Alyssa Katz is working on a series of articles for the Investigative Fund exploring the landscape of the foreclosure crisis, and the new vultures it has unleashed. In a piece for Salon, she explored for-profit mortgage servicers, many of whom had been among the worst of the subprime hucksters. For The American Prospect she looked at how real estate speculation has trampled the efforts of families and community groups to reclaim foreclosed homes. In this interview with Nation Institute intern Darius Dixon, she walks us through the complexities of the unfolding foreclosure crisis and explains how she identified this new breed of profiteers, ready to gain from others' loss. —Eds.
Darius Dixon: Your article talks about the government programs set up in March to help homeowners, but you found that the program was really more about rescuing the mortgage brokers themselves.
Alyssa Katz: Well, that's right. All over the country what we've seen is the emergence of an enormous loan modification industry that charges homeowners who are having trouble paying for their mortgages fairly hefty fees and offering to help them avoid foreclosure. I wrote that in Salon that the administration's plan to help homeowners was going to help brokers more because what I found was that in California, not only were these brokers popping all over the place and many of them were formerly selling subprime loans, but they were actually being licensed by the state of California to do this and were getting customers. I mean I went to these offices; phones were ringing off the hook, people offering to pay thousands of dollars. And so any savings that those borrowers would get as a result of the government's foreclosure avoidance programs were really going right to these brokers selling the services.
Dixon: So when and why did you start researching this?
Katz: Well, I got a call from Esther Kaplan at The Nation Institute Investigative Fund who was broadly wondering about what was happening to the former subprime players. The Investigative Fund does a lot of work of its own thinking about stories, not just relying on their reporters, and have been talking to people who noticed these very troubling signs of bad products continuing to be marketed even as the subprime ministry itself was falling apart. And as I started looking into some of these companies offering various services, I started to really see a lot of loan modification services schemes/operators out there, and began to wonder what they were up to.
One great thing about working with the Fund is that they are very responsive to what the reporter finds, and so they start out with one idea and I come back and say, well, actually I think this is really what's going on here. It's that not only are there more and more, every day, of these loan modifications companies charging people for services that they are not clearly providing or may not be helpful to borrowers, but in fact, as I found in California, this is becoming a state-licensed business. It is really to the Fund's credit that they want to really go to that extra, that deeper level on the stories, because honestly, in business you get many bad actors. It's part of the reality of the landscape and it honestly wasn't necessarily surprising to me, or I think to the Investigative Fund, that companies would be emerging offering these loan modifications. It was much more disturbing that the government was licensing the groups to do this, giving the imprimatur of legitimacy to a business that was very dubious.
Dixon: How would you differentiate what's going on now with the government incentive for these companies as to what was going on during the bubble?
Katz: Loan modifications have existed for a while. Basically what a loan modification simply is, is if a borrower has trouble making mortgage payments, a lender may be willing to make some other arrangements for payment, to make sure that the home doesn't go into foreclosure. They might lower the interest rate temporarily or stretch out how long the mortgage takes to get paid back, or tack on the amount of money owed to the end of the mortgage. There is a variety of ways of doing this, and so before the administration's plan, most loan modifications really were just prolonging the inevitable, because the money owed didn't go away. It had to go somewhere so it got hidden, pushed back, refinanced, so it basically became subprime phase two. The same loans would get restructured in ways that were equally destructive but on a longer time horizon, which meant the payments would continue coming in for the time being. So the big difference with the administration's loan modification plan that was announced in February and has come into effect this year is that it provides a little bit of money, not a whole lot, to one, make it worth the mortgage company's while to even consider doing this, just to give some small financial incentive. Although that has turned out to be far from adequate and also to set hard numbers about what they are looking for.
In other words, the lenders have to find an arrangement that would bring mortgage payments down to 38 percent of a borrower's net income, and if they can do that, then the government will provide a subsidy allowing the monthly payment to go down to 31 percent of income. So it sets a clear measure of what is affordable, whereas before, a loan modification could set up anything and the borrower would have to accept it. So not all landlords participate in the government loan modification program, but most do, many do. And it's definitely a step forward from what existed before, but it's far from adequate still.
