We’ve mentioned that the FDIC has been pushing to reform the securitization process, including imposing standards on servicers. That has put it at odds with the bank-friendly Treasury and Office of the Comptroller of the Currency (the SEC has proposed securtization reforms but of a much more modest nature than the FDIC’s). This behind the scenes battle is heating up further because Dodd Frank calls on bank regulators to draft new rules to improve the operation of the mortgage securitization market. The FDIC intends to include mortgage servicer behavior in those provisions and want the rules ready in January.
The pressure to take action has increased with a spate of hearings last month (two Senate Banking Committee, one House Financial Services, the Senate Judiciary Committee, HUD, plus the release of a blistering COP report and related chat with Geithner) and the FCIC report due out next month. The publication of a letter to banking regulators signed by 50 experts urging action was joined by a letter by Representative Brad Miller, which is apparently also garnering Congressional support. The trigger for both missives is the failure of the authorities to act on provisions in Dodd Frank related to securitizations:
Representative Brad Miller 941 Letter
However, other banking regulators are not exactly keen to move ahead. From the Huffington Post:
Nevertheless, the Fed and the OCC are pushing back, according to a source at the FDIC. Spokespeople from both the Fed and the OCC said their agencies support new mortgage servicing standards but declined to comment on the new rules being advocated by the FDIC. A spokesman for the Treasury Department said the Treasury supports regulating mortgage servicers, but was unable to comment on the FDIC plan by press time.
This is a tad disingenuous. Per American Banker:
If the Federal Deposit Insurance Corp. has its way, federal regulators would not wait for Congress to create national servicing standards, but instead write such rules as part of risk retention guidelines set to be released soon.
The agency’s idea has divided the banking agencies, with the Federal Reserve Board and Office of the Comptroller of the Currency arguing risk retention is not the place for new servicing standards. But FDIC officials said that with all the problems in the servicing industry, regulators must act now.
“We shouldn’t wait for legislation,” said Michael Krimminger, FDIC acting general counsel, in an interview. “In Dodd-Frank, Congress instructed us to apply the risk retention rules to help ensure high quality risk management practices, and servicing standards are critical to achieve this. If Congress wishes to adopt further servicer standards that may be a good thing, but we have a rule in Dodd-Frank that applies across the board.”
An aside: Krimminger spoke at the American Securitization Forum early this year on securitization reform proposals. He was reportedly very well informed and not particularly sympathetic towards typical industry rationalizations as to why a broken status quo needed to be left alone. No wonder banks are pushing back through friendlier channels.
And the obvious issue with claiming that further Congressional approval is that this is simply cover for acceding to bank wishes. Any “further approval” guarantees inaction, given the even-more-bank-friendly composition of the incoming legislature.
As the role of servicer abuses in foreclosures is finally coming to the attention of Congress and the media, so to is this ongoing turf battle. A story in the Huffington Post indicates why this matters. Efforts are starting to collect better data about poor servicer practices. Some attorneys representing homeowners have reported that anywhere from 50% to as many as 70% of the defendants they represent are in foreclosure due to servicer error and malfeasance. On the one hand, there’s some sample bias here; borrowers who fight foreclosures typically feel they can afford their home, either on a going-forward basis or with a mod. Borrowers who are hopelessly under water aren’t typically the sort to put up a fight.
The Huffington Post reports on the efforts to improve the sampling:
Last week, the National Consumer Law Center and the National Association of Consumer Advocates published a survey of 96 foreclosure attorneys from around the country, attesting that servicers have pushed 2,500 of their clients into the foreclosure process, even as the borrowers were negotiating loan modifications with the same servicers.
Notice this is merely one type of abuse, one that was a major focus of fraud cases filed by the attorneys general of Arizona and Nevada against Countrywide. This does not get at the type too often seen by foreclosure defense attorneys, that of banks applying payments late or compounding one or two late payments through the incorrect application of subsequent payments and junk fees into an arrearage so large that the homeowner is a goner. It’s very hard to get to the bottom of these abuses (no joke, it’s a battle merely to get the internal records), which of course makes it well nigh impossible to ascertain how often they occur.
