The Government Accountability Office released a report requested by several Democratic members of Congress about documentation problems in mortgage foreclosures. If you’re just coming to the question of foreclosure fraud, it provides a pretty good overview. If you’re aware of the issues, it’s good to have it all in one place. The GAO does say that, while federal regulators often don’t have the jurisdiction on foreclosures and mortgage issues that state courts do, their performance in this regard has been “limited and fragmented.” Given that 78% of mortgage servicers have the Office of
Bank Advocacy the Comptroller of the Currency as their main federal regulator, that is not surprising. Federal regulators simply haven’t done much on this mess, hoping that a stronger economy would just make the problem go away.
About the only area where federal regulators have been proactive in finding irregularities is on the subject of military foreclosures:
In addition, regulatory staff told us that some servicers reported instances where foreclosures proceeded against military service members on active duty in violation of SCRA (The Servicemembers Civil Relief Act). According to regulatory staff, violations of SCRA were not reported by all servicers. According to our discussions with regulatory staff, 2 servicers of the 14 included in the regulators’ review preliminarily identified almost 50 instances of foreclosures proceeding against military service members on active duty in violation of SCRA.
But as Sen. Al Franken says in his letter to federal banking regulators, while the military foreclosures are “perhaps the most egregious” violations, they are by no means the only ones from the banks and their servicer counterparts.
Yves Smith points out that GAO also highlighted the inadequate nature of the federal foreclosure task force review, with its focus on a mere 2,800 loan files:
They noted that the files chosen were a small sample, clearly chosen to be a mix. The GAO refrained from using language critical of the process, but reading between the lines, made it clear that this selection process was not rigorous, but was an informally designed but hopefully indicative sample. This section was telling:
“The reviews did not include an analysis of the payment history of each loan prior to foreclosure or potential mortgage-servicing issues outside of the foreclosure process. For example, examiners focused their reviews on foreclosure procedures and documentation preparation and did not examine whether servicers had followed other requirements, such as FHA requirements for assessing the borrower for a loan modification or other loss mitigation alternatives, before initiating foreclosure…
However, bank regulatory officials told us that examiners did not always verify, as part of the loan file review process, whether documentation included a record of all previous mortgage transfers from loan origination to foreclosure initiation, as may be required by some state laws or contracts. In addition, with some exceptions, examiners found that notes appeared properly endorsed and mortgages appeared properly assigned. In a few instances, examiners uncovered notes that were not properly endorsed, which could subject the servicer to challenges on its authority or standing to foreclose. Additionally, while each of the regulators stated that servicers could generally produce requested documentation, servicers at times had required some time to find necessary documents.”
In addition, GAO said that federal banking regulators admitted to them that they have “not yet fully assessed the extent to which MBS loan transfer problems could financially affect their institutions.” In other words, even though bad transfers and chain-of-title problems could have a material impact on the ownership of tens of millions of mortgages across the country, the regulators haven’t really looked into it. The OCC, OTS and the Fed told GAO that the banks told them they have standing to foreclose and they believed them, “although examiners noted instances where documentation in the foreclosure file alone may not have been sufficient to prove authority to foreclose without reference to additional information.” I mean, there are $1.3 trillion in private label mortgage backed securities, there are serious questions about the mortgages backing those securities and whether they were conveyed properly, a scenario that would make those securities worthless, and the federal regulators tasked with judging the safety and soundness of the financial system… don’t care.
GAO’s final recommendation is this:
GAO recommends that banking regulators and the Consumer Financial Protection Bureau (CFPB) develop plans for overseeing mortgage servicers and include
foreclosure practices in any servicing standards that are developed. GAO also recommends that regulators assess the risks that documentation problems pose for their institutions. The agencies generally agreed with the recommendations.
We definitely need strong federal servicer standards, and CFPB is a great place to house them. All the more reason to recess-appoint Elizabeth Warren as soon as possible.