Dixon: The plan tries to account for 4 to 5 million homeowners, something on that order. I mean, compared to the number of foreclosures, that seems very infinitesimal.
Katz:To the administration's credit, I mean they are dealing with a very, very, bad hand of cards here. So many borrowers are in situations where it's simply not financially feasible for any lender to offer them a deal. Many borrowers are what's known as “underwater” so it makes it impossible, for example, for them to refinance into a cheaper or more affordable mortgage. If you are “underwater” it means that you simply owe more than the property is worth, and many times even a lower payment would still be far more than the borrower could afford. Or the other scenario is people either said they were going to live in a home and really didn't, they bought it as an investment. Or very, very often what they have is a second mortgage, and the thing is that even if they get a modification on one mortgage, they might've used the second mortgage to make a down payment or for some other purpose. And if that second lender won't agree to the modification, they are out of luck too. So when you start removing all the people who would qualify, who would really benefit from such help, you really have a much smaller universe. And of course now, with rising unemployment, that is a huge blow because no loan modification would make a mortgage payable for someone who has no job and no income. So we are talking about a pretty small group of people who can be helped.
Dixon: So you see because of the economy, a boom and more foreclosures because people can't pay on these houses or get refinanced.
Katz: Absolutely. Unemployment is definitely the biggest driver right now of increased foreclosures. I mean, for a while it was adjustable interest rates, early on in the foreclosure crisis, you had teaser rates that would then reset to higher rates, but in fact that ended up not being as huge a problem as a lot of observers have initially feared because of a couple of reasons. But one is that interest rates in general have stayed fairly low and so have the benchmarks that lenders used to set borrowing rates. What it means is that adjustments don't go up terribly high. The more of the problem are these type of mortgage products like interest-only mortgages, option ARMs, pick-up payments, things like that, where borrowers are paying much less than the actual cost of what would they need to pay a mortgage successfully over a period of 30 years. I think that's the group of people who really needs the most help right now
Dixon: Now, it's been several months since you published this story. Have you seen any changes that you like in the program or anyone who is raising any red flags?
Katz: First of all, there's been some great journalism that really follows up on what I did. My story was really the first big one to look at this business, and specifically how this business is trying to become more legitimate and entrenched itself as part of the solution. You saw a lot of companies, like they would put President Obama's picture on their websites or they would make it look like an official government site, you had all that going on.
What we see now is one, even though the numbers from the government aren't in yet, it's increasingly clear that loan modifications, there just aren't as many as there should be right now. And that the companies that are saying they are doing the work or not achieving results, in some cases these companies maybe making some good-faith attempt to do that, in many cases they're not, but because so few modifications are going through, the results are the same. People are paying a lot of money, not getting results. So I think there is awareness of it now. The New York Times has been especially good just these past couple of weeks in following up on that. So now there's a really, we are at a very interesting crossroads because now all the things I warned about in the story have really come to pass. One, you have a lot of companies out there providing services of really dubious value, and that two, loan modifications aren't always a good deal for borrowers because they forestall the inevitable, even under the government programming, in some cases even raise people's payments. And that three, we just weren't going to see a whole lot of them because the incentives weren't good enough for the lenders, just to use shorthand for that. Now that all that's clear, the question is what's next. And you already had Barney Frank in Congress last week saying, what if we don't get more loan modifications soon, cramdowns are going to be back on the table, and what a cramdown is, is the legislation empowering bankruptcy judges to reduce the amount of principal that a borrower owes.
You know, you can tweak interest rates or monthly payments or do various things, but at the end of the day, if the principal is still far in excess above what the borrower can pay and also what the property is worth. I mean you have to remember how much real estate, especially on the coast, is just really, in any reality, and certainly now, worth far less than the amount many borrowers owe on it. And one of the big problems of loan modifications, as I point out in my article, is that you're basically compelling borrowers who paid too much, to agree to recommit to this excessive amount of money they borrowed. It becomes a sort of prolonged indebtedness that's endorsed at this point by the federal government and that may not be a great idea. Yes, for some people, people who want to hold on to their homes and they go in with eyes wide open, knowing they're getting into and want to do it, that's great, but for many, many people, it's not the best financial decision even if it's emotionally the best decision.
