About a year ago, I appeared at Netroots Nation with Sen. Jeff Merkley (D-OR), the Huffington Post’s Ryan Grim and Professor Elizabeth Warren on a panel called “The Forgotten Foreclosure Crisis.” Speaking with Merkley today, I remarked that we could hold the same panel again this year, without changing a word of it, and not be out of date in the slightest. Sen. Merkley agreed.
He’s trying to do something about that. Merkley introduced a bipartisan bill with Sen. Olympia Snowe (R-ME) called the “Regulation of Mortgage Servicing Act.” The bill takes some of the elements of Merkley’s comprehensive fix for mortgage servicing, providing a plan that he thinks could pass Congress. “We needed to have it be bipartisan,” Merkley said, mindful of the lack of votes for Democrats in both chambers of Congress. “There’s much more I’d like to do, but this seems like something to get done.”
The bill has three major elements. It would require lenders to create a single point of contact for borrowers, it would end the dual track process where servicers simultaneously negotiate a modification and initiate foreclosure proceedings, and it would provide a third-party independent review before proceeding to foreclosure. If these steps aren’t in place, the servicer cannot foreclose on any borrower.
Some of these provisions, particularly the first two, are present both in the consent decree from federal regulators to the top 14 mortgage servicers, and in the proposed state AG settlement, which is still in process. But Merkley still saw the need for his legislation, and thought it could facilitate the other processes out there. He clearly didn’t think much of the OCC-led consent decree. “It’s really kind of a cheerleading agreement, asking the banks if they’ll please take these steps, and you can hire somebody to tell if you’re doing it well or not.” There’s no teeth in the consent decree, in contrast to Merkley’s proposal to bar foreclosures until these conditions are met. The FDIC’s departing Sheila Bair similarly criticized the consent decree today, saying that “millions of foreclosures could be infected” by servicer abuse and documentation problems, and that state and federal regulators still do not know the extent of the violations. There needs to be much more aggressive action,” she told the Senate Banking Committee. She added that bank exposure as a result of forced repurchases of soured loans “has yet to be quantified.”
The state AG settlement would also force single point of contact and ending dual track. But that deal has not been signed, and according to Merkley “there’s no guarantee that we will have an agreement.” He hopes that the legislation can encourage those servicing reforms in any agreement, to head off a Congressional response. “Maybe they’ll say, let’s do it now, because we don’t want to have to deal with it with Merkley-Snowe.
Merkley expressed “real concerns” about the AG settlement. It’s really hard to get a handle on where it’s headed. The banks floated a $5 billion counter-offer on penalties, but state and federal regulators are still holding out for $20 billion in fines and perhaps a fund for homeowners. Adam Levitin of Georgetown Law spun out a long theory which asserted much higher numbers in penalties, as much as $160 billion, but most of it was pure conjecture. Without a real investigation, it’s impossible to know the “correct” fines and penalties that should be imposed on the banks.
“The challenge is we haven’t seen the details,” Merkley said. “The deal could come out in a form that really is our best hope, but it also could do just a modest amount and give away rights of action” for state Attorneys General to pursue additional prosecutions.
The real problem with the consent decree, the state AG settlement and Merkley-Snowe is enforcement. You can put forward all the laws and servicing standards you want, but they’re meaningless if they cannot be enforced. Here’s a good example: Bank of America was barred from foreclosures by one of its servicing units in Utah, but they keep pursuing foreclosures anyway.
The one difference-maker in all of this is a federal regulator committed to mortgage servicing reform, located at the Consumer Financial Protection Bureau. And to Merkley, the person for that job is clearly Elizabeth Warren. “I hope the President nominates her and soon because the time is now. She’d be a tremendous leader of the organization.” Merkley would prefer to have her nominated while the Senate is in session, giving a chance at confirmation. “Then if it cannot go through, he could pursue a recess appointment.” But the point is that national leadership is fundamental to any progress on the foreclosure crisis.
“With CFPB in place, we wouldn’t have allowed yield spread premiums or liar loans or pre-payment penalties,” Merkley concluded. “We need an advocate who looks out for working families. This is a pro-family organization.”