Foreclosure Process

Pitch for National Mortgage Servicing Rules Gains Momentum

Posted on Thursday, December 23, 2010

The call for federal officials to establish industry-wide mortgage servicing and foreclosure standards is getting louder. A group of more than 50 senior economists, academic leaders, and influential investors sent a letter to
Treasury Secretary Timothy Geithner and the heads of five federal regulatory agencies Tuesday, urging them to take the lead in setting national standards for mortgage loan servicers.
“Widely reported servicer fraud, whether in the foreclosure process or in the systematic assessment of illegal fees against homeowners, is…a serious problem,” the group said in the letter. “Fraud is also a symptom of the disease affecting our broader financial system, namely the lack of accountability in the loan servicing industry and the resulting impairment of the value of securities sold to investors.”
The group demanded that new standards “be adopted now,” and put forth the argument that provisions of the Dodd-Frank Act relating to disclosure and risk retention for mortgage securitizations gives regulators the authority to undertake a coordinated rule-making effort to map out guidelines for the proper origination, sale, and servicing of mortgage loans.
Section 941 of the Dodd-Frank Act requires federal regulators to develop new standards for mortgage loans that are sold to investors as securitizations, in order to ensure “the excesses and abuses of the past are not repeated,” according to the letter.
The legislation requires sellers of loans to retain a 5 percent stake in the mortgages they package as securities. Sellers are exempt from this risk-retention rule only if the loans meet regulators’ criteria for a “qualified residential mortgage” – the definition for which has not yet been set.
“This new definition for what constitutes a qualified residential mortgage should be the gold standard in all areas of mortgage origination, securitization packaging, and servicing, and disclosure,” the group said in their letter to regulators.
They argue that there is a sense of urgency to nail down this definition because of recent revelations of “inadequate servicing, lost loan modification documents, and improper foreclosures” – all of which have been magnified by the recent robo-signing scandal that ignited a flurry of investigations, lawsuits, and congressional hearings.
The group says the new set of servicing standards must address the misaligned incentives that have plagued the mortgage servicing throughout this crisis.
To protect borrowers and investors alike, the group’s proposed standards would require servicers to provide loan modifications, including principal reductions, to address “reasonably foreseeable default” as long as the homeowner “can make a reasonable payment.” When loans are more than 90 days delinquent, the group says federal regulations should mandate it be assigned to a special servicer.
They also argue servicers should be held accountable for lost paperwork on loan modifications and for failing to suspend foreclosure when a homeowner is actively engaged in the loan modification process.
Among the 52 individuals who signed the letter to regulators were Allan I. Mendelowitz, former chairman of the Federal Housing Finance Board; Nouriel Roubini from New York University; Dean Baker with the Center for Economic and Policy Research; and Christopher Whalen of Institutional Risk Analytics.
Earlier this month at a Senate Banking Committee hearing on the robo-signing controversy, Federal Reserve Governor Dan Tarullo told lawmakers that the industry should consider “fundamental structural changes to the current mortgage system.” He said regulatory examinations have uncovered extensive deficiencies in servicing and foreclosure processes.
“It has been increasingly apparent that the inadequacy of servicer resources to deal with mortgage modifications … was actually a reflection of a larger inability to deal with the challenges entailed in servicing mortgages in many jurisdictions and dealing with a complicated investor base,” Tarullo said. “[I]t seems reasonable at least to consider whether a national set of standards for mortgage servicers may be warranted.”
By: Carrie Bay DSNews

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