital markets are, it was even more essential that documentation of the mortgages was carefully transferred between complex entities to make legally clear who owns what and on what terms. As Dayen notes, “you can’t skip a link” in this process, and you can’t go back and fix it later. This was designed to ensure protection for both Wall Street investors and ordinary borrowers in case something went wrong.
Something went wrong. By now we have well-documented history of how fraud dominated the creation of subprime mortgages. Mortgage terms and prices were not set competitively; people were aggressively upsold into dangerous subprime mortgages; instruments designed to fail were sold off to investors. But the handful of citizens-turned-Wall-Street-detectives that populate Dayen’s book found out that there was just as much sloppiness and fraud in the management of these mortgage documents as there was in other industry practices.
Epstein, the nurse portrayed in Dayen’s book, slowly worked through her mortgage and the mortgages of others. As she followed the complex maze of legal steps necessary to prove ownership of land, she found nothing there. Documents didn’t exist, or were forged. She joined forces with a community of bloggers, journalists, academics, and other citizens, who all parsed through these records, finding them online and elsewhere. Together, they found false documentation in foreclosures across the entire nation. A mysterious “Linda Green” was signing foreclosure documents with multiple signatures across twenty different mortgage companies, implying poorly paid subordinates were using her name to keep foreclosures going. The sleuths found crooked efforts to backdate many of these documents. The activists called it “securitization FAIL.” As Dayen writes, “Three centuries of American land title operations had been outsourced” to Wall Street, and they ruined it so they “could save a buck.”
It wasn’t just sloppy paperwork that allowed the foreclosure crisis to occur, but sloppy processes as well. Without the legal notes of the mortgage itself, it wasn’t clear who owned what and on what terms, so there was no fair way to settle disputes. Worse, the mortgages were serviced and handled by people with incentives different from those of borrowers and lenders; it was often just as profitable for the middlemen to run mortgages into distress and foreclosure than to make them work well. Wall Street’s way of financing mortgages through complex instruments had never been stressed; when it was, it collapsed spectacularly.
As a result of these activists’ investigations, the media, courts, and law enforcement started to pay attention. They won a major victory when the foreclosure machine came to a screeching halt in late 2010, when several large banks declared a foreclosure moratorium to look at their procedures, and the government, notably the Obama administration, was forced to investigate it themselves.
Housing isn’t just a natural market. It requires a large amount of bureaucracy and violence and paperwork to ensure that land is divided up correctly. This is a system that has been around for centuries. Yet Wall Street neglected to care about the details, and as a result, when people pulled back the curtain, they couldn’t prove that they owned anything they believed they did.
The cognitive dissonance that followed was overwhelming. Should we throw some people in jail? Demand some sort of settlement and a promise this won’t happen again? Should we cancel debts that couldn’t be documented, perhaps paving the way for a radical program of land redistribution? It’s ironic that, left to their own devices, high finance’s control over land leads to the conditions where a bloodless revolution could have taken place. Business media claimed that this was about deadbeats who wanted free homes, as opposed to the deadbeats on Wall Street who didn’t follow the rules.
The Obama administration was not interested in jailing bankers, much less euthanizing the claims of rentiers over land as a result of finance’s own carelessness. Instead the administration’s investigators, along with regulators and state attorneys generals, made it seem as if Wall Street had followed the process all along, all for the price of a small settlement and a promise to do better. The Federal Reserve shamefully swept a subsequent 2013 investigation into servicing abuses under the carpet, arguing that illegal activities couldn’t be disclosed because they were “trade secrets.” Maintaining the illusion of the integrity of the housing market was more important than maintaining its actual integrity. Meanwhile these same problems of abusive processes and improper documentation have emerged across all kinds of consumer debt—from medical bills to student loans.
Both books struggle with the same overall problems. Political organizing is easy for those with power in these housing relationships, and incredibly difficult for those without. Desmond describes landlords as having a class interest in certain types of exploitation. Dayen focuses less on the creditors—those who owned underwater mortgages—even though their desire to be paid in full on bad collateral plunged communities and the economy into chaos. Efforts to force them to take losses—such as bankruptcy reform or municipal efforts to use eminent domain against their garbage loans—were easily resisted. Meanwhile we haven’t seen mortgage strikes or rent strikes, as we did in earlier eras like the Great Depression. For both the evicted and the foreclosed, a politics of self-loathing and recrimination places a limitation on political power they can express.