So the question now going forward, as Barney Frank said, we have to begin looking at principal reductions. This is not easy. Let's not pretend. The reason why we haven't seen principal reductions, certainly not from banks, but why the Obama administration is also not asking for them directly, is that they would deal a huge blow to the value of the mortgage-backed securities that many investors hold. What we have now is continued concern, realistic concern, about the condition of the banking system. So many financial institutions really have a lot of toxic assets on their books; they've been able to change the accounting and make their books look better, but doing principal reductions on a massive scale would be a huge blow. So we haven't seen this kind of systemic change yet. What has happened homeowners continue to be on the losing end of this question, who's going to pay for the crisis? So far, it's been them.
Dixon: When you were writing up this story and investigating, you went on the ground, you went off to California. How did you plan that out?
Katz: Well, first of all, I was able to go to California, of course, because of The Nation Institute's funding, which was wonderful, and I simply began to look at who were the players in this field and what kind of trail were they leaving behind. And I quickly found, just doing very basic internet and other source backgrounding on some of the players, is that they were very often people who had been selling subprime mortgages just a couple of years before. And not just anybody selling subprime mortgages, some of the principals in these companies that were signing up to do loan modifications had been involved in some of the most problematic subprime lending operations that used really aggressive tactics or operated at the edge of the law. And that their specialty was basically talking people into making bad financial decisions. And this to me was clearly a concern in the loan modification business.
I would look for anyone to be willing to talk to me, going through a list, looking at their products and practices and histories and then targeting companies that I thought looked like good opportunities. One helpful thing about loan modifications, if I can just sort of share a little bit of my method, is that part of the marketing for them is that this is saving homeowners, this is a good thing, that it's really providing a public service. So this makes a lot of people doing this work very eager to talk to journalists. They think it's a good opportunity to promote what they are doing and share the love.
Dixon: Some of the quotes you have and they seem almost cheerful when they are talking to you, happy about what they are doing, very proud of it and it's part of the sloganeering, I suppose, selling it to the homeowners.
Katz: And I think to a great extent, they themselves believe it. Part of what I do as a journalist is listen to people as they come to me and understanding the world from their point of view. This isn't a “gotcha.” I imagine you could feel someone different on the other side of my interview, but the idea is to really understand, well, how are they presenting themselves, how do they see themselves, and how do they operate? Because that is how their customers are going to see them, too. And that's the sales pitch: we're going to help you. We are part of the solution. That was the opening for me to go in and talk to them.
Dixon: Are there maybe one or two things that you feel that are still being missed with the loans and with the previous companies gearing up to sell this seemingly predatory loans again?
Katz: No. I have to say to the credit of many other fine journalists out there, between the time that I wrote this piece, which it came out in March and I basically reported it in January, and now I'd say even in the past month, all the missing pieces of the story have emerged very clearly and publicly. Like I said, The New York Times has been especially good on this. What we've now seen is loan modifications aren't happening, these companies that are doing it are by and large not performing the services they claim to be and also that lenders have powerful, powerful incentives not to do loan modifications because they just make a whole lot more money if people go into foreclosure. So I think that's all the really important stuff to understand. I think the real question now that journalists need to be asking about, and they are not as equipped to do this in mainstream daily journalism as there might be in some vehicle like The Nation Institute Investigative Fund, is asking what comes next. Are we just going to have to push for cramdowns and let the chips fall where they may? And investors, including banks, will have to take those losses? Or is there some other solution that the federal government can come up with, any of which it's going to cost enormous pain to banks? So that's really the next big question.
Dixon: Thank you, Ms. Katz. It's been a pleasure talking to you.
Katz: Thank you.