October 13, 2010

A foreclosure nightmare

The Wall Street Journal’s projection this week that investment banks will pay out a record $144 billion in bonuses this season shows that Wall Street has recovered from the recession. The homeowners whose mortgages were securitized and used to fuel the Wall Street bubble, however, are not doing nearly as well. Foreclosures remain epidemic in harder-hit states like Florida, Nevada, and my home state of Rhode Island, and our economies are slow to recover as a result.

Elected officials have heard from our constituents being ignored and abused in the bureaucratic nightmare of the foreclosure process: documents repeatedly lost, inconsistent advice, hours trapped on the phone, common sense turned on its head to reject fair modifications in favor of foreclosure. We have heard from our mayors about the terrible collateral cost to communities from foreclosure. We have seen the big loan servicers drag their feet in the Obama administration’s well-intentioned mortgage modification program. Now we learn that these companies have been playing fast and loose in their foreclosure process, carrying out foreclosures in the cheapest manner possible, often outsourcing the process to a “foreclosure mill” document processing company.

Trapped in the bureaucracy nightmare, real families suffer when the big banks and their servicers force foreclosures. The emotional toll on children packing up their rooms and on parents struggling to find a temporary roof is a deep one. We owe these families a fair chance to stay in their homes, an answer to the question of why the bank would sell their homes to someone else for less than the family would be willing and able to pay, and a humane, logical and orderly foreclosure process if all else fails.

Since the major loan servicers have proven both heartless and incompetent in dealing with mortgages following the collapse of the housing bubble, the Federal Reserve, Fannie Mae and Freddie Mac should institute a nationwide foreclosure moratorium. Fannie and Freddie, who collectively hold or control millions of mortgages nationwide, have the power to force the mortgage companies to change their ways. And they should use it.

The foreclosure crisis was worsened by the big banks blocking our attempts in Congress to permit bankruptcy courts to reduce mortgage principal on primary residences to market levels — the way they can do for loans on vacation homes, cars, and boats. The proven failures of the mortgage companies should revive this bankruptcy legislation, and other proposals to help homeowners, such as mandatory pre-foreclosure mediation.

We let the mortgage companies do it their way for the last three years, and it has created nightmare, agony and frustration. Now it’s time for Congress to scrap that failed approach and chart a more reasonable path forward for struggling homeowners.

By: Senator Sheldon Whitehouse