The housing markets covered in these books don’t look like they will merely “self-correct” with time. The mortgage market remains in critical condition, surviving only because government support is compensating for the failures of Wall Street. The housing stock in Milwaukee and other poor cities will continue to deteriorate, and nothing other than a publicly driven campaign can change that.
But both books point in the right direction. There’s a fundamental need for security and shelter. If the private market won’t provide it, that points to a more active and assertive role for the state itself. But it must start from the premise that no market alone can ensure security for all; these markets are government creations, and they require government solutions.
For the past year, Occupy Fights Foreclosures has been fighting to
keep many homeowners from being wrongfully foreclosed and evicted by
Wells Fargo Bank, which has been sued, not just by unhappy homeowners,
but by the US Justice Dept., the Federal Reserve, and two large cities
for its predatory and discriminatory lending practices. Many of its
victims have stories similar to these:
• Learn about Richard Castaldo, Columbine shooting survivor, who is fighting to keep his home after Wells Fargo gave his family a predatory loan. http://www.youtube.com/watch?v=3LTKmUBa5lA
Despite pocketing vast bailouts from the Fed and the
U.S. Treasury, and promising to make amends in the settlement with state
attorney generals, Wells Fargo has been rated as among the worst
performers in fixing their predatory mortgages. In other words, Wells
Fargo continues trapping people with the very practices that have helped
tank the U.S. economy and set the global economy spiraling. [reference 1, 2, 3]
States are willing to settle on empty promises, and legal help often
doesn't happen sooner than eviction. Let's start a DIY fight for justice
by hitting Wells Fargo in the only place it feels the pain: its wallet.
Let’s starve the beast. Let's bring justice closer. And let's regain
control of our economy.
Move Your Money Out of A Criminal Hand, Wells Fargo.
Here are 6 reasons to do it:
1. End foreclosure abuses by compelling Wells Fargo to work with homeowners.
2. Force Wells Fargo to invest in homeowners by providing more principal reductions.
3. Invest in Main Street, not Wall Street.
4. Lend a Hand to Local Businesses
5. End Too-Big-o-Fail Banks
6. Fewer Fees, More Savings
PLEDGE TO SUPPORT AND MOVE YOUR MONEY OUT OF WELLS FARGO BEGINNING ON SATURDAY, JUNE 22ND
And let these Wells Fargo executives know why you support the "Move Your Money" Out of Wells Fargo Campaign:
515-213-6117 MICHAEL HEID (Wells Fargo President of Home Loans)
Follow these steps to take action to stop illegal foreclosure.
1. Find Legitimate Legal Assistance & Avoid Scams
Many homeowners go to foreclosure-rescue scammers, only to drain their time and money without a result. Please take advantage of our handpicked list of legitimate agencies that can actually help you.
It is important to file as many complaints and reports as possible
so that your case will be noticed by many institutions and agencies as
well as build a collective pressure to legal bodies to bring justice.
To break up with your bank by transferring all of your balances from a bad bank to a good bank is an effective method to bring justice to the economic injustice.
Laura is struggling with chronic pain due to nerve damage and needs to be close to her doctors in Portage Park. She could be evicted any day, and she has nowhere for her, her son and her dogs to go.
Instead of putting them out on the street, the Cogsville Group should at least offer her and her family a new lease that allows them to stay in the home they previously owned.
Tens of thousands of people are still being evicted each month
through foreclosure, and now private equity firms and hedge funds are
executing a massive land grab in cities across the country.
In some cities, like Phoenix, there are already Wall Street-owned homes on every single block by the hedge fund Blackstone.
These Wall Street hedge funds and private equity firms are pretending
to help by renting out these vacant houses -- but we know that they are
just trying to make more money off the banks of the 99%. One of these
private equity firms has even released a new risky security backed by rental payments -- which is just like the mortgage-backed securities that destroyed the economy in 2008.
The story of Laura and her family show how we must stop this land
grab and demand that housing be enshrined as a human right, not a means
to make a short-term profit.
