The Senate Banking Committee convenes at this hour for a hearing on foreclosure fraud, or officially, Problems in Mortgage Servicing from Modification to Foreclosure. The hearing will feature testimony from Iowa Attorney General Tom Miller, who is heading up the 50-state AG investigation into foreclosure fraud; Barbara Desoer, the President of Bank of America Home Loans; David Lowman, CEO of Chase Home Loans; Adam Levitin, a law professor at Georgetown who has been pre-eminent on these issues; and Diane Thompson of the National Consumer Law Center.
This hearing is the latest example of national policymakers getting involved in the foreclosure fraud issue. The Congressional Oversight Panel warning of the enormous risk from the failures of servicers was the first report of its kind at the federal level to take full measure of the situation, and this is the first Congressional hearing. Senators on the Democratic side like Jeff Merkley and Sherrod Brown are sure to press the bank representatives aggressively on why foreclosure mitigation programs have failed, and why they used false documents to evict people from their homes. The ranking member on the Republican side, Richard Shelby, wants to investigate failures at the major loan servicers.
It will be interesting to see if any Senators dare to defend the banks on this issue. There are certainly candidates on the committee, from Evan Bayh and Mark Warner on the Democratic side, to Judd Gregg and Jim DeMint on the Republican side.
The hearing will begin at 2:30pm ET.
…OK, here we go. This is a two-part hearing. You’re going to see a panel vote on the nomination of Peter Diamond as a Governor for the Federal Reserve. Then the foreclosure hearing will happen in the second half. I think the Diamond business will be fairly quick.
…They’re going to try and cram in this hearing in an hour for the Republicans, because there’s a Republican caucus happening in about an hour. The Diamond vote will only happen when they get a quorum on the committee. Democrats are coming out of their caucus meeting, Republicans are going into theirs. Says something about the attention paid to the issue, that they’re cramming it in.
…Sen. Dodd is making opening statements. Says that Tim Johnson and Richard Shelby will be picking up the issue when he goes out the door. Says they’ve held numerous hearings on the problems in the mortgage industry going back to 2007. Committee has spent great deal of time and attention on it. Dodd intends to hold another hearing to invite the regulators for their thoughts (new info).
Dodd explains mortgage servicing. Servicer processes the loan after it gets securitized and sold.
Dodd quotes a WSJ editorial (a good one) on how the mortgage servicers don’t really know how to do anything. Quotes Cordray, “This is about the private property rights of our homeowners and the sanctity of the courts.”
Dodd says he held a summit on how to handle foreclosures with servicers in 2007. Servicers agreed to modifications, added resources to deal with the scale of delinquencies. Despite agreeing to that, the servicers simply failed to do any of this.
Dodd mentions people losing their homes without having mortgages. Banks were “too quick” to call robo-signing scandal a technical problem, seem emblematic of much deeper problems with servicing practices “putting homeowners at risk.” The current servicer business model “is broken” and not equipped to deal with the current crisis. Mentions financial disincentives to modification among servicers. Could be “extensive problems” throughout the servicing process. Quotes Sarah Bloom Raskin on all the servicer fraud. “Service-driven defaults,” mentions “forced-place insurance” scandal, failure to record transfer, failure to administer HAMP, failure to meet requirements of foreclosure process, and failure to manage trusts under pooling and servicing agreements.
Mentions COP report and systemic risk.
Dodd says he created Financial Stability Oversight Council to deal with exactly this issue. That’s a big deal; the FSOC doesn’t think this is a systemic risk.
Dodd says we need more robust loan modifications with real principal forgiveness, but should expedite foreclosures where the homes are vacant. Must put an end to this housing crisis.
Now they’re moving on to the nomination of Peter Diamond. Shelby is talking about Diamond, who he opposes because he only won the Nobel Prize for Economics.
While Shelby bloviates, let me say that Dodd was better than I expected in his opening statements. Yes, he was saying “let’s not just blame people and let’s get to solutions,” but he also pretty thoroughly blamed the servicers for failing. And he brought up systemic risk, as well as the need for principal reductions.
…Dodd is basically vivisecting Shelby’s stupid argument that Diamond should be disqualified from being on the Fed board because of what Federal Reserve district he lives in.
