At yesterday’s Senate Banking Committee hearing, three experts in the law—a state attorney general, a legal services attorney, and a law professor—agreed on this about the mortgage servicing industry: The problems aren’t just technical, and they aren’t just with robo-signing.
For the banks to characterize the situation in such simplified terms “shows a certain type of arrogance,” said Iowa Attorney General Tom Miller, the point man for a 50-state investigation into flawed foreclosure practices.
Diane Thompson, a legal services attorney with the National Consumer Law Center, told the panel that errors in foreclosures are “a widespread problem throughout the country.” She estimated that, in the cases she’s seen, about half of the defaults were caused by fees that banks themselves stacked on struggling homeowners. A smaller percentage, she estimated, were cases in which homeowners were not in default at all.
We’ve tracked the problems with banks’ servicing of mortgage loans, both in the foreclosure process and in the loan-modification process. Banks—confronted with employee depositions that show proper processing procedures were not followed—have said that they believe no wrongful foreclosures have occurred because regardless of the procedural errors, the underlying facts in the documents were accurate. Some have stated in calls with investors that they hope for a quick resolution to the controversy and are refiling the questionable documents.
But when Senate Banking Committee lawmakers asked the three experts about the best possible solutions to the problems, they suggested some that went much further:
1) Fund quality foreclosure-mediation programs and legal services for homeowners facing foreclosure. The Dodd-Frank financial reform bill authorized $35 million for programs providing legal assistance to homeowners fighting foreclosure. According to Thompson, “we urgently need that funding,” but it has not yet been appropriated. She also noted that foreclosure-mediation programs like the ones in Philadelphia and New York—which she said are reducing foreclosures by about 50 percent—have produced positive results and should also receive better funding.
2) Regulate the fees banks are heaping on homeowners. “There’s been a huge abuse” with forced place insurance, Miller told the committee. American Banker, in a piece this week, noted that “astronomically priced” insurance policies—purchased to protect investors—impose costs on investors and add to homeowners’ debts. Bank of America and JPMorgan Chase executives at the hearing denied that their companies were trying to maximize fee revenue and stated that it was in their best interest to keep homeowners in their homes and paying off their loans.
3) Solve the dual track of concurrent foreclosure and loan modification proceedings. We’ve noted that under the government’s loan modification program, servicers are forbidden from foreclosing while loan modifications are pending, but many homeowners have found the practice is still occurring. On this point, Bank of America’s top mortgage official, Barbara Desoer, told the panel her company is “very open to discussing changes for the existing pipeline that’s going through the dual track.” However, David Lowman, JPMorgan Chase’s top mortgage official, expressed some hesitation about such changes. “I think we have to be careful with that,” he told the panel.
4) Take servicers out of the loan modification process altogether. “Servicers were never in the loan modification business,” argued Georgetown University Law Center associate law professor Adam Levitin. “They’re in the transaction processing business.” Levitin suggested creating a federally administered loan modification program with a system of triage, much like in bankruptcy court: Homeowners who absolutely can’t pay would get an expedited foreclosure proceeding; homeowners who can pay would be given “a cookie cutter mod” with principal reduction, he said. As we’ve noted, the government’s loan modification program has resulted in few permanent modifications, but data suggest banks’ in-house programs are even worse.
Bank of America CEO Brian Moynihan has called for a quick settlement of the 50-state attorney general probe. CNBC reported yesterday, citing anonymous sources, that banks and state attorneys general were “nearing a settlement,” but when asked by lawmakers, Iowa Attorney General Miller said a settlement is still months away.
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