Laura, her son and 3 small dogs have lived in their Portage Park home
for the last seven years. With the help of a partner, she bought the
home in 2006 for nearly $400,000. After the market crashed, they
attempted to refinance the mortgage. Following the bank’s instructions,
Laura and her partner missed three months of their mortgage payments to
qualify for a loan modification. But instead of working with the family,
Bank of America put the home in foreclosure, using the highly controversial process of “dual tracking”
in which banks simultaneously put families in the process of modifying
their loans and put the loan in the foreclosure pipeline.
In Laura’s case -- as with so many other homeowners across the country -- the foreclosure process won.
Her home was sold at an auction and bought back by the
government-owned mortgage giant Fannie Mae -- which then allowed a
private equity firm, The Cogsville Group, to buy the right to manage her
house and collect rent from the family. But when her home flooded this
past spring, the company did not help her with clean up, mold
remediation or repairs.
In efforts to pressure Cogsville to assume responsibility for its
property management, Laura’s partner stopped paying the rent. But
instead of negotiating under the circumstances, the family received an
eviction notice.
Laura and her family are asking that the eviction be dropped, and
that the Cogsville Group offer Laura a new lease with an option to buy.
Help us stop Laura’s eviction -- and send a message to Wall Street
that they can no longer exploit our human needs for their short term
profits!
This should never happen, but it did, thanks to the sordid mortgage servicing industry.
Photo Credit: Shutterstock.com/iQoncept
September 20, 2013 |
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A few months ago, Ceith and Louise Sinclair of Altadena, California, were told that their home had been sold. It was the first time they’d heard that it was for sale.
Their mortgage servicer, Nationstar, foreclosed on them without their knowledge, and sold the house to an investment company. If it wasn’t for the Sinclairs going to a local ABC affiliate and describing their horror story, they would have been thrown out on the street, despite never missing a mortgage payment. It’s impossible to know how many homeowners who didn’t get the media to pick up their tale have dealt with a similar catastrophe, and eventually lost their home.
As finance writer Barry Ritholtz has explained, home purchases involve a series of precise safeguards, designed to protect property rights and prevent situations where borrowers who are perfect on their payments get evicted. “In a nation of laws, contract and property rights, there is no room for errors,” Ritholtz writes. “The only way these errors could have occurred is if several people involved in the process committed criminal fraud.”
Any observer of the mortgage industry since 2009 is no stranger to foreclosure fraud, and the fact that virtually nobody has paid the price for this crime. But the case of the Sinclairs involves a new player in that rotten game: Nationstar. Unheralded just a few years ago, the firm, owned by a private equity behemoth, has been buying up the rights to service mortgages, accepting monthly payments and distributing the proceeds to the owners of the loan, taking a little off the top for itself.
Nationstar has racked up an impressively horrible customer service record in its short life, failing to honor prior agreements with borrowers and pursuing illegal foreclosures. The fact that Nationstar and other corrupt companies like it are beginning to corner the market for mortgage servicing should trouble not only homeowners, but the regulators tasked with looking out for them. It didn’t seem possible that a broken mortgage servicing industry could get worse, but it has.
Nationstar is at the forefront of a massive shift in mortgage servicing. In the past few years, the largest servicers were arms of major banks, like JPMorgan Chase, Wells Fargo, Bank of America, Citi and Ally Bank. Those were the “big five” servicers sanctioned for an array of fraudulent conduct in the National Mortgage Settlement, which mandated specific standards for servicers to follow, like providing a single point of contact for customers and an end to “dual tracking,” when a servicer offers a trial modification to a borrower and pursues foreclosure at the same time.
The banks realized that they could sell the servicing rights and evade these standards, along with the higher labor costs associated with implementing them. What’s more, they would avoid new, higher capital requirements associated with holding servicing assets, allowing them to give bigger dividends to shareholders and bigger bonuses to executives.
So the big banks started selling off their servicing rights, not to other banks, but to specialty financial services firms like Green Tree, Nationstar, Walter Investment Management and Ocwen, all of whom are in kind of an arms race to become the biggest servicer.
Last October, Ocwen purchased the entire servicing portfolio of Ally Bank, covering about $329 billion in loans. Ocwen has also purchased part of JPMorgan Chase’s servicing, as well as a slice from OneWest Bank; it is attempting to dominate the market.
