George Babcock: RI’s Foreclosure Issue is a Community Problem
Tuesday, October 08, 2013
Banking and Community
For generations when Rhode Islanders received home mortgages from Old Stone Bank and Hospital Trust, the process was fairly simple: the homeowner applied for the loan, was approved, and would have a closing. At the closing, the homeowner was required to sign two documents: 1) a promissory note obligating the homeowner to pay all monies borrowed back to the bank in installments, over a period of time, and at a specified interest rate and 2) a mortgage which provided security for the lender and allowed it to foreclose on the property in case of non-payment under the terms of the promissory note. The note and mortgage are inseparable under the Rhode Island General laws. The local banks of yesteryear retained the loans in-house and did not sell the servicing rights or the promissory notes.
Previously in times of great financial hardship, borrowers experiencing difficulty could walk into the neighborhood branch of Old Stone Bank or Hospital Trust, speak face to face with an account representative and receive a restructured loan, forbearance plan, or other repayment options in order to avoid foreclosure. A prime example of this relationship between a bank and the community is evidenced in “It’s a Wonderful Life” and the Bailey Building & Loan and with dedication to supporting and building communities.
Rise of National Banking Institutions
Eventually, the Old Stone Banks and Hospital Trusts gave way to national banking institutions such as Bank of America, JPMorgan Chase, and Wells Fargo, who routinely sold homeowner’s promissory notes and “bundled” them into large packages that were sold as Wall Street securities. No longer could a homeowner walk into a bank branch and talk to a representative having the power to restructure a loan and create forbearance and repayment plans. At this point in time, the need for local banks engaged with the community is at an all time high.
Despite Rhode Island’s historical interrelationship between the local banking industry and community development, the Rhode Island Bankers Association (“RIBA”) has turned its back on homeowners and the working class.
On August 16, 2011, the Honorable Justice John J. McConnell, Jr. of the United States District Court for the District of Rhode Island issued a stay of all litigation, foreclosure, and evictions in cases pending in his court directing the parties to have meaningful settlement discussions prior to the cases proceeding. On January 5, 2012, Judge McConnell appointed Merrill Sherman as a Special Master to create and administer a settlement process and structure with the goal of keeping individuals in their homes.
At the very beginning of her tenure as Special Master, Ms. Sherman reached out to the local banking community to build a coalition of local lenders that could step in and assist homeowners who had the ability to pay a mortgage in obtaining new financing and ultimately retain ownership of the property. In a June 1, 2012 report to Judge McConnell, Ms. Sherman reported that she described her settlement program to RIBA and received a positive reception from the association members and a head of a major local credit union. Ms. Sherman also attempted to “secure further participation and funds” from Rhode Island Housing Mortgage Finance Company (“RIHMFC”) and the State Attorney General. To this date, RIBA, RIHMFC, and the State Attorney General have not participated in the settlement program. These entities have chosen to sit back like Mr. Potter and hope that the settlement program fails so their interests are advanced ahead of the interest of the communities.
Meanwhile, the 2013 HousingWorks RI Housing Factbook evidences that the communities hit hardest by the foreclosure crisis are in the urban centers of Providence, Woonsocket, and Central Falls. These communities have experienced urban blight and severely decreasing property values. After properties are foreclosed (often illegally), they are stripped of all tenants by absentee owners (the banks) and can remain vacant for years. While thieves steal the property’s copper, gut them of all valuables, and vandals deface the property.
For example in Providence, neighborhood blight caused by vacant properties reached its pinnacle when former Providence Housing Court Justice Jorge O. Elorza severely fined Deutsche Bank for failing to appear in Providence Housing Court in response to numerous subpoenas seeking information as to why Deutsche Bank allowed the subject properties to fall into such disrepair. In an effort to hold owners of vacant accountable, the City Council passed an ordinance fining property owners for not securing those properties.
In short, the foreclosure problem facing Rhode Island is first and foremost a community problem which has morphed into a legal, judicial, and political battle of the Mr. Potters v. the George Baileys. The solution is simple and has nothing to do with interpreting Rhode Island foreclosure law or prosecuting banking fraud. The Rhode Island banking community has an opportunity to become reengaged in community preservation and development, yet they refuse to participate.
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