Industry Experts Dissect Foreclosure Crisis and Servicer Performance

The Congressional Oversight Panelrn(COP) recently conducted a hearing focused on the current status of thernforeclosure crisis and the recent revelations that inappropriate processes havernbeen used to prosecute those foreclosures.  </p

COP was created by Congress under the TroubledrnAsset Relief Program (TARP) to “review the current state of financialrnmarkets and the regulatory system.”  The panel consists of Senator Ted Kaufmanrn(D-DE), chairman; Richard H. Neiman Superintendent of Banks for thernState of New York; Damon Silvers, associaterngeneral counsel for the AFL-CIO; J. Mark McWatters, attorney and CPA who specializesrnin tax law and mergers and acquisitions; Dr. Kenneth R. Troske, Director of thernCenter for Business and Economic Research, Chair of the Economics Departmentrnand William B. Sturgill Professor of Economics at the University of Kentucky.</p

Kaufman said he hoped to definernmore concrete goals for success in foreclosure prevention and to hear evidencernthat the foreclosure picture had improved dramatically since the Panel had lastrnlooked at the issue.  “Yet allrnevidence appears to be to the contrary.” rnHe cited reports that banks and servicers may have rushed the process;rnreports which he said were already undermining investor and homeownerrnconfidence in the mortgage market.  Yet,rnif the reports are true, “it is conceivable that the problems are evenrnworse; that banks have failed to follow the legal steps necessary to ensurernclear title” which could lead the financial industry to sufferrn”staggering losses.” </p

PhyllisrnCaldwell, chief of the Treasury Department’s Homeownership Preservation Office, outlinedrnthe problems initially facing the administration and servicers.  She said there was no consensus about how tornrespond to responsible borrowers in need of assistance and no timeframes for servicer decisions. “Servicers were paralyzed by the needrnto seek approval from investors on an individual, mortgage-by-mortgagernbasis.  And, perhaps most critically,rnthere was no affordability standard for monthly mortgage payments.”  In the absence of a framework the solutionsrnoffered by servicers “often achieved nothing other than adding unpaidrninterest and fees to the mortgage balance, resulting higher – not lower -rnpayments for homeowners.  Millions ofrnresponsible American families simply lost their homes.”  </p

JuliarnGordon, Senior Policy Counsel, Center for Responsible Lending, however, blastedrnthe response to the crisis saying, “Things did not need to be this bad.”<bShe faulted both the Bush and Obama Administrations for failing to act quicklyrnand forcefully to limit the breadth and depth of the crisis.  “Instead, seemingly hamstrung byrnconcerns about bank capitalization levels and ‘moral hazard’, the governmentrnput forth a series of initiatives that relied on voluntary actions fromrnservicers in return for targeted monetary incentives.”</p

She called HAMP’srnperformance “disappointing,” and said it would have met with greaterrnsuccess if government had implemented measures such as changes to thernbankruptcy code and providing borrowers with an alternative to servicers whichrnput their own interests first. rn”Instead, the system is still entirely at the mercy of thosernservicers, who frequently have not acted in the best interests of eitherrninvestors or homeowners, and who have demonstrated a complete disregard for thernlegal requirements of the foreclosure process.”  The servicing industry has even now, shernclaimed, failed to develop the capacity and quality control to ensure thernintegrity of the process.  </p

Guy Cecala, CEO and Publisher of Inside Mortgage Finance addressedrnwhy proprietary servicers modifications have outpaced those done under the HomernAffordable Modification Program (HAMP) by 3 to 1 since HAMP began; a gap, hernsaid, that has increased significantly over the past several months.  First, the proprietary servicers have morernflexibility than allowed under HAMP’s tough government mandated underwritingrnand documentation requirements.  The onlyrncriterion for proprietary servicers is whether a modification is in the bestrninterests of the investor.  </p

Second, Cecala said, thernHAMP modifications are much more aggressive in terms of payment reductionsrnwhile proprietary modifications tend to restructure the loan to bring itrncurrent.  However, there is somernindication that the HAMP method may have a more positive impact on re-defaultrnrates.  While modifications with littlernor no pay reductions have default rates of 50 percent or more, big reductionsrnsuch as found under HAMP have rates as low as 25-30 percent.  Further muddying the equivalencies;rnunemployment has emerged as a leading cause of re-defaults in recent months andrnthat impacts modifications regardless of payment reductions.  </p

KatherinernPorter, professor, University of Iowa College of Law spoke to the current flaprnover documentation of loan transfers and of the process followed during the foreclosurernprocess. She said that the implications of problems with asset transfer arernserious.  If the trust does not have thernloan, homeowners may have been making payments to the wrong party.  If the trust does not have the note orrnmortgage, it may not have standing to foreclose or legal authority to negotiaterna loan modification.”  Where therndocumentation of transfers is being done retroactively there are issues ofrnhonesty and questions about validation if an entity in the securitization chainrnis defunct.  Such transfer may alsornviolate the terms of the trust or may cause the trust to lose its REMIC statusrnand favorable tax treatment.  Thesernproblems also have the potential to expose the banks to investor lawsuits.</p

Porter said it is importantrnto know if the problems are sporadic or endemic but, regardless of the scope,rnlenders have an obligation to address it and the assertion by one party thatrnthe other is clearly liable, i.e. has not paid its mortgage, does not give thernfirst party sufficient standing to foreclose.</p

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