Nationstar acquired business from Bank of America and Aurora Bank in 2012, and more in 2013. Wells Fargo is poised to sell some servicing rights as well, and Nationstar will surely bid for those rights. As of June 30 of this year, Nationstar has the right to collect on $318 billion worth of home loans—growing three-fold in under two years—and it will seek to add even more in the future. The company, majority owned by the private equity firm Fortress Investment Group, recently raised $1.1 billion in capital to buy up more servicing rights from banks around the country.
This means that homeowners victimized by big-bank servicers, who were supposed to get a commitment to honest treatment as part of the National Mortgage Settlement, instead got their servicing rights sold to companies no longer bound by the terms of that settlement. So homeowners lose all of their protections, and often have to start back at square one with their new servicer. For example, if a borrower was in process on a loan modification with their old servicer, the new servicer can choose to simply not recognize that modification, and demand the full monthly payment under threat of foreclosure. This is a verycommon practice.
What’s more, this new breed of non-bank servicers scooping up all these servicing rights has proven themselves as a bunch of cheats profiting off their customers. Green Tree Servicing has a terrible record of ripoffs. Ocwen has been sued in state court over its practices, including an innovative scam involving sending homeowners a check for $3.50, and claiming that cashing the check automatically enrolls the customer in an appliance insurance plan, which costs $54.95 a month.
Fitch, the credit rating agency, wrote in a research note in June that the growth of non-bank servicers “may pose challenges to a potential orderly transfer of servicing,” and that the involvement of private equity firms “raises questions” about the ultimate endgame for these servicers. In effect, servicing has shifted from big banks to private equity and hedge funds, and neither really have the customer’s needs in mind.
Nationstar is no different in the non-bank servicer space. While the company promised California that it would adhere to all settlement obligations on the servicing rights it purchases, the Sinclairs were subjected to familiar abuse. The family paid their mortgage on time since purchasing their home in 2003. Last year, they received a loan modification. But their servicer sold the rights to Nationstar, and Nationstar didn’t honor the modification. In June, the Sinclairs sent in their mortgage payment, and Nationstar sent it back in full. Then it sold the home. When questioned, Nationstar claimed the Sinclairs didn’t notarize one page of their modification, which turned out to be untrue.
It was a clear attempt to find an excuse to deny the modification and push the Sinclairs into foreclosure. Mortgage servicers actually make more money with foreclosures than with loan modifications, because of how their compensation structure works. Servicers load up various foreclosure fees on homeowners that they get to keep, and they get paid off first in a foreclosure sale. A loan modification simply cuts their percentage balance on the loan.
This is not Nationstar’s only scam. The Consumer Financial Protection Bureau, which recently started examining non-bank servicers, put out a report this summer on the illicit practices of these firms. CFPB found that servicers like Nationstar often failed to inform homeowners about the change in servicing rights when they are transferred, meaning that the homeowner kept paying the wrong servicer. This is a clever way to facilitate late fees; just don’t tell the customer where to send their money.
Servicers also delayed property taxes paid out of escrow accounts, making borrowers late on those taxes and triggering more delinquency fees; failed to refund insurance premiums and other fees due back to borrowers; did not communicate properly with borrowers in need of a loan modification; lost documents solicited from borrowers for that process and made it impossible to complete the applications; failed to even properly file documents associated with the transfer of servicing rights; and charged customers default fees “without adequately documenting the reasons for and amounts of the fees,” and neglected to waive certain fees or interest charges.
CFPB also found that non-bank servicers like Nationstar had no comprehensive compliance management system in place to ensure that they followed all applicable consumer protection laws. Many didn’t even have formal, written policies or independent auditors. They hadn’t been subject to any examination prior to CFPB, so this stands to reason.
Nationstar is being sued in New York’s Supreme Court for auctioning off non-performing loans that it would rather not service at a severe discount, shortchanging investors in the process. The company’s auction sales, made with an online auction company that its private equity parent firm has a “business affiliation” with, end up allowing Nationstar to recoup its take, with all the losses falling on the underlying loan owners. So Nationstar has managed to infuriate both sides of the mortgage deal, the lenders and the borrowers, with its unscrupulous practices.
Getting examiners inside these “specialty” companies is a start, and new servicer rules coming from CFPB in January would cover non-bank servicers as well. But no regulator has the resources to deal with such flagrant abuses. Mortgage servicing is a sewer, and it needs to be completely overhauled from the ground up. If Nationstar represents the future, then until it faces real penalties or an expulsion from the industry for its conduct, private property rights in America will have to be seen as theoretical. Just ask the Sinclairs.
