I wasn’t the only one to deride the FHFA’s ingenious plan to end the foreclosure fraud crisis. Indeed, the reliance on internal reviews, and encouragement to engage in more foreclosures, raised the eyebrows of many housing advocates and prominent politicians. Now, six Senate Democrats have sent a letter to FHFA Acting Director Ed DeMarco and top regulators on the systemic risk council (including Geithner and Bernanke) calling for legitimate action on the servicers, who have no specific federal regulator.

The six Democrats – Sherrod Brown, Barbara Boxer, Sheldon Whitehouse, Debbie Stabenow, Tom Harkin and Mark Begich – pushed back on the idea that these are merely technical errors, as the FHFA letter intimates, rather than systematic violations of the law:

There have been attempts to dismiss the reported violations as minor technical paperwork errors, and to employ the defense that these were harmless errors because the homeowners were in foreclosure and would have lost their houses anyway. These are not technicalities, they are not isolated cases – it is likely that over 200,000 foreclosures have now been suspended – and these improprieties cast doubt on the foreclosures in question.

Rather than a few rogue employees disregarding company policy, the policies themselves were flawed, indicating that there is a systemic problem with the manner in which loss mitigation and foreclosure operations are being conducted by most, if not all, mortgage servicers. This pattern of behavior has undermined the integrity of the housing market, creating uncertainty for home sales and the availability of title insurance.

We shouldn’t be reassuring the banks and their servicers that they’ll make it through this all right, we should be filling out criminal charges. The banks basically never changed their policies from the questionable lending practices of the subprime mortgage scandal – they couldn’t be trifled with basic legal procedures, and they hired a bunch of incompetents to push the paperwork. When the defaults rose, the same gang of idiots failed to provide any relief for homeowners through mortgage modification. And now they’re breaking the laws surrounding foreclosure, to cover up for their other fraudulent activities with proper mortgage assignment.

While this has started to become an election issue, with familiar battle lines, it should be noted that only Barbara Boxer among these six is up for re-election. I do think this issue resonates and is pretty clear:

To Cuban-born Jose Martinez, 65, a lifelong Republican from the Miami area who works in liquor manufacturing and export, “It seems like a joke that we are a country with laws and the banks keep stealing.”

As for remedies, the Senators suggest forcing the servicers to work with homeowners to modify loans, to impose “tailored moratoriums” for certain lenders as per their authority as regulators of banks and non-bank institutions that are the parent companies of the servicers, and to “review and reform” the financial incentives that make it beneficial for the servicers to foreclose. They are looking at the issue in a comprehensive way and beyond the “technical errors” argument which is clearly false.

One Democrat, Alan Grayson, has gone further: he wants the FBI and the local US Attorney to prosecute criminal activities by the banks in Florida. Grayson spoke today in front of the home of Nancy Jacobini, who had her home broken into by a contractor for JPMorgan Chase in a case of mistaken foreclosure. Here’s a sample of the letter:

It is not enough for big banks only to apologize for fraud, perjury, and even breaking and entering – when they are caught. It is time for handcuffs. Fraud does not become legal just because a big bank does it [...]

To give but two of the many available examples, attached is a deposition from an ex-employee of one of the largest ‘foreclosure mills’ in the state, the Law Offices of David Stern. In it, this employee testifies under oath that it was routine for that office to falsify documents regarding military records, in order to move foreclosure cases along more quickly [...] fundamentally, this is a question of protecting basic property rights – if you don’t own it, then you shouldn’t try to take it. Without clear property rights, and a legal system that insists on clear proof of those rights before transferring ownership by force, the economy will fall apart.

Absolutely right. This pressure needs to continue.

The full text of the letter from Sherrod Brown and the other Senate Dems is below.