Another section of this story is simply astonishing:
On December 8, community outreach officials from the OCC and the Fed met with dozens of housing counselors from around the country and acknowledged that complaints about mortgage servicing abuses have been coming to their offices for years. Nevertheless, at a recent hearing, Comptroller of the Currency John Walsh said his agency didn’t know about the outright fraud being committed by servicers until press reports emerged this fall.
Huh? This is “see no evil, hear no evil, speak no evil” in action. We’ve commented on this 2007 article by Chapman University School of Law professor Kurt Eggert before. From its abstract:
This article discusses the opportunistic and abusive behavior of some servicers of residential mortgages toward the borrowers whose loans they service. Such abuse includes claiming that borrowers are in default and attempting to foreclose even when payments are current, force-placing insurance even when borrowers already have a policy, and mishandling escrow funds.
Earth to base. An academic is in a far less advantaged position to detect abuses than regulators. The idea that that at least some of the complaints received by the OCC and Fed would not have led a neutral party to wonder about fraud is hard to swallow. Even with our very limited contact with Fed officials, they have shown a strong bias against consumers.
It’s not surprising to see bank-friendly regulators looking for any and every excuse to justify past and current inaction. What is astonishing is that they continue to see this as a viable course in the face of the mounting economic and social devastation created by the foreclosure crisis.
Update: The bone of contention is whether Section 941 of Dodd Frank extends to the regulation of bank servicers. Here is the FDIC’s legal analysis:
FDIC Legal Arguments for Residential Servicing Standards
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“Even with our very limited contact with Fed officials, they have shown a strong bias against consumers.”
Made me wish Reagan was here to clarify his quip that “Government is the pproblem”.
“The idea that that at least some of the complaints received by the OCC and Fed would not have led a neutral party to wonder about fraud is hard to swallow. Even with our very limited contact with Fed officials, they have shown a strong bias against consumers.”
I have not read one single article which contained anything consumer positive about the OCC. The PBS program Frontline did a program which pointed out that OCC attempted to preempt state and local consumer protection!
They are banking lobbyists. The Congress should remove any consumer protection responsibilities from them.
The only reason to keep OCC in existence is to insure that it’s employees do not migrate to other banking regulatory agencies.
“The only reason to keep OCC in existence is to insure that it’s employees do not migrate to other banking regulatory agencies.”
An OCC employee might say:
“Ouch – do you have to get so personal? Our blinders are removable, I think, though they have been on for 30 years.”
Both the Republicans and the administration are squarely behind the banks and other financial services. Just before Obama left for Hawaii, after benefiting from victories in congress that were gifted to him by Lieberman, Kerry, Schumer and others, repeated the stupid mantra about dealing with the deficit; Clearly, a problem whose importance is way below unemployment and bank and health insurance companies sound controlled.
At the very least, Democrats should expel Obama from the party and find a candidate who represents the people in 2012.
If you haven’t noticed, Congress welds the barn doors shut only after the horses are out roaming free. I’m sure it’s by design.
The game has to continue, otherwise where will the $$$$’s come from for the Corruption to continue? Certainly not from the vast majority of wage earners, who see their wages going south on a continual basis. As we see with the people who do supposedly objective papers, that are paid for by the entity that sponsored the paper, there is no objectivity, rather a conformation that the sponsors are correct in what they say/believe in. In other words, those who provide the wherewithal, also call the shots. “O” is no exception, as he has demonstrated not the leadership qualities people who elected him believed, but those of who bankrolled his run. What a sad day for the history of the U.S.A. when even the P.O.T.U.S. has been bought & paid for.
Just before the second graf quoted from HuffPo these lines are offered to explain possible sampling bias: “On the one hand, there’s some sample bias here; borrowers who fight foreclosures typically feel they can afford their home, either on a going-forward basis or with a mod. Borrowers who are hopelessly under water aren’t typically the sort to put up a fight.”
Is there a way to clarify or expand that, please? Servicers are abusing homeowners REGARDLESS of whether (a) they are current on their mortgages, (b) they are in “default,” (c) the mortgage is “under water,” or (d) the homeowners believe “they can afford their home[s].”
Usually the phrase “under water” refers to the extent the remaining mortgage debt exceeds the value of the collateral, i.e., the house & lot. Not all mortgages which are now “under water” are owed by homeowners who DON’T “feel they can afford their home.” Not all “under water” mortgages are being hit with foreclosures. But they are still being victimized by servicers who parasitically suck them dry using junk fees, compounding late fees, forced insurance, fraud, etc.