David Dayen is a freelance writer based in Los Angeles, CA. Follow him on Twitter at @ddayen.
Those defrauded by Bank of America aren’t allowed to file a collective complaint, thanks to a 2011 Supreme Court ruling.
AP Photo/Michael Dwyer, File
In June, six former employees of Bank of America's loan-modification department testified in court that since 2009, they had been instructed to lie to struggling homeowners, hide their financial documents, and push them into foreclosure. In the most egregious example, the employees said they were offered Target gift cards as a bonus for more foreclosures, which generated lucrative fees for the bank. The employees, who were in charge of implementing the government’s Home Affordable Modification Program (HAMP) at the bank, described the same deceptive practices across the country.
Two weeks ago, U.S. District Court Judge Rya Zobel dismissed the case, denying class-action certification to 43 homeowners in 26 states who suffered because of similar conduct. “Plaintiffs have plausibly alleged that Bank of America utterly failed to administer its HAMP modifications in a timely and efficient way,” Zobel agreed, adding that vulnerable homeowners had to wade through a “Kafkaesque bureaucracy,” and that the legal claims of missing documents, arbitrary denials, and deliberate misinformation “may well be meritorious.” But she would not grant class-action status because of differences in the individual cases. Homeowners are now free to pursue cases on their own, but the advantage of class-action suits is that they put expensive and burdensome litigation within reach for victims; if these homeowners had the money to sue powerful banks, they probably wouldn’t have needed a loan modification in the first place.
A decade ago, homeowners may not have faced the same hurdles in litigation. But a more stringent test for class-action certification, formed by precedents reaching all the way to the Supreme Court, has become another tool for large corporations to resist accountability. Class-action suits can have a societal benefit, exposing systemic wrongdoing and bringing an end to it. But if nobody can acquire class-action status, the courthouse doors have been effectively shut to a large number of Americans.
Without class actions, individuals face the hurdle of asymmetrical legal warfare, pitting a resource-constrained victim against a deep-pocketed corporation. And because individual damages are far lower than in a case affecting thousands or millions of people, it becomes difficult to find a lawyer willing to take the case. “Low-value claims mean a lot to individuals living paycheck to paycheck,” said Michelle Schwartz, an attorney at the Alliance for Justice, a progressive organization focused on the judiciary. “But banding together is the only way to get into court. A personal lawyer on a mission might take the case, but they would have to bankrupt themselves in order to do it.”
The most dramatic example of how courts have restricted class-action suits is the 2011 Supreme Court ruling, Wal-Mart v. Dukes. Led by former store-greeter Betty Dukes, 1.5 million women banded together to argue gender discrimination in pay and promotion policies at the world’s largest retailer. They pursued class-action status to sanction Wal-Mart because they could better show the reduced pay and fewer opportunities for advancement for women as a pattern and practice. “Standing on their own, you might not see the pattern, but when you see this has happened to hundreds or thousands—or in the case of Wal-Mart, 1.5 million people—you can make the case that it’s not an isolated incident,” says Schwartz.
But the Supreme Court reversed three lower-court rulings and denied class-action status in Wal-Mart v. Dukes, essentially arguing that the retailer had discriminated against so many women that they couldn’t possibly have all faced the exact same type of marginalization. Moreover, the Court set a precedent that limits class-action certification. Whereas before, class-action certification mainly hinged on whether the claims boiled down to a common question—whether gender discrimination had occurred, for example—in the Wal-Mart v. Dukes ruling, the Court said plaintiffs must prove whether the commonality of those claims was the most important factor in the case. That required law firms to obtain evidence, previously confined to the discovery phase, showing that the similar nature of the claims was the most relevant factor in the case. This adds to the expense of the class action at the outset, and heightens the burden on the plaintiffs in order to get certification for a class-action suit.
This has led to predictable consequences. Circuit Courts of Appeal have followed the Wal-Mart precedent, denying class-action status in multiple cases. Class actions involving securities law hit a 14-year low in 2012, and accounting class actions last year were nearly cut in half. In 2012, employers settled fewer class-action discrimination suits than at any time over the past decade, and the top ten settlements of the year totaled $48.65 million, compared with $346.4 million in 2010, before Wal-Mart. Meanwhile, the Wal-Mart women started pursuing claims 12 years ago, and none of them have had their day in court yet.
