Foreclosures and the lost soul of the American Banks

On January 9, 2009, the Senate Congressional Oversight Panel, which was created to oversee TARP, confirmed the suspicion held by consumers that TARP funds were not “trickling down” to the retail lending market. The panel stated, “In particular, the Panel sees no evidence that the US Treasury has used TARP funds to support the housing market by avoiding preventable foreclosures.” The panel also stated, “Although half the money has not yet been received by the banks, hundreds of billions of dollars have been injected into the marketplace with no demonstrable effects on lending.”

Throughout the financial crisis, the recurring theme is that Wall Street saves itself while Main Street is left to wither. There is tremendous popular resentment that the recovery money helped save the big banks, but the banks did not turn around and work very hard to help the average person who was faced with losing their home. Anyone trying to restructure a loan that was underwater experienced this first hand. If they were successful it was not because the banks were helpful, it was because they were able to complete it despite the complexity and push back from the banks. This only made the average American distrust the banks more.

Realty Trac, a company that tracks foreclosure activity, announced in January 16, 2012 that more than 5 million Americans were now two months or more behind on their mortgage payments, setting the stage for a record high foreclosure rate this year. One million homes were repossessed by mortgage lenders in 2010, and  2011 is projected to be 1.2 million foreclosures.

On April 6, 2012, a federal judge approved the $26 billion settlement deal reached between the nation’s five largest mortgage providers; Bank of America, Citibank,  JPMorgan Chase, Wells Fargo, and Ally Financial (the former GMAC).

Banks will compensate some homeowners who were impacted by the robo-signing scandal, in which bank employees signed hundreds of documents a day. The banks committed at least $17 billion toward modifying mortgages for delinquent borrowers. $3.7 billion will go toward refinancing mortgages for borrowers who are current on their payments. This is supposed to help some 750,000 borrowers take advantage of low interest rates. For the people who have already lost their homes to foreclosure, there are payments of $1,500 to $2,000. This is expected to cost the banks $1.5B.

$5 billion in fines will be paid to the states and the federal government. Other funds will be paid to legal aid and homeowner advocacy organizations that help individuals facing foreclosure or experiencing servicer abuses.

But the beneficiaries are only the borrowers that have mortgages held by the 5 major lenders. Fannie Mae, Freddie Mac, Federal Housing Administration loans are not included in this settlement. Also the principal-reduction provisions apply only to delinquent borrowers is also a sore point for many borrowers. So the people who have been struggling but kept up with their payments despite the situation, will not receive a principle reduction even if their loan is underwater.

Banks need to seriously consider supersizing this program. There are so many struggling hardworking Americans that need help. Although the government is forcing this program through a settlement, the banks could do more. Banks have lost so much good will with customers during the crisis. 2011 Gallup survey indicated that only 25% of Americans trust the integrity of bankers. Now the government is forcing them to do the right thing instead of their past practices of robo-signing. Bank CEO’s should be like Steve Jobs when he went back to Apple. Win back the customer’s through doing the right thing. Without customer’s trust, banks will never be great again.

Read more about foreclosures and what can be done in BankRUPT – Why Banking is Broken, How it can be Transformed.

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About Carol Realini

Serial Entrepreneur, Mobile Payments and Banking Pioneer, Author, Board Member Carol Realini is a successful Silicon Valley executive and expert in financial service innovation. She has worked with leading financial institutions including MasterCard and Citi, as well as numerous multinational and regional banks, to change the way banking is conducted. In 2011, as a Technology Pioneer attending the World Economic Forum, she led discussions on alternative banking at their meeting in Davos. A serial entrepreneur, she has been recognized as one of the 50 Top Women in Technology by Corporate Board Member magazine. Carol is a huge believer in the potential of mobile banking and payments to create financial inclusion - where everyone with a mobile phone has access to affordable financial services that empower their life and work. To understand Carol's vision please watch the WEF video (click on the link below). Carol also mentors entrepreneurs providing wisdom and lessons learned from her four successful startup experiences.
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