WASHINGTON -- Despite mounting evidence of big banks committing serious fraud in the foreclosure process, the U.S. Senate eliminated $35 million in legal aid to homeowners trying to keep their homes.
The fund was wiped out in order to meet government spending caps advocated by Sens. Jeff Sessions (R-Ala.) and Claire McCaskill (D-Mo.), but will likely end up costing taxpayers much more in the long run, as wrongful foreclosures burn through the balance sheets of Fannie Mae and Freddie Mac. The slashing of the foreclosure-assistance fund is just one casualty of Washington's increasing bipartisan push to cut spending across the board.
The $35 million fund was created by the Wall Street reform bill signed into law by President Barack Obama in July, but the Senate never took the additional necessary step of appropriating the money. Even if it had been appropriated, Senate Majority Leader Harry Reid (D-Nev.) last week gave up on passing a budget for next year in the face of Republican opposition to earmarks.
Although the dollar amount is tiny in comparison with other federal housing programs, legal aid funding is a critical to the foreclosure relief effort. Without hiring a good lawyer, it is extremely difficult for borrowers to successfully defend their homes against banks -- even when banks are committing clear-cut violations.
Recent reports suggest severe, nationwide problems with the mortgage system. A survey of 96 attorneys found that banks started foreclosure proceedings on 2,500 borrowers who were negotiating a loan modification. The survey was conducted by the National Association of Consumer Advocates and the National Consumer Law Center.
According to a Dec. 13 report by the Congressional Oversight Panel, Obama's main foreclosure prevention initiative, the Home Affordable Modification Program (HAMP), will reach less than one-fourth of the borrowers it was intended to. And for the lucky few that do get help, the process can require years of legal wrangling. Over 29,000 borrowers have been stuck in trial modifications awaiting permanent relief for at least one year, according to the COP. Under program rules, the trial period is supposed to last for 3 months.
Millions of other homeowners have been improperly denied loan modifications, charged illegal fees, and even improperly evicted. But for the $35 million legal aid fund to ever do borrowers any good, Congress had to actually set aside money for the program. And the Senate Appropriations Committee never did.
As rhetoric about allegedly out-of-control government spending heated up this year, both Obama and members of Congress began touting plans to freeze discretionary spending. Sen. Jeff Sessions (R-Ala.) and Sen. Claire McCaskill (D-Mo.) even authored a bill that would have implemented a three-year freeze on spending levels. While the bill never passed, it made new initiatives like the foreclosure relief fund very difficult to get through the appropriations committee, according to Senate aides familiar with the battle. The committee decided to follow the Sessions-McCaskill limit despite the fact that it didn't have the force of law.
McCaskill, who does not serve on the Appropriations Committee, insisted that she was not to blame in an interview with The Huffington Post.
"I'm not an appropriator, so I don't participate in the process of prioritizing. So I can't speak to the priorities that they decided were most important. Clearly, going to Sessions-McCaskill levels of spending, that was a modest cut in what had been submitted by the president. It's still an increase over last year. So I'm trying to figure out why they had to cut a program if in fact this budget reflects an increase over last year's spending, which it does, a little short of two percent," said McCaskill.
Rep. Barney Frank (D-Mass.), chairman of the House Financial Services Committee, regretted the Senate failure. "We had a big fight in our committee and we won it to, to reauthorize $35 million and we're hoping it gets appropriated," he told HuffPost late last week.
"I think McCaskill is wrong on these things. I understand she's got some worries about her district, but she plays an unconstructive role in this," said Frank. "These kind of restrictions on domestic spending with unlimited spending for the war -- and you always have to talk about both -- is a great mistake. And the liberal community's got to focus more on Afghanistan, Iraq, NATO. NATO is a great drain on our treasury and serves no strategic purpose."
Frank said the overall deficit hysteria has tilted the debate. "The president plays into it with his freeze on domestic spending," he said. "And particularly when you say we're going to stick with where we are, how do you accommodate new things?"
Critics say that targeting legal aid simply makes no sense in the context of the overall federal budget. "This is such a trivial sum -- it's what we spend on the military in about 20 minutes," according to economist Dean Baker, co-Director of the Center for Economic Policy and Research.
What's more, by allowing borrowers to fight improper foreclosures, legal aid funding would almost certainly help ease taxpayer losses from fraudulent home seizures implemented by major banks. Fannie Mae, Freddie Mac, the Federal Housing Administration and the Department of Veterans Affairs all provide federal guarantees for mortgages. When those mortgages sour, government agencies are usually better off working out a mortgage modification with a borrower than foreclosing.
But government agencies do not connect with borrowers -- instead, they rely on private sector banks to interact and negotiate on their behalf. Since the banks make money from charging fees and conducting foreclosures, critics allege that banks are improperly pushing borrowers into trouble -- at taxpayers' expense. Legal aid funding to help borrowers could help limit those losses.
"We don't know how many foreclosures this will end up preventing, but given that we are willing to spend over $100 billion a year in tax subsidies to support people owning a home, it certainly seems reasonable to spend $35 million a year -- less than 0.04 percent of this amount -- to give them the chance to stay in their home," Baker said.
Frank said that the fiscal argument is counterproductive and that legal help should be given to homeowners in foreclosure as a matter of social justice. "Let's not make that argument. We don't know and you don't know," he said. "I'm for the money because I think it's a matter of social justice. Let's not try to [make] up that we think it's going to save money in the long run, which we don't know. And that's not why we're doing it."
Regardless, banks clearly come out winners in the plan. Fewer borrowers fighting foreclosures results in more bank revenue from foreclosure fees, and lower expenses for the banks.
"The mortgage servicing industry is broken and that the effects of that broken system are being felt by America's homeowners," Rep. Maxine Waters (D-Calif.) told HuffPost. "If not for the tireless efforts of foreclosure attorneys, many families would have mistakenly lost their homes and the fraudulent and corrupt practices of the mortgage servicing industry may have never come to light."
The author of the legal aid provision, Rep. Mel Watt (D-N.C.) expressed frustration over the impasse in an interview with HuffPost, accusing the funds' detractors of using budgetary gimmicks as an excuse to cut a program they didn't support.
"These funds are as important now as they were when we were trying to get them into the bill in the first place," Watt said. "There were some people who didn't want this fund all along. We had to work to get it in there, so it's not surprising that they would try to come up with excuses to take it out."
Banks are likely to benefit from the death of the legal aid package, as borrowers find themselves financially unable to challenge improper fees and foreclosures. But the fund's defeat is doubly unfortunate for struggling homeowners thanks to last week's defeat of a separate legal aid bill in the House.
The U.S. Treasury Department had refused to allow funds for the Wall Street bailout to be spent on legal aid for borrowers, citing a lack of legal authority. That decision came under fire from COP panelist Damon Silvers during a Dec. 16 hearing.
"When hedge funds get money under [the bailout], I believe they get to pay for lawyers, and it puzzles me that a vast amount of TARP money has been expended on legal counsel for the benefit, obviously, of the government. It seems as though lawyers are understood to be a necessary and essential component of all the transactions that HAMP and TARP undertake, except when homeowners need the lawyers."
But Treasury had insisted that because the Wall Street overhaul included a $35 million legal aid fund, a separate fund was not necessary. Last week, House lawmakers from foreclosure-battered states attempted to push legislation that would explicitly authorize Treasury to extend legal aid funds to borrowers, but the bill failed to garner the two-thirds majority needed for passage under fast-track rules.
So troubled homeowners will not be receiving any help from Congress this holiday season. And with soon-to-be-House-Speaker John Boehner (R-Ohio) opposed to legal aid programs, they are unlikely to get any further assistance next year.