…OK, roll call on Diamond. The Democrats all vote Aye. Schumer, Menendez and Kohl are not at this hearing at the moment. Bob Bennett votes for Diamond’s nomination and so does Mike Johanns and Judd Gregg. Most of the Republicans didn’t bother to show up to this hearing. Diamond gets out of the panel 16-7.
…OK, back to the subject at hand. Shelby is delivering his statement. Agrees with Dodd on many of the key issues. Shelby says we need to determine the extent of the problem. Focusing on the robo-signing issue, which is a fraud, but also a cover-up. Asking if any foreclosures happened when they shouldn’t have (yes). Wants to examine law firms that worked with the servicers. Asking role of the GSEs and securitization market in this debacle. Then wants to examine the role of the regulators. This is a common argument from Republicans, putting the burden on the regulators instead of the servicers who committed the fraud.
…Wondering why Ally Financial isn’t at the hearing. Wants to hear from Fannie and Freddie as well, because they hired a lot of the foreclosure mill law firms. Shelby reads from the COP report on securitization and the put-back apocalypse. Whoa, the CEO of MERS is there?
…I agree with Shelby that the regulators were asleep at the switch, but that’s the matter for another hearing. “I expect this hearing to be focused on the foreclosure process.” Shelby doesn’t think mortgage modifications should be part of this hearing. That’s nonsense. He does want to know where the HAMP money has gone. (The answer is nowhere; they’ve used 1% of it.) Basically, Shelby wants to investigate more than just this hearing.
…Tom Miller, the Attorney General of Iowa, will give his testimony. “These are very important issues that have difficult questions and difficult resolutions.” Explains 50 state AG investigation. Banking regulators looking at a series of issues triggered by the robo-signing, “an affront to state courts… a very serious matter.” We are looking at other aspects as well, like other servicing issues, lost paperwork, not hearing from servicers, modification decision-making (there should be a pattern developing of whether people fall within modification, and it’s more ad hoc), forced-place insurance, assignment issues, “dual-track issue” (working on modification and starting foreclosure process at same time), second lien process (bank servicing loan and holding second lien at the same time).
Opened up a dialogue with the investors. Had sessions with BofA. We view this as a chance to solve some of the problem that’s hung on for three years. We want to figure out a way to leave the situation better than when the mess started. Beyond ensuring this doesn’t happen again, changing the paradigm of the system to make sure it works.
…Barbara Desoer, BofA Home Loans is up. This should basically be a whitewash. Says 86% of BofA current on loans, but many aren’t. Touts 700,000 completed loan modifications. “Reached a crossroads” between modification and foreclosures. For some customers, foreclosure is unavoidable. Wants to be fair (ha!) and treat customers with respect (haha!). She accepts responsibility for damages the integrity of the foreclosure process. We know that the issues are not technical. We’re moving forward with the needed improvements. We must follow the guidelines established by our investors. We will continue to innovate. Will improve communication with customers. Redesigned process to offer single point of contact with customers. In discussion with state AGs to expand that approach. Need to provide greater transparency. Want to eliminate dual-track to improve understanding of where a customer is in the process. Making improvements to foreclosure process. We found that affidavits did not conform best practice. Implementing new procedures for affidavits and outside counsel. Want to stop foreclosure before giving customers options. Foreclosure is the option of last resort.
…Mr. R.K. Arnold, CEO of MERS, is up. He wasn’t on the original list. He’s going to submit his remarks for the record.
…Adam Levitin of Georgetown is up. Talks about the “unconnected issues” in foreclosures: robo-signers, chain of title, and put-back demands by investors. They’re actually all connected. The mortgagee must have legal standing to foreclose. All of the defects relate to the need to show standing. Counterfeited notes, backdated assignments, all go back to standing. Chain of title issues also go to standing. And this all has profound implications for investors. Titles on most properties in US would be clouded, and investors would be holding non-mortgage backed securities. Mentions servicer conflict of interest. Problems with the ASF (American Securitization Foundation) white paper released today. The white paper is analyzing the wrong law: the pooling and servicing agreements go around the UCC (this is complicated, but important). Most securitization trusts governed by NY trust law, and they force additional measures for transfer. If they didn’t do this, they would lack standing to foreclose. I am not predicting a wholesale chain of title problem with MBS, but there are unanswered questions. ASF white paper makes it too simple. If the worst is true, there are dire consequences. There is a compelling reason for a global settlement to fix this problem. Only this will help restart the economy.