In the Bank of America case, Judge Zobel determined that individual borrowers had to jump through so many hoops in the loan-modification process—certifying they lived in the residence and could not afford their monthly payments, documenting their income, making required trial payments, and potentially seeking credit counseling—that no two cases were similar enough to grant certification as a class. In other words, the very convoluted nature of the process at Bank of America protected the company from the suit. Additionally, Judge Zobel cited discrepancies on whether certain members of the class actually made their trial payments on time, turned in the correct documents, or lived in the homes being foreclosed upon, arguing that these inconsistencies would have to be litigated individually. But that grants tremendous discretion to the bank to simply muddy up the records (which they are in fact accused of doing) and evade class action on the larger question of denying eligible borrowers a loan modification. In a tragicomic example, Bank of America claimed that one plaintiff, Aissatou Balde, did not seek credit counseling when required; Balde claims that she never obtained credit counseling because the phone number Bank of America gave to her for their credit counselor was faulty.
While the judge cited the proliferation of mortgage-related cases working through courts to argue that “individual plaintiffs are normally well-motivated to bring any claims they might have in order to save their homes,” the reality is that almost all of these plaintiffs don’t have the funds to pursue a case against Bank of America on their own.
Zobel cited the Wal-Mart case near the end of her ruling to bolster her argument that “there is no commonality where plaintiffs did not suffer the same injury from the same practice.” But Wal-Mart is far from the only example of the Supreme Court limiting class-action cases. The 2011 ruling in AT&T Mobility v. Concepcion allowed companies to make their customers sign contracts forcing any complaints to go through a “mandatory arbitration” process, taking away an individual’s right to sue whether alone or in a class action. Numerous other cases have constrained class actions in recent years. “They’re creating an impenetrable fortress around corporations and the Supreme Court is helping them do it,” said Schwartz. As Elizabeth Warren noted in a speech last week at the AFL-CIO convention, a recent study found that the five conservative Justices are among the top ten most pro-corporate in the past 50 years, and that Justices Samuel Alito and John Roberts are numbers one and two. “Sooner or later, you’ll end up with a Supreme Court that functions as a wholly owned subsidiary of big business,” Warren said.
Class-action suits are an imperfect way to get restitution for a group of individuals. The real remedy to stop homeowners from being snookered by banks is for law enforcement to start throwing executives in jail. But class actions can bring to light systematic illegal activities and can lead to legitimate changes in corporate behavior. Reforms to the tobacco industry and auto safety have come from class actions. “They’re really acting as a private Attorneys General, bringing cases on behalf of the public, and it’s often a way you can bring an end to wrongdoing,” says Schwartz of the Alliance for Justice.
Sadly, the actual attorney general has walked off the playing field when it comes to prosecuting financial fraud. In the Bank of America case, the ex-employees delivered a road map for what the company did and how they did it, even naming specific executives who directed the conduct and citing documentary evidence in the form of email communications. But it took victims attempting to certify a class-action suit, not a federal investigation, to bring these misdeeds to light. And because of the way in which big business has pushed the courts to their side, even that class action will amount to nothing.
Massachusetts homeowners continue to face wrongful foreclosures based
on improper documents, despite various multi-billion-dollar legal
settlements meant to end lender abuses nationwide. Housing attorneys in
the state say banks and lenders are flouting a state law
providing struggling homeowners five months to get their repayments
back on track before the lender can initiate a foreclosure, as well as
frequently basing their foreclosure actions on faulty documents.
Massachusetts is one of 28 states where foreclosures do not need final approval from a judge. State law requires banks to send something called a “right-to-cure notice”
when a homeowner goes into default. The document includes information
on who actually owns the borrower’s mortgage, who the borrower should
contact, and what steps he or she must take to “cure” the default and
avoid foreclosure proceedings. But attorneys have found dozens of
examples of erroneous or missing information in the notices, the Boston
Globe reported on Sunday.
The Massachusetts Alliance Against Predatory Lending’s Grace Ross
said the organization’s review of a sampling of the notices showed “an
ongoing issue that the banks continue to disregard our laws.” Because
judges don’t need to sign off before authorities take a defaulted
borrower’s home in Massachusetts, errors in the legal notices don’t
always keep people in their homes.
