The illegal foreclosure scandal is spreading to more states across the U.S. and Congress is calling for a Justice Department probe. Image: CC/The-Lane-Team/Flickr

Evidence of illegal foreclosure practices have forced three major lenders to freeze evictions and foreclosure proceedings in 23 states. Wednesday the Justice Department announced it will investigate reports that some of the nation’s biggest mortgage lenders submitted illegal foreclosure documents to the courts. On Capitol Hill, House Democrats accused financial firms involved in the foreclosure scandal of violating the law. The prospect of a nationwide foreclosure moratorium is gaining momentum.

Banks back off as foreclosure investigations multiply

Illegal foreclosures became a nationwide issue when some major mortgage lenders admitted that employees signed off on tens of thousands of foreclosure documents without reading them. Bloomberg reports that J.P. Morgan, Bank of America and Ally Financial have backed off on foreclosures or evictions in the 23 states where courts have jurisdiction over home seizures. At least seven states are investigating lenders for using fraudulent documents and signatures to justify hundreds of thousands of foreclosures. State officials and legal experts have said the number of investigations is bound to increase.

Congress: Mortgage lenders violated the law

The foreclosure scandal is emerging as Congress tries to lean on banks and mortgage lenders to give a growing number of struggling homeowners a break. The Hill reports that House Speaker Nancy Pelosi and 30 California House Democrats submitted a letter to the Justice Department requesting an investigation of financial firms for “possible violations of the law.” The letter said banks had misled and obstructed homeowners from benefiting from a foreclosure prevention program funded by $50 billion set aside from the financial bailout to help the housing market.

Nationwide foreclosure moratorium

The letter to the Justice Department is expected to embolden support for a nationwide foreclosure moratorium, according to the Washington Post. Tuesday, the AFL-CIO joined other consumer groups calling for a foreclosure moratorium. But real estate analysts told the Post that the a moratorium could overwhelm the court system and further weaken the housing market by killing potential deals on foreclosed properties. Guy Cecala, publisher of Inside Mortgage Finance, said millions of homes in foreclosure remain “in limbo” until they are processed by the courts. A foreclosure moratorium would further delay a stabilization of home prices and a recovery for the housing market.

Mortgage foreclosure prevention just got a $3 billion infusion, but some say the housing market is too far gone for the money to help. Think Stock photo.

The Obama administration is pumping $3 billion into programs to help the unemployed with foreclosure prevention. Last week the administration announced plans to allocate $2 billion toward the Hardest Hit Fund, doubling the size of the program. Another $1 billion will go toward a Housing and Urban Development program to help unemployed borrowers who are delinquent on their mortgages. However, some housing experts are concerned that the funding infusion will help banks more than homeowners.

The foreclosure prevention money pit

To fend off an epidemic of unemployed foreclosures, the Hardest Hit Fund was launched in February as a way to help states design their own foreclosure prevention programs. The Wall Street Journal reports that the fund is currently financing initiatives in 10 states. The money is part of $50 billion earmarked for housing aid under the Troubled Asset Relief Program. The $2 billion infusion will be distributed to housing agencies in 17 states, plus the District of Columbia, that have the highest unemployment rates. Another $1 billion goes to HUD for providing interest-free bridge loans of up to $50,000 for eligible unemployed borrowers to be used to make mortgage payments for up to two years.

Hardest Hit Fund a drop in the bucket

The housing market, which has led the way out of past recessions, is dragging the current economic recovery down. The New York Times reports that interest rates are at record lows, but too few can afford to buy or refinance. Unemployed homeowners who live in communities where values have fallen sharply are often unable to sell. Their foreclosures weaken neighborhoods and create a vicious cycle that further undermines the housing market. Until now, the Hardest Hit Fund had been projected to help about 140,000 borrowers. With the new money, both the Hardest Hit and HUD programs could eventually help about 400,000 borrowers — a drop in the bucket set against 14.6 million unemployed and three million unemployed borrowers contemplating foreclosure.

