Obama Foreclosure Program Criticized By Expert Panel

PROVIDENCE, R.I. -- Former Wall Street bailout watchdog Neil Barofsky blasted the banking industry on Friday for inflicting a litany of abuses on American homeowners, and issued a withering critique of the Obama administration for protecting those same banks at the expense of homeowners.

"Our entire housing system is built on a foundation of fraud," said Barofsky, who served as special inspector general for the Troubled Asset Relief Program from 2008 into 2011.

Barofsky's comments came at a special panel on foreclosure fraud at this year's Netroots Nation conference -- an annual gathering of progressive bloggers and activists. Barofsky and white-collar crime investigator Lynn Szymoniak, Massachusetts foreclosure activist Malcolm Chu, and moderator David Dayen recounted foreclosure horror stories in which bank documentation is in such disarray that homeowners who have not even missed mortgage payments find themselves facing foreclosure. In thousands of other cases, the panelists emphasized, homeowners who do find themselves in financial trouble are unable to obtain any kind of relief from banks, even when aid would be less costly for investors than evictions. Meanwhile, in other cases, the banks rely on an entire cottage industry of forged signatures and fabricated documents to push through evictions.

That terrible documentation, Szymoniak said, has jeopardized the integrity of the entire housing market, which has been using bogus ownership records for several years as homes have changed hands. Both she and Barofsky argued that the magnitude of the documentation problem -- and the fact that any concerted effort to solve it would hit the bottom lines of Wall Street banks -- has discouraged Washington from taking action.

But Barofsky levied particularly heavy criticism on the Obama administration, which he said broke a promise to Congress to fix mortgages in exchange for the TARP vote in 2008. As Barofsky recounted, Obama told lawmakers he would change bankruptcy laws to secure widespread foreclosure aid if they voted in favor of the bank bailout. But once in office, according to Barofsky, Obama abandoned the pledge. Other lawmakers, including Rep. Brad Miller (D-N.C.), have previously presented a similar accounting of the events to HuffPost.

"Foreclosure relief and mortgage modification was what Congress demanded to bail out the banks," Barofsky said. "That was part of the deal for TARP."

The White House did not immediately return requests for comment. But the administration frequently responds to criticisms of its foreclosure record by highlighting the number of families helped by its Home Affordable Modification Program, its efforts to expand refinancing programs to underwater borrowers and a $25 billion settlement with the nation's largest mortgage operators.

HAMP, however, is widely criticized by foreclosure activists as ineffective. Because the White House has allowed banks to administer much of the program, critics say, many of the abuses -- such as those detailed by members of the Netroots panel -- have occurred under the HAMP program. Borrowers are frequently foreclosed on after being promised loan modifications from their banks, and have enormous difficulty communicating with banks that claim to lose tremendous volumes of paperwork.

Barofsky dedicated much of his time on the panel to deriding the settlement with some of the biggest mortgage operators.

"You have a settlement that is supposed to change behavior ... and how does it work? The taxpayer money flows from us toward them," Barofsky said, referring to Wall Street banks that process mortgages and foreclosures. "They're actually going to profit, they're going to recognize taxpayer-funded profit [from aspects of the settlement]."

Much of the $25 billion settlement figure, Barofsky said, will reward banks for activities they would ordinarily perform in the normal course of business. After evicting borrowers, banks sometimes are unable to resell their home, and bulldoze the property to curb their own losses. Under the settlement, the cost of bulldozing will count toward the $25 billion. Similarly, some states permit banks to seek unpaid loan balances from borrowers even after foreclosing on a home. In practice, banks almost never actually pursue such activities, as borrowers who lose their homes are usually broke. Nevertheless, any unpaid loan balances that banks do not pursue will count toward the $25 billion settlement total -- even though banks ordinarily wouldn't be seeking this money.

But Barofsky appeared most critical of the settlement's relationship with HAMP. Loans that are modified under HAMP will also count as part of the $25 billion settlement total. But HAMP is itself a taxpayer-financed program that already subsidizes banks for providing foreclosure relief, resulting in another indirect subsidy for big banks.

One of the $25 billion settlement's architects, New York Attorney General Eric Schneiderman, boasted about holding banks accountable during a Netroots speech on Thursday, but declined an invitation to participate in the foreclosure fraud panel, according to Dayen, the panel's moderator.

White-collar crime lawyer Szymoniak and Chu, the Massachusetts activist, both bemoaned Obama's frequent invocation of "responsible" borrowers, arguing that this subjective focus on the moral integrity of borrowers ignores the rampant wrongdoing committed by the banking system both before and after the financial collapse. Chu emphasized that much of the legal architecture surrounding the mortgage system is rigged against middle-class and low-income homeowners, while providing breaks for wealthier borrowers.

"We live in an economic system where if you own two houses or a yacht, you can declare bankruptcy and save those with principal reduction. But if you've only got one house, you can't," Chu said. "So people find themselves in foreclosure through a whole set of factors beyond their own personal decisions."

The panelists generally appeared heartened by the media attention foreclosure fraud has received over the past two years. Nevertheless, Barofsky has little faith that Republican or Democratic politicians will do anything substantive to curb foreclosure abuses.

"We will be here in two years again, talking about this program, unless something radical changes. And I don't see how it's going to happen," Barofsky said. "So many people make so much goddamn money off of it, and that is what controls things in Washington."