There is an unknown number of homeowners who can “afford their home.” Whether they can “afford” the home has little to do with whether the mortgage is “under water.”
The ability to “afford their home” is governed by INCOME and the size of the debt; how deeply a mortgage is “under water” has nothing to do with the debtor’s income, it is caused by the collapse in the prices of homes.
Yves, I’m sure you are already working on a separate post about this, but here is another reason OCC & Treasury are desperately trying to stop sanctions for servicer frauds [cross-posted from comment to today’s Links]:
WaPo front page above the fold of print edition today (Thurs. 12/23) has blockbuster:
http://www.washingtonpost.com/wp-dyn/content/article/2010/12/22/AR2010122205828.html
My take: Fannie & Freddie knowingly & deliberately ordered & facilitated assembly-line foreclosures by servicers AND law firms, including especially Stern Law Firm, now under investigation for fraud. Fannie & Freddie knew about the assembly-line (i.e., unverified, pell-mell, hasty, unjustified) foreclosure mills SINCE THE YEAR 2000!
Time to indict Fannie & Freddie and put some GSE executives in jail.
I am thankful this Christmas that in the chaos of what is happening here with such things as the servicer’s abuses that there is a discourse here on this blog courtesy of Yves. Everyone learns here the buyer beware and individual responsibility for self preservation. We have broken trust with people and the very system we have used for property law for a long time is in shambles. It is starting to look like a collapse and rebirth or at least a significant rewrite of laws and procedures. Then by who and to what aim? Someone benefits unfortunately from this fall and the human pain of those affected. I hope those in the place of decision making have the foresight of our Founders this Christmas and beyond. Rob Hahn “Notorious Rob” makes his own predictions for 2011 in his latest post http://bit.ly/eP34tp
It just came to my attention yesterday that Nye Lavalle wrote a report about all of this back in 1999. His knowledge arose from a long legal battle that started with servicer abuse on his family home’s mortgage…….in 1993! Bear Stearns spent $2.5M in legal costs fighting Lavalle over a $100,000 loan, no doubt trying to keep the cat in the bag. Obviously this worked for over a decade. But meanwhile Lavalle was calling out the alarm and telling people what he learned.
I’ve been reading about the mortgage/foreclosure fraud since trying to help a friend whose mortgage servicer was abusing her, three years ago. I learned all about the servicer abuse from one friend. Don’t tell me the regulators didn’t intentionally ignore the abuse, if not actively paper it over.
Has anyone ever wondered why they called it TARP? As in cover-up? I’m convinced that the regulators let it happen, and then when it got out of hand, jumped into action orchestrating the cover-up. Let’s face it. The baks have taken control of the government. Expecting any improvement, I’m now concluding, is nearly hopeless at this point.
Blaming Fannie & Freddie alone is now in progress in the medium of one’s choice:
The private-label, mortgage-backed securities market would have rebounded faster from its near extinction during the financial crisis but was hindered by the growing reach of Fannie Mae and Freddie Mac, according to a new analysis from the Congressional Budget Office.
Will the media actually cover the FCIC report when it is released? I’m beginning to doubt they will.
I wondered why Hillary had made reference to Bobby Kennedy’s assassination nearing the end of the 2008 primary. There were newspaper stories worrying about Obama’s safety, as if it were merely a bunch of racists that were plotting. But now I think this was meant to control the candidates.
You can google up Lavalle’s 1999 report in pdf: ‘Predator Grizzly Bear Attacking Elderly, Disabled, Minorities, Disadvantaged & Poor With Predatory Lending Scams & Frauds’
Yves,
Am I being too suspicious when I wonder about all the political wrangling over writing new financial regs re: securitization, in particular, in the face of tens of
thousands of hrs. of incessant fraud, especially regarding the pooling and services agreements, as per New York state extant law? I worry that Obama will retroactively overlook these bankstas in the same manner he forgave AT&T’s spying, as per the Patriot Act. Regulation only works when the regulators have integrity. I have zero trust in “the establishment”…’been this way for decades.
As usual, thanks for your outstanding insights.