AN OVERVIEW OF THE U.S. HOUSING CRISIS IN 2013

January 16, 2014

• 462,970 Foreclosures Completed In 2013
• ŸForeclosures Hit the Five Million Mark
Ÿ• 6.4 Million Homeowners Underwater
Ÿ• 180,000+ Homes Owned by Fannie Mae and Freddie Mac
Ÿ• American Home Ownership Falls to 18-Year Low
Ÿ• 44% of Settlement Funds Kept From Homeowners by States
Ÿ• Wall Street Turns Foreclosures into Rentals into Investments
Ÿ• Invitation Homes Now the Largest US Single-Family Home Landlord
Ÿ• No Solutions for Decimated County Land Records
Ÿ• No Criminal Prosecutions From the Mortgage Fraud Taskforce
Ÿ• Neighborhood Blight and Eminent Domain

FORECLOSURES IN 2013

In 2013, five years after the peak of the U.S. financial crisis, nearly half a million U.S. homes were lost to foreclosure. 462,970 residential foreclosures were completed in 2013, down 31 percent from 2012, and less than half of the 1.05 million home foreclosures completed in 2010.

The five states with the highest number of completed foreclosures for the 12 months ending in November 2013 were Florida (115,000), Michigan (54,000), California (42,000), Texas (40,000) and Georgia (36,000). These five states account for almost half of all completed foreclosures nationally. As of November, 2013, there were 812,000 homes in some stage of foreclosure. Florida headed the list of homes in foreclosure, with 306,018 homes.

Including the 2013 numbers, over the past eight years 10.9 million foreclosure actions were filed against residential properties nationwide. Lenders completed 5.6 million foreclosures.

Most of the foreclosures involved families, not individuals.  In addition, many families forfeited their homes through deeds in lieu of foreclosure or short sales. Over 12 million people were forced form their homes since 2007.

 

NEW FORECLOSURES

New foreclosure filings nationwide were reported to be 747,728 in 2013, down 33 percent from 2012, and the lowest annual level since 2006.  New foreclosure filings increased from the 2012 level in Arkansas, Connecticut, Delaware, Maine, Maryland, New Jersey, New York, Pennsylvania, Vermont and Washington.[1]

The total number of new foreclosure filings declined sharply in the second half of 2013. In Florida, the decrease was significantly impacted by non-recovery developments.  New legislation took effect in Florida on July 1, 2013, that imposed restrictions on banks and mortgage companies, requiring that these plaintiffs actually possess the documents showing their right to foreclose at the time they file their cases.  The law was designed to make it easier for banks to push foreclosures through the courts much faster, regardless of proof and due process. The unexpected result of the new legislation, however, was a sharp decline in new filings in the second half of the year because the banks and mortgage companies did not have the required mortgage loan documents.[2]

More than 1.2 million homes nationwide were in some stage of foreclosure. In addition to newly filed foreclosures and completed foreclosures, there are also cases that have been pending, many for three years or more. While the backlog of cases eased in 2013, 272,470 foreclosures remained pending in Florida.[3]  Some states used money they received from settlements with banks accused of mortgage fraud to ease the backlog of foreclosure cases by hiring retired judges, judicial assistants and clerical support.  In many cases, the “easing” will be temporary because banks and mortgage companies have dismissed their cases when forced to trial, but will be allowed to refile these cases under most circumstances.

 

LOST HOME VALUES

6.4 million homeowners continue to owe more that their homes are worth, according to the Associate Deputy Assistant Secretary for Economic Affairs at the Office of Economic Development and Research of the U.S. Department of Housing and Urban Development (“HUD”).

2.3 million mortgages, or 5.66% of all mortgages, were seriously delinquent, defined as more than 90 days behind, at the end of the third quarter of 2013.  Florida led the nation in serious delinquencies, with 12.6% of homes seriously delinquent, followed by New Jersey at 12.1% and New York at 9.3%. In Florida and Nevada, more than one in every three homes was deeply underwater.