October 14, 2010

The Honorable Timothy Geithner
Secretary, United States Department of the Treasury

The Honorable Shaun Donovan
Secretary, United States Department of Housing and Urban Development

The Honorable Benjamin Bernanke
Chairman, Board of Governors of the Federal Reserve

The Honorable Jon Leibowitz
Chairman, Federal Trade Commission

Mr. John Walsh
Acting Comptroller of the Currency

Mr. Edward DeMarco
Acting Director, Federal Housing Finance Administration

Dear Secretary Geithner, Secretary Donovan, Chairman Bernanke, Chairman Leibowitz, Mr. Walsh, and Mr. DeMarco:

You are no doubt aware of the recently reported improprieties in the foreclosure processes employed by some of our nation’s largest mortgage servicers. Unfortunately, these reports are consistent with complaints that we have heard from our constituents alleging behavior on the part of servicers and foreclosure law firms, popularly referred to as “foreclosure mills,” that would constitute bad faith at best, outright abuse at worst. All of these practices raise serious questions about the integrity of mortgage servicers’ loss mitigation and foreclosure processes, from their modification procedures to their foreclosure pleadings.

There have been attempts to dismiss the reported violations as minor technical paperwork errors, and to employ the defense that these were harmless errors because the homeowners were in foreclosure and would have lost their houses anyway. These are not technicalities, they are not isolated cases – it is likely that over 200,000 foreclosures have now been suspended – and these improprieties cast doubt on the foreclosures in question.

Rather than a few rogue employees disregarding company policy, the policies themselves were flawed, indicating that there is a systemic problem with the manner in which loss mitigation and foreclosure operations are being conducted by most, if not all, mortgage servicers. This pattern of behavior has undermined the integrity of the housing market, creating uncertainty for home sales and the availability of title insurance.

The systemic problems that are being uncovered in the current mortgage market are remarkably similar to the predatory practices employed during the subprime mortgage crisis. These difficulties stem from the fact that servicers lack the proper oversight and incentives to follow basic procedures required either by mortgage contracts, pooling and servicing agreements, or state and federal laws. Homeowners have no leverage in the modification process and federal agencies (including the Treasury Department) have yet to impose meaningful penalties for noncompliance. It is time for the government to restore some sanity and oversight to the housing market. Your agencies are in a unique position to address this problem because your agencies have various authorities over, or relationships with, bank and non-bank mortgage servicers.

First, you can require loss mitigation prior to foreclosure to eligible homeowners facing hardship, where consistent with investor interests, subject to meaningful penalties. Such a requirement would focus servicers’ efforts to assist homeowners. It would also establish clear repercussions for servicers who fail to participate in loss mitigation in good faith.

Second, your agencies have the ability to impose your own tailored moratoriums on foreclosures for certain identified lenders, pending assurances that such lender’s paperwork complies with state and federal requirements; proper ownership documentation is in order; and all contracts and loss mitigation requirements under those contracts have been followed. The banks are focusing solely on their affidavit processes, but a more comprehensive review is required. Failures to comply with all of these requirements should be penalized.

Finally, your agencies have the authority to review and reform the financial incentives for servicers and foreclosure mills. Mortgage servicers have been accused of imposing unfair fee arrangements in modification contracts and foreclosure pleadings, and foreclosure mills are paid on a per-case fee basis. These arrangements benefit the mortgage companies to the detriment of homeowners.

Congress has a role to play in addressing this crisis as well. But your agencies have tools at your disposal to address the substantial challenges facing homeowners in the mortgage market, and you are able to respond more nimbly than Congress to this emerging crisis. The ample record of homeowner abuse should compel you to act expeditiously in the best interest of homeowners and investors.

Thank you for considering our views. We await your response to the ongoing developments of the foreclosure crisis.

Cc: Mr. David Stevens, Commissioner, Federal Housing Administration
Ms. Elizabeth Warren, Assistant to the President and Special Advisor to the Secretary of the Treasury on the Consumer Financial Protection Bureau
Mr. Timothy Massad, Chief Counsel, Office of Financial Stability, United States Department of the Treasury