Federal Deposit Insurance
Corporation Chairperson Sheila Bair told an audience in Washington on Tuesday
that the current "robo-signing" situation underscores how wrong
things went in the financial crisis and that there is still a lot of work to
do.
Robo-signing refers to recent
reports that servicers are relying on shoddy documentation and skirting legal
procedures in some states, foreclosing on properties without sufficient
authority or even reading the relevant documents. These reports have led three large money center banks to
temporarily halt foreclosures and the sale of owned real estate as the
attorneys generals of the majority of states have called for a nationwide moratorium.
Bair told the Urban Land
Institute that the robo-signing issue also points to the poorly aligned
incentives that have existed in the mortgage servicing business. Pricing of mortgage securitization deals have
resulted in inadequate funding and staffing of servicers, making it difficult
for them to address problems. In
addition, the frequent practice of requiring servicers to advance principal and
interest payments to the securitization trusts for nonperforming loans while they
quickly reimbursing them for their foreclosure costs has had the effect of
accelerating foreclosures while discouraging modifications. Foreclosure is a costly, unpleasant,
and emotional process, she said. It hurts communities and families alike and
should be a last resort; loan modifications should be considered whenever
possible. "Foreclosure should only come after careful thought, thorough
analysis, and good documentation."
In response to these systemic problems, Bair
said that the FDIC has recently adopted a new rule on securitizations which
requires that the issue of servicer incentives be addressed in order to obtain
safe-harbor status. New agreements must
provide servicers with the authority to act to mitigate losses in a timely
manner and modify loans in order to address reasonably foreseeable
defaults. "The agreements,"
she said, "must require the servicer to act for the benefit of all
investors, not for any particular class of investors. The new
rule also strictly limits the number of advances the servicer must make to
three months unless there is a way to promptly repay the servicer short of
foreclosing and selling the home.
FDIC's authority is limited to
imposing this rule on banks, but Bair said that the Dodd-Frank financial reform
law provides an opportunity to improve incentives across the market. "Dodd-Frank requires regulations
governing the risk retained by a securitizer.
Those regulations may reduce the standard 5 percent risk-retention where
the loan poses a reduced risk of default."
While an initial review indicates
that FDIC supervised non-member state banks did not engage in robo-signing and
have limited exposure to the current situation, Bair said her agency continues to
closely monitor the problem and is working with other regulators through its
backup examination capacity where the FDIC is not the primary federal
regulator. FDIC is also requesting
certifications from loss share participants in failed bank transactions that
their foreclosure activity complies with all legal requirements.
Bair said that servicing plays an
important role in mitigating the incidence of default and that new regulations
should addressed the need for servicer reform.
"We want the securitization market to come back," she said,
"but in a sustainable manner. Its
return should be characterized by strong disclosure requirements, high-quality
loans, accurate documentation, better oversight of servicers, and incentives to
assure that servicers act to maximize value for all investors.
Bair also spoke
to the audience about challenges in commercial real estate where, she said,
average prices are down by 30 to 40 percent from peak levels of 2007 and rents
continue to drop. Credit availability
has been limited as lenders have tightened standards, the commercial
mortgage-backed securities market has virtually disappeared, and the credit
standing of many borrowers has declined.
She said that FDIC holds about half of the $4.5 trillion in CRE loans currently
outstanding so her agency has been focusing on this market for a long time.
Federal
regulatory agencies issued guidance last fall on how banks should confront the choices
they have to make when some loans with significantly reduced collateral values
come up for renewal. This, she said was an important step to reduce uncertainty
as to how restructuring efforts would be viewed and reported for regulatory
purposes. Some have criticized these
loan workouts as a policy of "extend and pretend," she said, but
"the restructuring of commercial real estate loans around today's cash
flows and today's low interest rates may be preferable to the alternative of
foreclosure and the forced sale of a distressed property. And going forward, as
is the case with residential mortgage lending, we need better risk management
and stronger lending standards for bank and nonbank originators to help prevent
a recurrence of problems in commercial real estate finance."
Bair said that she believes that,
for now, continued federal involvement in mortgage lending is needed
to keep credit flowing on reasonable terms to the housing market as the economy
and the financial system recover. But going forward, there needs to be a
broader debate about the future role of government in mortgage finance and the
housing sector.
READ MORE: Special Servicers More Motivated to Mitigate Housing's Losses