The Breakdown

Explaining Southern California's economy

Housing advocates accuse Wells Fargo of damaging communities through foreclosures

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Wells Fargo writes the most mortgages in California. According to a new report released Tuesday from a consortium of grassroots activists and housing advocates, 11,616 of those loans are currently in foreclosure, out of roughly 65,000 homes in foreclosure in the state.

The report accuses Wells Fargo of damaging both California communities and the state’s overall economy. It was produced by the Alliance of Californians for Community Empowerment, the Center for Popular Democracy, and the Home Defenders League.

Ross Rhodes of the Alliance of Californians for Community Development said on a conference call Tuesday that Wells Fargo was singled out because the bank is "responsible for handling more delinquent loans than any other servicer."

He added that Wells Fargo is failing to live up to the terms of last year's mortgage settlement between the states and the country's biggest banks. Rhodes said that Wells is lagging behind both Bank of America and Chase in efforts to keep people in their homes. 

In a statement, Wells Fargo said that its foreclosure rate in California is lower than its rate in the nation as a whole and that the report "appears to be an attempt to question Wells Fargo’s longstanding track record as a fair and responsible lender and servicer."

The bank emerged from the financial crisis relatively unscathed. But in recent years it has been called to task for past lending practices. It was was fined $175 million by the Justice Department in 2012 for steering minorities into costly subprime loans before the housing crisis.

The bank was also fined $148 million by the Securities and Exchange Commission for violations perpetrated by Wachovia Securities (Wells took control of Wachovia in 2008, at the height of crisis, when major U.S. banks were failing). 

The report also argues that Wells Fargo’s foreclosures in the state are disproportionately affecting African American and Latino neighborhoods and could wind up costing the state $20 million in lost tax revenue. 

The authors say that the solution is “principal reduction” — adjusting mortgages to reflect the reduced market value of homes in foreclosure.

Numerous economists support the idea of principal reduction, but the notion has been resisted at the federal level, most notably by Edward DeMarco, acting director of the Federal Housing Finance Agency, which has overseen mortgage giants Fannie Mae and Freddie Mac since they were taken into receivership during the financial crisis. 

DeMarco has supported principal forbearance, a method that would not reduce the amount of mortgages held by Fannie and Freddie but rather restructure them so that homeowners could see more affordable payments.

The report's consortium of advocates doesn't favor forbearance, arguing that it can't address the core issue of borrowers drowing in debt. 

But as tempting as principal reduction might be in theory, in practice is doesn't always lead to the homeowner staying in the home.

Economist Stuart Gabriel is Director of the Ziman Center for Real Estate at UCLA. He said that principal reduction isn't a "cure all."

"For borrowers that are deeply underwater, a modest amount of principal reduction is going to make no difference the ultimate outcome, which would be default and foreclosure," Gabriel said.

In its statement, Wells Fargo called its principal reduction efforts since 2009 "aggressive." But the advocacy groups said that Wells Fargo is one of the most difficult banks to work with, and that it engages in "dual tracking" — undertaking loan modifications at the same time it moves forward with the foreclosure process.

The report also recommends that Wells Fargo disclose more data about its foreclosures, and specifically about the impact that foreclosures are having on minority neighborhoods in California.

Gabriel said that more transparency about lending practices and the racial and geographical makeup of loan portfolios is always a good thing because additional information improves markets.

Follow Matthew DeBord and the DeBord Report on Twitter. And ask Matt questions at Quora.

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