…David Lowman of Chase Home Loans is up. Says “we are committed to ensuring that all borrowers are treated fairly and with respect.” Taking the issues seriously. Regret the errors and working to correct the issues. We strongly prefer working with borrowers to …
Now someone is screaming and calling Lowman a liar. “Let the homeowners speak!!!!” Lots of chaos in the room.
That was awesome. Certainly better than the BS on Chase modifications and the claims of 1M borrowers helped. Saying that sadly, sometimes they must proceed to foreclosure. Blaming GSEs for the dual track problem. Says they don’t allow a foreclosure sale until dealing with foreclosure. “We have not found issues that would have led to foreclosures on borrowers that were current.” (That’s a lie.)
…Says they have rolled out additional training and safeguards.
Diane Thompson of the National Consumer Law Center is up. “No, not enough progress has been made.” Lots of testimony on this issue from last year is still relevant. I hear what’s going on everywhere on a daily basis. Robo-signing reveals contempt that servicers have for rules. Their contempt for rules is the root cause of the scandal, the failure of HAMP and the crisis of foreclosures. Servicer errors are creating foreclosures. Telling several horror stories of servicers just lying and illegally foreclosing on people. “These abuses occur because servicers have strong financial incentives” to foreclose. They profit from foreclosure actions. Strips wealth from investors as well as homeowners. Until they’re held accountable we’ll continue to see “moral hazard juggernaut” that threatens global economic security.
…Thompson gets a standing ovation in the hearing.
…Shelby starts with question for MERS CEO Arnold. Bank makes a loan, note is signed, and recorded at the courthouse. Bank owns the mortgage, security for the loan. Used to be they’d sell the loan and do an assignment of record. There would be a record of that. And then if they foreclosed you would recite all this in the foreclosure notice. And you’d have to do that. What has changed? What’s the problem, did you get away from the basic property laws of the state (he actually said “I don’t know”). You pool thousands of mortgages, but what has changed?
Arnold: There’s been a great deal that’s changed. The velocity of the transactions began to jam up recorder’s offices. Recorders would make mistake.
Shelby: In the courthouses?
Arnold: No, mistakes by the banks. That would cause title problems. It was unnecessary to record each time.
Shelby: Why would that be unnecessary?
Arnold: MERS is a common agent for all of those bank, and when mortgage changes hands, that’s reflected on the MERS system.
Sheby”: it might be reflected on your computer but is it in the courthouse?
Arnold: MERS is reflected in the courthouse.
Shelby: I could see who transfered the mortgage?
Shelby: So you’ve taken the place of the property laws of the states?
Thompson: That’s correct. MERS removes from the public record any chain of title.
Shelby: Isn’t this part of the problem. People are saying that you don’t really own this mortgage, how can you foreclose on it?
Arnold: Sometimes MERS is the mortgagee?
Shelby: But that isn’t right, is it? Can MERS foreclose?
Thompson: Whether or not MERS can foreclose is a hotly contested issue. Some states allow it, some states forbid it.
Shelby: So MERS is part of the problem.
Thompson: MERS complicates the issue.
Shelby: I’m looking for the truth of the problem. You got yourself in trouble when you subverted the property laws of the country.
Johanns: Nobody in the room would claim that the servicer errors are right. Fundamentally, it’s just not right. But on mortgage foreclosure issue, I’ve done some. My understanding was somebody was giving me money that would help me buy the house, and if I failed to repay it, they would take the house. As sad as that is, that was the bottom line. How many instances have you run into, that these foreclosure people are foreclosing where somebody hasn’t failed to pay.
Thompson: I have three examples in my written testimony.
Johanns: That’s not right, but is is 3, or 3,000 or 3 million?