 

THE YEAR OF THE CORPORATE LANDLORD

In 2013, the Wall Street rental empire emerged as a powerful new force in the housing market. Hedge funds and private equity firms purchased over 200,000 foreclosed properties, primarily in the cities hardest hit by the foreclosure crisis.  Blackstone Group, the largest private equity firm in the U.S., bought more houses than any other company.[4] Blackstone, Colony Capital, American Homes 4 Rent and other investors bought as many as one in every three homes in some key cities, including Atlanta, in 2013. As of November, 2013, Blackstone had spent $7.5 billion to purchase 40,000 homes, spending $100 million per week since October, 2012.

Blackstone became the largest owner of single-family rental homes in the nation.  Fannie Mae owns more homes, but does not use most of these homes as rental properties. Large institutional investors still represent only about 2% of property owner/landlords.[5]

Blackstone introduced an investment product in 2013 called Invitation Homes and invited investors to buy $479 million in bonds backed by rental income streams from 3,200 homes as collateral.  Investors responded enthusiastically. Invitation Homes operates in nine states, primarily in areas with high foreclosure rates.

Many international banks are some of Blackstone’s largest institutional investors – including JP Morgan Chase, Morgan Stanley, CitiGroup, Deutsche Bank, UBS, Bank of America and Goldman Sachs and provided financing for Blackstone’s efforts to securitize the rental income market.

Blackstone also entered the business of lending to smaller would-be landlords by originating loans of $500,000 to $50 million to small and mid-size investors buying a minimum of five single-family rental properties.

 

THE CONTINUING DECLINE OF HOME OWNERSHIP

The U.S. rental market expanded as the economy declined after 2008. According to a report by the Joint Center for Housing Studies of Harvard University, “From 31 percent in 2004, the rental share of all US households climbed to 35 percent in 2012, brining the total number to 43 million by early 2013.”[6]  The U.S. Census Bureau estimates that the total number of U.S. Households from 2008 – 2012 was 115,226,802. The Harvard housing study attributes the increase in renters to high rates of sustained unemployment preventing would-be buyers from purchasing homes, but also a new appreciation for renting because of the many risks of home ownership, including the potential loss of wealth from falling home values, the high cost of relocating, and the financial and personal havoc caused by foreclosure. The US home ownership rate hit an 18 year low in 2013 and was predicted to dip slightly lower in 2014.[7]

The residential real estate purchases by large institutional investors drove up home prices in many cities.  Rental incomes did not increase at the same rate as home prices, causing these programs to be less profitable overall in 2013, and also causing the increase in home prices that was heralded by many as a sign of the rebounding real estate market.

 

FANNIE MAE’S STOCKPILE

Fannie Mae continued to own more homes in most U.S. counties than any other institutional owner. Fannie and Freddie are often reported to own approximately 180,000 single-family homes.  Fannie’s stockpile of homes includes thousands of homes acquired in 2012 or earlier, with many of these homes having been vacant for over 12 months or more.  The next biggest owners in most counties in the U.S. are Bank of America, U.S. Bank and Wells Fargo.

Fannie and Freddie continued to refuse to allow mortgage modifications that included principal reductions for underwater balances.  On January 6, 2014, Melvin L. Watt was sworn in as Director of the Federal Housing Finance Agency.  Many of Mr. Watt’s supporters expect that he will introduce policy changes that will allow both principal reductions and refinancing underwater mortgages unto low-interest rate loans.

 

MORE SETTLEMENTS

Approximately 44 percent of the $2.5 billion sent to state governments as a result of the $25 billion foreclosure abuses settlement was “redirected” to efforts other than helping homeowners who were the victims of the abuses.[8] The settlement funds were sent to rainy day funds, budget shortfall efforts and economic development funds. In some states, including Florida, the settlement funds were used to expedite foreclosures by hiring retired judges to handle the backlog of foreclosure cases.

In 2013, four of the largest banks (Bank of America, Citibank, JP Morgan Chase and Wells Fargo) approved more modifications with principal write-downs and short sales, as a result of the $25 billion national mortgage settlement reached in 2012.

Lender Processing Services announced a $35 million settlement with the Justice Department and most state attorneys general in January, 2013. In November, the Justice Department and most state attorneys general announced a $13 billion settlement with JP Morgan Chase. At the end of the year, in December, a $2 billion settlement with Ocwen was announced by the CFPB and most attorneys general, with $2 billion set aside for principal reductions.

