Marcy’s right; you cannot write the story of the economy without writing about housing and foreclosures, and the fact that Peter Baker thinks he can is an indictment of economic literacy in the media. It’s just obvious that continued slack in the housing market threatens any type of recovery, but precious few people in positions of power want to say that. For the most part, I’d guess that the reticence from Administration officials and their media courtiers to even mention the foreclosure crisis has an answer a lot like Adam Levitin’s statement to the House Financial Services Committee: “The federal regulators don’t want to get info from servicers, because then they’d have to do something about it.” Similarly, the Administration doesn’t want to talk about the problem because it would require them to act.
But that’s not true of every regulator. The FDIC’s Sheila Bair, for example, wants to use Dodd-Frank risk retention rulemaking to implement rigid standards for mortgage servicers. She expanded on that today by pushing the concept of a “claims commission” for foreclosure victims.
Chairman Sheila Bair wants a foreclosure claims commission set up, similar to the one established during the oil spill crisis in the Gulf of Mexico last year, to help homeowners victimized by improper foreclosures.
Bair spoke at the Mortgage Bankers Association summit in Washington Wednesday on the future of mortgage servicing, a day after regulators announced new work to develop a national servicing standard [...]
“The mortgage servicing industry is fundamentally flawed and in desperate need of reform. It does not provide significant incentives to provide borrowers enough loss mitigation needs,” Bair said.
She added that some servicers have become too big to succeed. Since 2000, the five largest servicers grew their market share from 32% to more than 60% today, Bair said, adding that these companies were either incapable of or reluctant to commit the resources necessary to implement effective loss mitigation practices.
Bair seems to be the only person in the government to recognize how broken the modern servicer system is, both for borrowers, investors and the economy as a whole. Servicers are supposed to work on behalf of investors, who hire them to collect payments on the mortgages they hold as securities. But they have their own incentives, to cut expenses to the bone (leaving them without the staff to deal with modifications down the road) and tack on as many fees as possible (they get to keep those 100%, rather than the fraction of a percentage they get to keep out of monthly payments), that run completely counter to the investors, and prioritize foreclosure over modification. And during this crisis, that has led to a flood of unnecessary foreclosures and rampant fraud upon the courts in order to get that done.
This claims commission is similar to one of the ideas being thrown around in the 50 state AG investigation. They want to create a big nationwide fund for foreclosure victims who were cheated out of their homes by servicers. Bair adds the concept of a national servicing standard to that, with rigid guidelines (hopefully along the lines of what Stop Servicer Scams has produced) for conduct. The FHFA released a letter yesterday highlighting a new initiative, in conjunction with HUD, to figure out a new model for compensating servicers, so they aren’t incentivized to foreclose.
Let’s be blunt – this isn’t good enough. A nationwide compensation fund is fine, but in the end it’ll probably end up as just a payoff, the cost of doing business for the banks. You have to add to that real modifications with principal reductions, to reset the entire housing market and stabilize it. And you have to provide consequences for illegal behavior, which is in the background of virtually every foreclosure action over the past several years. Judge Arthur Schack is taking on foreclosure lawyers because they are lying in his court and breaking the law. The remedy for that is to throw those people in jail, and that needs to go all the way to the top. “I’m not going after lawyers, I’m out to do justice,” Judge Schack said. “We have something called due process of the law.” And there’s no justice without actual sanctions for criminal behavior. “We’re not Animal House,” concluded Judge Schack. “Some animals, like banks, are not more equal than others, to bring George Orwell into this.” It was Animal Farm, but have I mentioned that I love Judge Schack?
I appreciate Bair’s desire to push servicing standards, and she also highlighted the issue of second liens, proposing a “fixed formula” to govern the treatment of second liens when the servicer and its affiliate owns both (another conflict of interest). But you have to deal with this entire problem, not one part or another. And there is no resolution without a restoration of the rule of law.
UPDATE: Apparently the AFL-CIO crashed this Mortgage Bankers Association conference, not necessarily because of servicing standards, but because of the presence of the CEO of a home construction company who took federal money for job creation and instead laid off workers.