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Banks allocate relief funds to short sales, home equity loan forgiveness

180px-National_Bank_OamaruFive banks that agreed to help struggling homeowners last year to settle allegations of foreclosure abuses have spent a majority of the promised aid on forgiveness that eliminates home equity loans and sales that displace homeowners.

In accordance with a $25 billion settlement last year, Bank of America, JPMorgan Chase and three other banks spent $19.5 billion through the end of 2012 to approve a number of short sales, which allow homeowners to sell their properties for less than they owe on their mortgages, and $11.3 billion to get rid of home equity loans tied to delinquent mortgages. The banks, however, spent only $6 billion to reduce principals to help borrowers retain their homes, an increase from $2.6 billion at the end of the third quarter, Bloomberg reports.

Profits from new loan origination have increased, even as regulators seek to penalize firms that pursue foreclosure using fake or missing documentation or make mistakes in the loan modification process.

“The banks have shown a knack for sidestepping government attempts to have them redress their role in the foreclosure crisis and keep people in their homes,” Arthur Wilmarth, a law professor at George Washington University, said, according to Bloomberg. “A lot of these efforts end up helping the banks, not the homeowners.”

Short sales allow banks to get rid of high-maintenance borrowers as they seek to implement a number of new servicing regulations established under the settlement. Short sales are generally preferable to consumers over foreclosure and usually cost the banks less. Fair Isaac Corp., the creator of the FICO credit rating system, said, however, that short sales can harm consumer credit just as much as foreclosure.

Last year, Bank of America, JPMorgan, U.S. Bancorp and Wells Fargo reported $24.4 billion in income from home lending, and combined profits for all U.S. commercial banks increased to a record high of $130.2 billion, surpassing a peak in 2006 of $128.1 billion.

“Banks are paying mortgage settlements—it’s definitely a big expense for them—but they have set aside reserves for that,” Patrick Sims, the director of research at Hamilton Place Strategies, said, Bloomberg reports. “With the improvement in the economy and less troubled loans, banks now can take their capital and apply it to more profit-making activities.”