Also in 2013, the Office of the Comptroller of the Currency announced its settlement with thirteen mortgage servicing companies subject to enforcement actions for deficient practices in mortgage loan servicing and foreclosure processing.  The servicers agreed to provide more than $9.3 billion in cash payments and other assistance to help borrowers. The sum includes $3.6 billion in direct cash payments to eligible borrowers and $5.7 billion in other foreclosure prevention assistance, such as loan modifications and forgiveness of deficiency judgments. The servicers participating in the settlement includes Aurora, Bank of America, Citibank, Goldman Sachs, HSBC, JPMorgan Chase, MetLife Bank, Morgan Stanley, PNC, Sovereign, SunTrust, U.S. Bank, and Wells Fargo.

For most homeowners, the OCC Settlement resulted in checks of approximately $300. Rust Consulting, the distributor of the checks, issued checks to some homeowners that were returned for insufficient funds.[9] Homeowner advocacy groups largely denounced these settlements as grossly insufficient.

At the end of 2013, Congress failed to pass legislation that would extend a special tax provision that exempted principal reductions received through loan modifications or short sales from personal income tax liability. Without this exemption, many of the settlements will result in significant tax burdens to homeowners. Often, homeowners with debts extinguished in bankruptcy nevertheless received notices from lenders that their debt had been forgiven and they would be subject to tax liability as a result of the “forgiveness.”  42 state attorneys general called for passage of the Mortgage Forgiveness Debt Relief Act, and retroactive passage remained possible in early 2014.

 

COUNTY LAND RECORDS

The 2012 and 2013 settlements acknowledge that incorrect and deficient mortgage documents were filed by Mortgage Electronic Registration Systems, mortgage servicers, banks and other lenders, as reported by many County Land Record Recorders.[10] Despite requests to be included in settlement negotiations, county land recorders were excluded and no relief was obtained in any of the settlements regarding compensation for damages to local records systems.  None of the settlements required any servicer or bank to notify and court, homeowner or county land recorder that filed mortgage documents were fraudulent, deficient or just incorrect.  As a result, many homeowners lost their homes in 2013, and will lose their homes in 2014, in cases where the banks use fraudulent documents.  Attorneys general efforts to notify chief judges of the settlement findings were weak or non-existent.

 

NO CRIMINAL PROSECUTIONS FROM THE MORTGAGE TASK FORCE

The 2012 and 2013 settlements did not provide immunity from criminal prosecution for the settling servicers and banks or their officers or employees.  JP Morgan Chase reportedly specifically sought a non-prosecution agreement.[11]  In 2013, there were no criminal prosecutions of major lenders, securitizers or document producers that came from the Mortgage Task Force, formed in early 2012. The biggest parties to the biggest economic crisis continued to be “Untouchables.”[12]

Mark Devereaux, an Assistant U.S. Attorney in Jacksonville, Florida, successfully prosecuted Lorraine O’Reilly Brown, a senior vice president from Lender Processing Services.  On June 25, 2013, Brown was sentenced to 60 months imprisonment.  The sentence was later reduced to 58 months, to run concurrent with a sentence previously imposed by the State of Michigan, and to be followed by 24 months of supervised release.  Brown joined a very small circle of mortgage fraud executives, including Lee Bentley Farkas (30 years), Paul Allen (40 months), Raymond Bowman (30 months), Delton de Armas (60 months) and Desiree Brown (6 years) of Taylor, Bean and Whitaker.

 

NEIGHBORHOOD BLIGHT AND THE RISE OF EMINENT DOMAIN

The use of eminent domain powers by local governments to provide relief to neighborhoods especially blighted by abandoned homes from foreclosures was one of the most controversial developments in 2013.  The effort started with smaller cities in California, but on December 4, 2013, the Newark City Council voted to begin legal research of an eminent domain program.  The Newark program would make market-value offers on the most toxic loans, then rewrite these loans for better terms and offer the new reduced-payment mortgages to the homeowners so that they could stay in their homes at a substantially lower monthly payment.  Similar programs were under consideration in Richmond, California, Yonkers, New York and Seattle, Washington.

