In recent months, the mortgage servicing industry has emerged from the shadows to take its place as one of the great villains of the mortgage meltdown and foreclosure crisis. Last fall, state attorney generals across the country launched a concerted probe of the industry and compiled a mountain of evidence of deceptive and abusive practices that have had devastating effects on homeowners struggling to avoid foreclosure. The suit filed in just one state, Nevada, against one lender -- Bank of America and its servicers -- runs 152 pages and is filled with horror stories. (See below)
Charges of foreclosure fraud, in which servicers fabricated documents for foreclosure proceedings, are among the least of the abuses uncovered by the probe. More heartbreaking are the stories of homeowners who drained their savings or ran up debt to continue making payments as part of mortgage modifications deals, only to have their homes foreclosed on anyway. Or the stories of homeowners who were outright lied to about the status of their modification requests or the reasons that these requests were denied.
It would be bad enough if the banks had only thumbed their nose at the Obama Administration's effort to give people a chance to modify loans. But the banks and their servicers managed to behave even more badly than that by using the existence of the modification programs as an opportunity to exploit some of the most desperate people in America. It is no exaggeration to say that stringing along and sucking dry struggling homeowners appears to have become a business model of the mortgage industry.
Last week, the attorney generals announced preliminary settlement terms that would extract $20 billion from the nation's largest banks as punishment for their abuses and those of their mortgage servicers, and use these funds to help modify mortgages. (See the document below).
This proposed deal has been drawing fire from conservatives, including Virginia's Attorney General Ken Cuccinelli who likened helping struggling homeowners to "welfare." Meanwhile, Republican Senator Richard Shelby called the deal "nothing less than a regulatory shakedown."
In fact, the tough stance of the AGs should have ordinary folks -- and those who purport to speak for them -- on their feet cheering. While the Obama Administration has generally coddled the banks when it comes to pushing for mortgage modifications, the AGs are trying to achieve real justice in face of the overwhelming evidence of illegal, abusive, and unethical behavior that has been systematic across the nation and driven by a bottom line focus on profits.
If there is a problem with the deal, it is that it doesn't go far enough and only begins the process of bringing a rogue sector of the mortgage industry -- the servicers -- under control.
The basic problem is that mortgage servicers now have what Fed governor Sarah Bloom Raskin has called "structural incentives" to mislead, cheat, and exploit struggling homeowners. As Raskin explained in a speech last November:
The servicer makes money, to oversimplify a bit, by maximizing fees earned and minimizing expenses while performing the actions spelled out in its contract with the investor. In the case, for instance, of a homeowner struggling to make payments, a foreclosure almost always costs the investor money, but may actually earn money for the servicer in the form of fees. Proactive measures to avoid foreclosure and minimize cost to the investor, on the other hand, may be good for the homeowner, but involve costs that could very well lead to a net loss to the servicer. In the case of a temporary forbearance for a homeowner, for example, the investor and homeowner both could win--if the forbearance allows the homeowner to get back on their feet and avoid foreclosure--but the servicer could well lose money. In the case of a permanent modification, the investor and homeowner could both be considerably better off relative to foreclosure, but the servicer could again lose money. . . .
Even in the case of a servicer who has every best intention of doing "the right thing," the bottom-line incentives are largely misaligned with everyone else involved in the transaction, and most certainly the homeowners themselves.
Got all that?
Basically, Raskin is making a point others have stressed elsewhere: Which is that the front lines of the foreclosure crisis are being manned by an industry that actually has a self-interest in extending this crisis to boost earnings. And, as we've seen in other parts of the financial and real estate sector, companies and managers hungry for profits in a lightly regulated wild west environment all too often will bend the rules, even when it has devastating effects on people's lives.
While some servicers are independently owned, many are subsidiaries of the banks. Either way, as Raskin explained in her speech, the fee structures that servicers still operate under were designed for good times, when loan servicing was easy -- not bad times, when "loss mitigation" requires some real heavy lifting by servicers that cuts into profits. Until the fee structures are changed to incentivize servicers to do the right thing, which will mean higher costs for the banks, further abuses are inevitable regardless of any settlement imposed by the AGs.
Also, it should be obvious by now that the federal government needs to exercise more oversight around the foreclosure process -- an area now regulated by the states. The Obama Administration is working on this and the Office of the Comptroller of the Currency, led by John Walsh, has begun drafting "New National Mortgage Servicing Standards." Walsh outlined some of the ideas behind these standards in testimony before a Senate Committee last month. He stressed that the process is still in a preliminary stage.
One things seems certain, though: Despite the well-documented suffering of homeowners at the hands of mortgage servicers, opponents of regulation are likely to do their best to torpedo steps to prevent future abuses. That is the way Washington works these days.
Source: PolicyShop
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