Officials of both the Mortgage Bankers
Association (MBA) and the Federal Deposit Insurance Corporation (FDIC) told
Congress Thursday that resolution of the problems that have plagued the
mortgage servicing industry through the housing and foreclosure crises must be
resolved before the housing market can fully recover.
Mark Pearce, Director of FDIC's Division
of Depositor and Consumer Protection and David H. Stevens, President and CEO of
MBA testified to a joint hearing of the House Subcommittees on Financial
Institutions and Consumer Credit and Oversight and Investigations Committee on
Financial Services on "Mortgage Servicing: An
Examination of the Role of Federal Regulators in Settlement Negotiations and
the Future of Mortgage Servicing Standards."
Pearce told that committees that, while
earlier actions of the primary federal regulators to issue enforcement orders
against the largest mortgage servicers should, if correctly implemented, put
servicers on the path to working effectively to resolve defaults going forward,
this review did not look at errors in the past.
These past practices used by servicers in modifying loans and in
processing foreclosures have given rise to a multitude of actual and potential
claims in litigation, clouding the status of recent foreclosures and title
transfers. The market anxiety surrounding
servicer performance is dampening expectations about the housing market's
recovery and is discouraging the return of private capital to the mortgage
market.
Pearce said that, while FDIC is not the
primary federal regulator for those large servicers responsible for most of the
servicing and foreclosure deficiencies, they have worked to address problems
with mortgage servicing operations.
Following the "robo-signing" revelations
last fall and the subsequent reviews by regulators, servicers signed consent
orders which require them to retain independent, third party consultants to
review past foreclosure actions and report the reviews back to the
regulators. These reviews, Pearce said,
must be independent and comprehensive in order to identify errors and provide
meaningful remedies to borrowers harmed through those errors.
Servicing problems continue to present
significant operational and litigation risks.
There are currently 90,000 homeowners involved in actions to forestall
foreclosure. In addition, FDIC is tracking:
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67
pending class-action suits in 23 states challenging foreclosures related to
robo-signing, defective assignments, the MERS system or misapplication of
payments;
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57
class action cases in 25 states alleging improprieties in processing loan
modifications under the Home Affordable Modification Program (HAMP);
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24
class actions in 18 states alleging misconduct under non-HAMP modification
programs
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21
investor suits in 12 states alleging foreclosure and securitization misconduct related
to originator action;
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Three
suits brought by three Attorney's General against two major lenders with more
such suits expected.
These legal actions and the anxiety
surrounding them as well as ongoing servicing and foreclosure problems will
continue to hinder the recovery of the housing and mortgage markets Pearce
said. Loans in foreclosure are taking
longer and longer to process, more than doubling between the end of 2007 and
2010 while the pace of loan modifications has declined. "Coupled with the impact of the market
uncertainty regarding the impact of allegations of past errors, this current
shadow inventory of non-performing loans in the foreclosure process hinders the
clearing of the housing market."
Improving servicing, Pearce said,
will take both market reforms and regulatory reforms and the incentive
structure of mortgage securitizations must also be addressed. While HUD has begun to rethink compensation
for mortgage servicers they must keep in mind the implication of changes on
small or community bank servicers who have not been guilty of the shortcomings
of large bank servicers.
Pearce said that the
experience of FDIC suggests that there are certain common-sense practices that
should be incorporated into servicing and securitizations:
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Servicers should have
the authority and be granted appropriate incentives to mitigate losses on
residential mortgages, address reasonably foreseeable defaults and do what is
necessary to maximize net present values of mortgages to benefit all investors
not just a particular class of investors.
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Servicers must be required to
disclose any ownership interests and have a pre-defined process to address
subordinate liens they hold on properties that also secure loans in pools they
service.
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Servicers must establish
a single point of contact for borrowers for purposes related to collection,
loss mitigation, and foreclosure in a manner that ensures timely, effective,
and efficient communication.
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Servicers must provide
sufficient staffing to manage loss mitigation, collateral management,
collections, and foreclosures to comply with state and federal laws and provide
adequate training to that stuff.
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Servicers must maintain sufficient
document control to ensure foreclosure proceedings that comply with relevant
laws.
Over the last few years the servicing system has "ill-served
all parties involved - borrowers, lenders, neighborhoods, and investors,"
Pearce said, "and has impaired the health and recovery of the housing and
mortgage markets. Addressing the
problems that have been uncovered is critical to reducing the risk of a wider
disruption to the foreclosure process, a larger cloud of uncertainty over the
ownership rights and obligations of mortgage borrowers and investors, and
further significant claims against firms central to the mortgage markets."
Stevens agreed that the mortgage servicing system "admittedly failed a great
number of consumers during the recent foreclosure crisis." There was, he said, a perfect storm when the
global economy collapsed, the subprime market failed, unemployment and loan
defaults soared and "It is clear that the real estate finance
industry as a whole was unprepared to handle these unprecedented events -- and
that mistakes were made."
Today, Stevens said, trust is lacking at every level of the
industry. "There is a lack of
trust between borrowers and servicers. There is a lack of trust between
servicers, regulators, the state AGs and the courts to find a joint solution as
to how to equitably handle borrowers facing foreclosure. And there is a lack of
trust between investors, underwriters, and credit rating agencies to restore
private capital to the mortgage market in a meaningful way. Without trust, the
housing industry goes nowhere. And by trust, I mean the ability of
policymakers, borrowers and the industry at large to have faith in the products
and services we provide, and how those loans will be serviced. We must do
better moving forward. "
MBA
believes that consolidated national servicing standards are necessary to
stimulate much of the needed reform of the system. Stevens referenced his past experience when,
as FHA Commissioner, he was able to achieve reform of that agency and said he
believes the environment now exists to reach similar agreement among regulators
and stakeholders regarding servicing standards.
Such a national standard would streamline and eliminate many overlapping
requirements, he said, and provide clarity for everyone involved, but it is
critical that the regulators act in coordination to develop a standard that
applies to the entire industry "rather than each piling on requirement
after requirement."
Developing
such a standard should involve a complete analysis of existing requirements for
servicers and state laws regarding foreclosures and all stakeholders must be
involved in an open dialogue. "Servicing
does not exist in a vacuum, Stevens said. "Instead, it is part of a
broader inter-dependent and inter-connected 'ecosystem' that involves all the
varied elements of the mortgage industry. The housing market remains
fragile. Therefore, when considering changes to the current model, policy
makers must be mindful of unforeseen and unintended consequences that could
ultimately result in higher housing costs for consumers and reduced access to
credit.