Critics of these programs argue that such programs would harm investors and that lenders would penalize these communities by refusing to make loans in the future.  On September 16, 2013, US District Judge Charles Breyer dismissed a lawsuit brought by Wells Fargo, Deutsche Bank AG and Bank of New York Mellon that sought to stop Richmond’s program.  Four US Senators have urged the Departments of Housing and Urban Development and Treasury to oppose the use of eminent domain to lower principle. In a letter to Secretary Shaun Donovan and Treasury Secretary Jacob J. Lew, the group said they should block the Federal Housing Administration from insuring the purchased mortgages. The New York Times reported[13] that the banks are engaging in an opposition campaign that includes robocalls, mass mailings and free dinners. Richmond is likely to become the first city to test eminent domain as a relief from blight.

In June, 2013, the City of Los Angeles settled a lawsuit it had filed in 2011 against Deutsche Bank for $10 million. The City claimed that the bank acted like a slumlord and failed to maintain foreclosed homes, particularly in low-income neighborhoods.

In many other cities, the bank-owned properties remained “off-market.”  Many of these homes stood vacant without maintenance for several years, making rehabilitation too costly.  In a few cities, a few banks have cooperated with not-for-profit groups, including Habitat for Humanity, to repair blighted homes and relieve neighborhoods of the foreclosure blight.

Foreclosures continued, blight got worse, bank-friendly settlements got announced, and home ownership declined.  2013 was another bad year for homeowners.

 


[1] Statistics reported by RealtyTrac.

[2] In Palm Beach County, for example, there were 9,857 new foreclosures filed in 2013, the first time the number of new foreclosures had dropped below 10,000 since 2006.  A comparison of pre-law and post-law filing numbers shows the effect of the new restrictions on banks and mortgage companies. In Palm Beach County, Florida, for example, there were 6,454 new foreclosure filings from January through June; and 3,403 new filings from July though December.  These results, with a very sharp decrease in the second half of the year after the effective date of the new legislation, were reported statewide.

[3] The pending figure was reported in “Seven Years Later, Foreclosures Still Jam Courts,” Josh Salman, Herald-Tribune, January 11, 2014.

[4] See, “How Wall Street Has Turned Housing Into A Dangerous Get-Rich-Quick Scheme – Again,” Laura Gottesdiener, Mother Jones, November 29, 2013; and “Looking to Play the Rental Market? Blackstone Wants You,” Diana Olick, CNBC, December 16, 2013.

[5] See, “Looking To Play the Rental Market? Blackstone Wants You,” Diana Olick, CNBC, December 16, 2013.

[6] America’s Rental Housing: Evolving Markets and Needs,” Joint Centers for Housing Studies at Harvard University, http://www.jchs.harvard.edu/research/publications/americas-rental-housing-evolving-markets-and-needs.

[7] See, “American Dream Slipping As Home Ownership at 18-Year Low,” Prashant Gopal and Clea Benson, Bloomberg, July 30, 2013.

[8] See, “States Only Spent Half of Foreclosure Settlement Money Helping Homeowners,” Alan Pyke, Think Progress, October 8, 2013.

[9]  See, “Foreclosure Settlement Checks Bounce,” ABC News, April 18, 2013.

[10] See, Correspondence from County Land Record Recorders John O’Brien and Jeff Thigpen, dated April 6, 2011, to Iowa Attorney General Tom Miller, asking for an investigation of MERS, a requirement that all MERS assignments of mortgages be filed immediately, and inclusion of the County Land Recorders in any settlements with servicers.

[11] See, “Immunity’s Not For Sale and Other Thoughts About JPMorgan’s Potential $13 Billion Settlement,” Sheelah Kolhatkar, Bloomberg Business Week, October 21, 2013.

[12] “The Untouchables” was the name of a PBS Frontline segment on January 22, 2013 on why Wall Street’s leaders have escaped prosecution for fraud.

[13] See “Eminent Domain: A Long Shot Against Blight,” Shaila Dewan, New York Times, January 11, 2014.