Reiterates Need for Servicing Standards, Raises Concerns about Settlement Figure & OCC Protecting Banks Over Borrowers
Washington, DC – February 25, 2011 – (RealEstateRama) — Congresswoman Maxine Waters (D-Calif.), a senior member of the Financial Services Committee, issued the following statement today after reports of a deal between the Obama Administration and mortgage servicers to settle systemic fraud issues in the servicing and foreclosure industry:
Reporting from yesterday and today indicates that federal regulators are close to reaching a settlement over what they describe as “shortcomings in foreclosure governance and document preparation processes,” or what I have plainly referred to as “foreclosure fraud.” The settlement, as described by the Wall Street Journal, Huffington Post, and other media outlets, leaves me deeply concerned about whether homeowners will receive the due process and fair treatment they deserve.
Particularly, I am concerned about the $20 billion settlement figure, spread across 14 servicers, that has been noted in various reports. Though this figure sounds like a large settlement to those unfamiliar with the scale of the foreclosure crisis, we must remember that over 3 million homes have been lost to foreclosure since 2006, and some analysts expect an additional 11 million foreclosure filings in the near future. Moreover, the Center for Responsible Lending estimates that foreclosures between 2009 and 2012 will result in $1.86 trillion in lost wealth for families.
We must also contrast this $20 billion settlement figure, shared by 14 servicers, with the $8.6 billion settlement paid by Countrywide Finance Corp. in 2008 as a result of origination fraud. I have every reason to believe that today’s improper servicing is likely just as pervasive as origination fraud a few years ago.
This settlement is too small, and will likely have one of two results: either borrowers will receive insignificant principal reductions, or reductions will only be available to a small subset of troubled borrowers.
I am also concerned about the fact that this settlement, as reported, contains no discussion of mortgage servicing standards going forward. Though I was pleased that the Administration briefly mentioned the need for servicing changes in their Fannie Mae and Freddie Mac reform proposal, we have yet to see the details of their plan for servicing reform. As I have reiterated for years, meaningful servicing standards are absolutely necessary to protect the millions of borrowers vulnerable to foreclosure. My bill from the last Congress, The Foreclosure Prevention and Sound Mortgage Servicing Act of 2009 (H.R. 3451), which I plan to reintroduce, contained borrower protections that I believe could have prevented many of the servicing failures we see today. I urge regulators to insist on meaningful borrower protections that satisfy all of the servicing reforms described below:
• Provide that servicers have a duty to engage in reasonable loss mitigation activities, as outlined in H.R. 3451;
• Adopt servicer compensation structures that result in servicers having an interest as to whether the loan remains current, and separates simple transaction processing from actual loss mitigation activities;
• Require that a formula govern how second lien holders are required to modify second liens in the event of a first lien modification;
• Mandate that servicers establish a single-point-of-contact for each borrower seeking a loan modification, and provide that single-point-of-contact with actual decision making authority;
• Require that an independent master servicer provide oversight and resolve disputes regarding servicers’ actions;
• End the foreclosure “dual track,” which often results in borrowers being foreclosed upon by one division of a servicer while they are simultaneously attempting to negotiate a loan modification with another division of the servicer;
• Require servicers to foreclose in their own names;
• Change payment structures for law firms and other servicer contractors so that compensation is not tied to the speed at which these contractors foreclose; and
• Require servicers to disclose the complete chain of title as well as a full accounting of all fees (both upon request and in the Notice of Default), and the use of lost note affidavits in their foreclosures.
In addition to these borrower protections and servicing industry reforms, I continue to believe that it is essential for Congress to provide bankruptcy judges with the authority to alter mortgage debt on primary residences, an ability that judges already have on vacation homes. I also believe that the Treasury Department should pursue monetary penalties for servicers’ failure to comply with Home Affordable Modification Program (HAMP) guidelines. These monetary penalties could be redirected for any number of purposes, including increasing legal services funding so that homeowners can be adequately represented by counsel in foreclosure. Finally, if the interagency report on foreclosure fraud does not already address this issue, I would urge regulators to conduct a robust investigation into whether parties involved in mortgage securitization may have failed to follow rules regarding the creation of Real Estate Mortgage Investment Conduits (REMICs), and are therefore in violation of tax rules.
More generally, I remain concerned that our regulators didn’t learn the lessons outlined in the Financial Crisis Inquiry Commission report, which starkly laid out how a failure to protect borrowers led to an explosion in exploitive subprime mortgage products. All the evidence we have points to the fact that history is likely repeating itself. In fact, in a November hearing of my Subcommittee, regulators made it clear that they learned of foreclosure fraud via newspaper reports, despite having teams of examiners located within the operations of major servicers.
For this reason, I was very skeptical from the outset that this investigation would yield substantive results, given that it was led by the Office of the Comptroller of the Currency (OCC). As the subprime crisis has taught us, a regulator charged with protecting banks’ safety and soundness cannot also be charged with protecting the due process rights of borrowers.
Through yesterday and today’s reporting, we learned that the OCC’s position is that only a “small number” of borrowers were improperly foreclosed upon. I am doubtful of this claim, given what I’ve learned about servicer-driven defaults in the years since this crisis began. For instance, National Consumer Law Center attorney Diane Thompson has noted in testimony that around 50 percent of the borrowers she represents in foreclosure cases were subject to a servicer-driven default. Academic work from experts like Kurt Eggert at Chapman University School of Law provides additional support for claims of servicer misbehavior. And just recently, JPMorgan Chase admitted to wrongfully foreclosing on 14 active duty military personnel and overcharging another 4,000 military borrowers on their mortgages, in contravention of the Servicemembers Civil Relief Act.
To date, all we have are these anecdotal reports. But through both Congressional hearings, and first-hand experience with servicers, I believe that there is substantial evidence indicating that improper fees, wrongful application of borrower payments, the use of unscrupulous foreclosure mills and other practices evidence the fact that improper foreclosures are widespread.
I eagerly await the full results of the interagency foreclosure fraud investigation. In the meantime, I will continue to advocate for servicing reforms. I believe that these fundamental changes to mortgage servicing are needed not only for borrowers, but to ensure a fully-functioning mortgage market that protects investors and encourages the return of private capital moving forward.
Sean Bartlett (202) 225-2201