A couple days ago, the highest-ranking Democrat in the House called for investigations on mortgage lenders who have been unscrupulously misleading borrowers and courts and engaging in systematic fraud. Now the highest-ranking Democrat in the Senate is following suit, and focusing on his home state of Nevada.

Harry Reid, the Senate Majority Leader, just sent a letter to the largest mortgage servicers in Nevada, asking them to suspend all foreclosure operations in the state. He also wants them to make use of the Treasury Department’s “Hardest Hit” program, a loan modification fund that provides $200 million in incentive payments for negotiations with unemployed borrowers to prevent foreclosures.

Reid had to do this. Nevada is off the charts when it comes to foreclosures and negative equity. Over 70% of homeowners in the state, an amazing number, are underwater or nearly underwater. Foreclosures are higher than any other state as well, and this contributes to both the skyrocketing unemployment rate and state budget deficit. Mike Konczal writes:

Nevada is interesting because it’s such a disaster, it’s relatively small, and there isn’t going to be enough demand to clear the abandoned properties – it would be a perfect place for a state-wide implementation of a right-to-rent program. If we were serious about “shocking” a solution to a structural unemployment problem forcing some financial firms and bondholders to actually eat losses in Nevada would be a place to start. But let’s also not confuse this story with the story of the country as a whole, where every state has had an increase in unemployment.

Reid could have taken this further – national civil rights groups are now calling for a national moratorium – but if you’re going to pick one state where the crisis must be stopped, it’s Nevada. In addition, Nevada is not a judicial foreclosure state, so lenders can foreclose on properties without going through any court. So they are in dire need of protection, as well as real remedies to get them out of their mess. I don’t know that the Hardest-Hit Fund is big enough, but isn’t it interesting that Reid referred to that, rather than HAMP?

And yes, to state the obvious, it’s not a little sidelight to this that Reid is in the fight of his life for re-election.

More of my coverage on foreclosure fraud can be found here.

The full letter is below.

I write to request that your mortgage-servicing division suspend foreclosures on Nevada home owners until systems are in place to ensure Nevadans are not being improperly directed into foreclosure proceedings. I also renew my request that your firm meaningfully participate in the Nevada Housing Division’s Hardest Hit Fund (HHF) program by matching in kind any mortgage-principal reductions provided by our state agency.

Recent reports that some mortgage servicers have made misrepresentations in foreclosure-related court documents revealed they are cutting corners in their efforts to process the large volume of delinquent home owners. Some servicers have rightfully suspended foreclosures in those states that have judicial-foreclosure proceedings until they complete a review of their processes to ensure affidavits and other court documents meet the appropriate standards.

While Nevada is not among those states, suspending foreclosures on Nevadans is also justified because the reports of shoddy and defective affidavit preparation suggest that servicers might not be reviewing a home owner’s loan documents with the requisite care. To be sure, a closer review of these documents could lead a servicer to initiate a foreclosure in many cases. But I’m concerned about those cases where carefully analyzing a home owner’s income and debt would lead to the conclusion that a modification is the best solution. These are the cases where adjusting the terms or reducing principal of the mortgage would result in the net present value of the loan being greater to the lender than it would recover through foreclosure.

It is only fair to Nevada home owners, consequently, that you also suspend foreclosures in our state until you complete a review of your processes that ensures a home owner’s loan documents are being adequately analyzed to properly determine the best, individualized loss-mitigation solution. It is my belief and hope that once such a system is in place, more Nevadans will avoid foreclosure and remain in their homes. This is the goal of the Obama Administration’s various Making Home Affordable programs, and should be the goal of a servicer acting as a fiduciary to investors.

Additionally, since months have now passed since I last made the request, and the Treasury Department has now approved Nevada’s and the other HHF states’ foreclosure-prevention programs, I ask again that you consider matching the dollars contributed by the Nevada Housing Division through these programs. The Housing Division has designed both a principal-reduction and a second-mortgage-reduction plan that will only be successful with your commitment to do so. Indeed, many of Nevada’s local community banks have made this pledge. The similarities between the various state HHF plans should streamline your participation and provide the scale necessary to significantly reduce foreclosures in all of the hardest-hit states, quickening a recovery in these struggling housing markets.

I appreciate your consideration of these requests, and I look forward to your response.

Sincerely,

Harry Reid
U.S. Senator, Nevada