Thompson: It’s more than 3. It’s a complicated question. Sometimes wrong bank initiated foreclosure. Sometimes illegal fees put borrower into default.
Johanns: That’s not right either. Won’t get debate here. But for the purposes of the committee, it’s important to understand what we’re dealing with. So you can give me three cases?
Thompson: There are 26 examples in written testimony. 3 where there was no default. Others are default from improper fees. It is not uncommon. Difficult to assess magnitude because of improper affidavits.
Johanns: Want scope of what we’re dealing with so we can understand what to fix. But if you can only bring to mind three cases, that’s a different dynamic than 300,000 (he doesn’t get the issue).
Thompson: In virtually all the cases I dealt with, I believe homeowner was not in default when you look at underlying issues.
Johanns: I find that troubling.
Thompson: I only took cases with a meritorious defense of foreclosure. You can only defeat it where there is not a legal default. It’s a widespread problem.
Johanns: There are legal defenses and there are defenses to the fact of “my client is not in default” (accusing her of making things up?)
Thompson: Not a simple yes or no, for example with illegal fees. With 10% of cases I handle, not in default at all. Where something servicer did, maybe 50%.
Johanns: Trying to get to, if you haven’t paid and somebody’s suing you, I need to know the scope of the problem. Causing me concern about your testimony. Please provide more info for your concerns.
Dodd: I noted in testimony, 86% in compliance, troubling to me that 14% are not. In normal times, it’d be around 2%. Speaks to another larger issue. You’re talking about the end of the process, what about what happens before that. Ok, Bennett.
Bennett: I’ve defaulted on payments in my life. I know the angst that comes with having missed a mortgage payment with 6 children and a foster child at home (isn’t he super-rich?). Let me follow up on Johanns. We have BofA and Chase lending. I’d like your response to testimony from Ms. Thompson. She said there’s a built-in conflict of interest to pile on extra fees and force foreclosures. I’d like you two to respond. If that’s your policy, it’s really stupid policy. May make short-time revenue, but you build in long-term customer resistance to dealing with you. I don’t suggest there are not businessmen and women who are stupid. But if I were an employee involved with this and found out you were deliberately maximizing short-term profits with fees, I’d say that’s as dumb as anything you could do.
Desoer: We do not sacrifice the long-term brand of BofA for short-term gains in fees. As for inaccurately portraying a PSA, that was an error. We work to resolve them and correct them. Our financial interest is aligned with keeping the homeowner in the home. We try to keep people in the home, and we’ve done it 700,000 times. We were one of the first to offer a principal reduction program under a proprietary program, the hardest-hit fund. At the same time, we have to balance interest. Interest of the customer front and center, but must reference interest of investors and our role as servicer. We balance that seriously.
Bennett: Mr. Lowman?
Lowman: We don’t make money when we foreclose. We want to make loans perform again. We’ve invested lots of resources in modification. Extensive process to determine eligibility for modification. In our best interest and interest of the investor. We have a balancing act.
Bennett: I’m sure, Ms. Thompson, your information is accurate. but human beings make mistakes. I would say to the banks that I hope you’re checking your training to not make those mistakes. The IRS agents tell people wrong things.
Levitin: Important to hear the words in another servicer. This was a public document. Countrywide’s earning call. He said “we are asked what happens to costs on servicing efforts. Increased operating expenses tend to be fully offset by greater fee income from late charges.” Countrywide settled with the FTC on overcharging on late fees. Head of Countrywide did admit “we sacrifice long term for short term.”
Bennett: Yes some people are stupid.
Thompson: Fees make up a large chunk of profits for servicers. Servicer revenue per loan went up despite all these foreclosures.
OK, Marcy’s going to take over with a Part II. I’ll still be watching and paying attention.
…If she hasn’t gotten started, Adam Levitin was really good just there. Tim Johnson asked him how the law needs to change to account for this, and he replied: “I don’t think the problem is the law, the problem is compliance with the law… There’s no need to change the law to catch up with the market. The law itself would have been fine, and these procedures used to be followed. They just decided not to follow the law. Just as the underwriting standards fell, the transfer diligence fell.”
UPDATE: Here’s Marcy’s continuation of the liveblog.