Forget about the lame duck session for a second. It doesn’t look as if a whole lot will be accomplished, and outside of Charlie Rangel’s ethics trial there isn’t much entertainment value to be had, either.
Of far more news value will be the developments this week on foreclosure fraud, only one of which involves the Congress. Until now, the federal government has been loath to even comment on the routine practice of document fraud in foreclosure cases (we’re going with a 95% error rate), and the underlying chain of title problems that could prevent the banks from having standing to foreclose in millions of cases. But you get the sense that the dam is breaking.
The Congressional Oversight Panel held an extraordinary hearing on foreclosure mitigation programs like HAMP and the document fraud issue a few weeks ago. They will produce a report this week that is likely to be unsparing about the potential systemic risk involved in the chain of title issues, which Damon Silvers accurately explained at the hearing. In addition to the document fraud, the COP report could include information about servicer maladministration, the MERS system and a whole host of other irregularities. When it drops I’ll certainly bring it to you.
Federal Reserve Governors have started to speak out about this as well. Last week, Sarah Bloom Raskin, the newest member of the Board of Governors, spoke at the National Consumer Law Center and blasted the mortgage servicing industry.
Raskin, speaking at the National Consumer Law Center’s consumer rights litigation conference in Boston, said she’s deeply concerned that new questions about banks’ handling of foreclosure paperwork are part of a more widespread, long-standing problem with mortgage servicing.
“Many may view these procedural flaws as trivial, technical, or inconsequential, but I consider them to be part of a deeper, systemic problem and am gravely concerned,” she said [...]
Raskin said the mortgage-servicing industry has never been tested in a national housing crisis until now, and it’s far from getting a passing grade.
“Mortgage servicers simply are not doing enough to provide sustainable alternatives to foreclosure,” she said, adding that the lack of action might be due to the fact that loan servicing is largely done by large servicers that are subsidiaries of depository institutions, affiliates of depository institutions, or independent companies focused primarily or exclusively on loan servicing.
She gets this exactly right. The servicing industry has too many incentives to foreclose and not enough to modify loans. What’s more, their conflict of interest, by virtue of working for the big banks, means that they would rather protect the banks, by denying modifications that they would have to immediately write down on their balance sheets, than protect homeowners by working something out to restructure the loans.
Fed Governor Daniel Tarullo jumped into this debate as well, rejecting the notion that foreclosures are somehow preferable to modifications and must be sped along:
Several possible explanations have been suggested for this untoward state of affairs — the lack of servicer capacity to execute modifications, purported financial incentives for servicers to foreclose rather than modify, what until recently appeared to be easier execution of foreclosures relative to modifications, limits on the authority of securitization trustees, and conflicts between primary and secondary lien holders. Whatever the merits and relative weights of these various explanations, the social costs of this situation are huge. It just cannot be the case that foreclosure is preferable to modification — including reductions of principal–for a significant proportion of mortgages where the deadweight costs of foreclosure, including a distressed sale discount, are so high. While some banks and other industry participants have stepped forward to increase the rate of modifications relative to foreclosures, many have not done enough. I would hope that both servicers and ultimate holders of the mortgages will take this occasion not just to correct documentation flaws and to contest who should bear the losses of mortgages gone bad, but to invigorate the modification process.
In virtually any circumstance where a subset of borrowers are having trouble making the loan payments, the entity servicing the loan will work to restructure it. That’s certainly true in the finance sector when the borrower is a large business or a bank. Only with respect to homeowners recently has this tendency toward restructuring and modification broken down. And the costs to the economy are enormous, as well as the costs to the homeowner being downright cruel.
In addition to the COP and the Federal Reserve, the Senate Banking Committee will hold a hearing on Tuesday on the foreclosure fraud issue. Richard Shelby, the ranking member of the panel, delivered an aggressive statement on Friday calling for an investigation of the servicing industry at Ally Financial, JPMorgan Chase and Bank of America, and their foreclosure operations.
“The Federal Banking Regulators should immediately review the mortgage servicing and foreclosure activities of Ally Financial, JP Morgan Chase and Bank of America. The regulators should determine exactly what occurred at these institutions and make those findings available to the Banking Committee without delay.
“Furthermore, because it appears that the regulators have failed yet again to properly supervise the entities under their jurisdiction, the Committee should immediately commence a separate, independent investigation into these allegations. It is the Committee’s fundamental responsibility to conduct oversight of the banking regulatory agencies and the firms under their jurisdiction.
“With the recent passage of the Dodd-Frank Act wherein the financial regulators were granted even broader powers, I am highly troubled that once again our federal regulators appear to be asleep at the switch.”
His question-and-answer period should be fun. Representatives from Bank of America and Chase will be on the panel, in addition to Iowa Attorney General Tom Miller, Georgetown law professor and expert on this issue Adam Levitin, and Diane Thompson of the National Consumer Law Center. This should be a big hearing that ought to get a lot of attention.
Finally, a word on the “MERS Whitewash bill” floated by John Carney last week. Carney has been bloviating about this for well over a month, based mainly on speculation. He may have the history of Congress making mischief on behalf of the banks on his side, but he really doesn’t have a clue on this issue. Foreclosure operations are state issues governed by state laws, and lawmakers know they would have a difficult go of trying to adjudicate a constitutionally viable solution that would indemnify the banks in this case. They’d have to stick out their necks quite far, and it would almost certainly be challenged all the way up the legal ladder. The outcry that would ensue during that time would be tremendous. I’m not sure it’s something that risk-averse politicians would want to put up with. And Carney certainly has no evidence one way or the other. I’m happy to fight something that exists, but nothing does at the moment.