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To Right Foreclosure Wrongs, Go With the Bird in the Hand

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I can understand if you’ve forgotten, for a moment, about last April’s federal consent orders mandating independent foreclosure reviews at 12 big mortgage servicers.

There are so many mortgage-related lawsuits coming at the banks from every direction and a contentious potential settlement still being negotiated by state attorneys general. It’s hard to keep it all straight.

Millions of potential borrowers are waiting for a mortgage, waiting to sell their homes so they can buy a new one, or hoping to see housing prices and new construction numbers improve for good. Removing the uncertainty over prior foreclosures and improving the business practices of mortgage servicers for future borrowers may, possibly, get the housing market moving again. I would argue that the foreclosure reviews mandated by the Federal Reserve and the Office of the Comptroller of the Currency have a better chance of helping current and future borrowers than the AG settlement.

You, personally, may not be counting on a speedy and fair claims process or systemwide improvements that will help prevent such a mess from ever happening again, but there are many who are. According to the OCC, approximately 4.6 million homeowners may be eligible for monetary damages for servicer errors, misrepresentations, and other deficiencies, based on the results of the foreclosure reviews. Thousands of military service members had their homes seized, according to regulators, by at least one of the 10 leading mortgage lenders, allegedly in violation of the Servicemembers Civil Relief Act, which restricts foreclosures on the homes of active duty members of the U.S. armed forces. Those soldiers who have not already sued their bank and received compensation for their loss will have a chance to get some justice via the foreclosure reviews.

I must admit that what’s not assured are timely, independent, and productive foreclosure reviews. On Dec. 13, a Senate committee held a hearing to address legislators’ concerns about the lack of accountability and transparency of the OCC and Fed foreclosure review process. The hearing was held after the OCC issued a status report on Nov. 22 on the dozen bank- and thrift-owned mortgage servicers trying to comply with the regulator’s April consent orders. The OCC also posted online all 12 engagement letters between mortgage servicers and the independent consultants, chosen by the servicers, who would review the servicers.

I was not satisfied with what I heard and Congressional leaders weren’t either. Legislators remain concerned about the independence of the consultants conducting the reviews and the limited outreach to borrowers. Scott G. Alvarez, the Fed’s general counsel, testified that the Fed planned “to disclose significant portions of the final engagement letters” for the two remaining consent order recipients under its jurisdiction, Ally Financial (the former GMAC) and SunTrust, but those engagement letters are still not yet available. A Fed spokeswoman had no update of Jan. 25.

On Jan. 13, Senator Robert Menendez (D-N.J.) and three members of Congress - Reps. Luis Gutierrez (D-Il.), Maxine Waters (D-Calif.) and Brad Miller (D-N.C.) indicated their doubts by asking the General Accounting Office to examine the foreclosure review process. Menendez later told me the GAO has agreed to begin the study immediately and it should be completed in six to nine months. Some of it might come sooner than that, according to the Senator, in time for the April 30 deadline for borrowers to request their individual foreclosure reviews.

Even if the federal foreclosure reviews were done right – and consumer advocates share the concerns of Congressional critics – their focus is on compensating homeowners for past harms. The OCC and Fed reviews don’t require servicers to start providing affordable loan modifications.

The AGs’ settlement, if and when it happens, is reportedly focused, in part, on establishing strong mortgage servicing standards for the future. The proposed settlement also covers a key issue for underwater borrowers: principal reduction.

The settlements’ intended delivery of principal reductions and affordable loan modifications, in conjunction with cessation of foreclosure actions while those are being implemented, is crucial to harmed borrowers. And as Alys Cohen, a staff attorney at the National Consumer Law Center, pointed out to me, the foreclosure reviews only cover people who were in foreclosure in 2009 and 2010.

“What both approaches highlight is the need for strong, consistent, enforceable national servicing standards – a product best delivered, in our opinion, by the Consumer Financial Protection Bureau,” she says.

Cohen’s points are valid. But the timing and final terms of the multistate AG settlement are still uncertain. Same goes for any restitution that may result from the investigations by the new mortgage fraud task force that President Obama just unveiled. So my consultant’s brain says we can get more for past and future borrowers if we keep working on the deal that’s already done.

The weaknesses of the OCC/Fed foreclosure review process are well known but they’re fixable if the right pressure from Congress, the GAO and the regulators is exerted. The one-on-one reviews and personalized calculations of damages could recover more of a borrower’s loss, as opposed to those same borrowers sharing a portion of a settlement that was calculated according to the average loss of a larger group.

The scope of the consultants’ reviews also includes planning and implementing significant improvements to servicers’ systems and processes, including customer service. Servicers that can’t keep up should be forced out of business.

So sure, let’s not waste the borrowers’ time and anyone’s money on an OCC/Fed foreclosure review process that doesn’t meet the worthy objectives that were intended by the consent orders. But we’ll go a long way towards helping past and future borrowers if mortgage servicers see the regulators mean business for the victories they’ve already won. 

Francine McKenna writes the blog re: The Auditors, about the Big Four accounting firms. She worked in consulting, professional services, accounting and financial management for more than 25 years.

 

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Comments (2)
The only way out of this mess is if banks start working with the borrowers to optimize the outcome for the lender while being fair to the borrower.

If someone has made all their payments but are underwater, give them a current market interest rate so the loan is safer in the long run.

If someone has missed payments but can pay something and those payments exceed or reasonably approximate the value from a foreclosure, write down the principal and give them a current market interest rate. Perhaps the bank or RMBS could take back 50% of any upside upon the future sale of the property.

If someone cannot make payments that approximate the value from a foreclosure, but the market is saturated with foreclosures, but they can make rental payments and keep the house from being vandalized, foreclose with them renting the house going forward, with an option to buy the house at a foreclosure price if and when they can come up with a 20% downpayment and qualify for a mortgage again.

Consider paths that get the houses into the rental market so they are occupied. The most damaging thing is empty houses that get vandalized and drag down the value of all the other homes in the area.

Lawsuits and regulatory action will deal with retribution, but the economy needs this to be worked through so we can eventually reach some level of "normality".
Posted by Tom White | Monday, January 30 2012 at 9:44AM ET
@Thomas W

Thanks for your comments. Lots of sound suggestions there.
Posted by Francine McKenna | Monday, January 30 2012 at 7:21PM ET
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