Gravy train for mortgage lenders

Banks, not unemployed homeowners, will benefit more from Obama’s unemployed foreclosure funding, some experts believe. David Abromowitz, senior fellow at the Center for American Progress, told The Hill that banks should be required to share the burden being faced by unemployed borrowers. He said the main problem with the funding is that mortgage lenders don’t have to make principle reductions on loans or any major modifications. Abromowitz suggested that lenders should be required to make concessions and possibly even match funding. Dean Baker of the Center for Economic and Policy Research told The Hill that with so many people with underwater mortgages, the new funding is unlikely to do much good. Dean said for the programs to work there has to be a reasonable expectation that homeowners will have some equity in their property at the end or they will lose their homes anyway.

Are you financially illiterate? (Photo from creativecommons.org)

If you’re like a lot of people today, you may be looking for credit repair services now that the economy seems to be bottoming-out. Statistics show that in 2006 approximately 1.5 million consumers sought assistance in the management of their finances from the National Foundation for Credit Counseling (NFCC). By 2008, the number of customers seeking aid from the nonprofit organization more than doubled to 3.2 million.

Spokeswoman for the NFCC Gail Cunningham said, “One of the most astounding statistics is that people who came to us had six credit cards with unsecured debt totaling 62% of their total household income…To put this into perspective, realize that this debt does not include their house or vehicle payment, but strictly represents credit card debt.”

A startling 244% increase

The NFCC has nearly 3,000 credit counselors who help consumers with household budgets, provide debt counseling, housing counseling, (from purchase planning to foreclosure prevention), and bankruptcy counseling, (both pre-filing counseling and pre-discharge instruction). Cunningham verified that the agency’s largest area of growth was the housing-counseling division, which increased by 244% from 2006 to 2008.

Financial literacy survey

An NFCC survey, entitled the Financial Literacy Survey, provided some startling results. First, nearly one-third of Americans have no savings other than their retirement accounts. Second, during the last recessionary year, another third put no money at all towards their retirement.

Willing to give themselves failing grades

About 28% of those surveyed were unaware of the terms or interest rates of their mortgage loans, car loans, or personal loans.  If that isn’t frightening enough, another 41% were willing to admit to their financial illteracy in general, and gave themselves grades of C, D, or F concerning their knowledge of personal finance.  Cunningham stated, “To me, this strongly suggests that there is considerable room for improvement.”

Bringing financial ignorance into the light

The survey was telling of our society as a whole. One thing the recession brought about was an awareness that we are uninformed and uneducated when it comes to finances. This lack of information leaves people in difficult situations when, for example, credit card companies raise their interest rates. Our financial ignorance was brought into a glaring light as the recession wreaked havoc on the average household.

Education and awareness may bring change

“Having survived the recession,” added Cunningham, “people are now looking for credit repair options. That’s our job—to educate them on what to do and not do in the future. Our goal is to empower our clients, not just to get them out of their current financial situations.”

Education is the key to managing finances and avoiding bigger problems in the future. As a society we need to make a concerted effort to understand our financial positions. We need to know what it costs to live the way we do, and how to live within our means.  We also need to keep stay aware of changes in the finance industry.

Is the end in sight?

People are hoping the end to the recession is at hand. The economy is showing small signs of recovery, and consumers are starting to regroup and assess their finances. With organizations like the NFCC offering credit repair services, people should take advantage of the learning opportunity. Cunningham summed up our need for increased financial awareness when she said:

One of the things we want to convey to our customers is that you don’t know what the future holds. There could be another recession coming or there could still be a heavy burden to carry until the economy returns to normal. Everyone needs to be able to look at their 401(k)s and understand the terms. They need to know how to read their credit card agreements. They need to understand the value of a low-interest rate on loans….this is where the NFCC comes in. Hopefully if we are doing our job right we’ll create a new customer base of financially responsible and educated citizens.

Get professional credit repair help

Speak to a professional today and take proactive steps to repair your credit. For a FREE credit consultation, call 1-877-563-2076.