Posted on Tuesday, October 26, 2010
By Brady Dennis
Washington Post Staff Writer
Friday, October 22, 2010; 11:45 PM
DES MOINES - Iowa Attorney General Tom Miller, the man heading up a 50-state investigation into practices that generated mountains of flawed and possibly fraudulent foreclosure filings, understands the wave of anger the revelations have caused.
He had a visceral reaction himself when he first learned last month about "robo-signers," backdated assignments and other problems that have driven some of the nation's largest banks and servicing companies to halt foreclosures.
"My first reaction was concern, and curiousness as to the extent of it," Miller, 66, said in an interview. "My second reaction was, 'How in the hell can they let this happen?' "
Not that the Harvard Law School graduate and seven-term attorney general was entirely surprised. He and Assistant Attorney General Patrick Madigan have been immersed in the abuses and shoddiness of the mortgage industry for years. They led the multistate effort that resulted in a $325 million settlement with subprime lender Ameriquest in 2005, and they helped form another multistate effort aimed at preventing foreclosures, just as the housing market began to nose-dive.
But both men say they have never witnessed the type of fierce public outrage over financial industry wrongdoing since it was learned that some of the nation's biggest banks and servicers had submitted hundreds of thousands of dubious documents to courts across the country.
"This has become a proxy for the frustration with the banks and with the foreclosure process. This was the straw that broke the camel's back," Madigan said. "We didn't pick this issue. It picked us."
In his spacious office in Des Moines, with its view of the golden autumn foliage and the state capital dome beyond, Miller said it remains unclear to him and other attorneys general just how deep the problems go. He said they have only begun to gather information and determine the scope of their investigation.
"That's still an open question, how widespread it is," he said. "We just don't know yet."
He and others say the group has been in touch with numerous banks and servicers and plan to contact more firms to inquire about their foreclosure practices. They also are beginning to coordinate with the federal agencies that Housing and Urban Development Secretary Shaun Donovan said this week are undertaking a comprehensive review of the cases. Donovan told reporters that, so far, the probe has found no evidence of systemic problems in the mortgage servicing industry.
Miller did not rule out the possibility that the large-scale issues with foreclosure filings - which prompted lenders such as Bank of America, GMAC and Ally Financial to halt foreclosures temporarily - could lead to criminal charges. But that's not his current aim, he said. Some criminal matters probably would rest with federal officials.
"Our focus is on the civil side now," he said. "We hope to clear up the problems. We hope to have redress for any homeowners that have been harmed, and we hope to try and leave the situation better than when we came in. We think this has been, in varying degrees, a mess for a long time."
Miller and Madigan have heard horror stories from scores of homeowners trying to navigate the maze of bureaucracy to get help altering their home loans to avoid foreclosure. For years, they have pushed servicers to hire more staff to handle loan modifications for borrowers in trouble. Miller said he hopes the latest uproar prompts the companies to do that.
The two men insist that taking time to modify "preventable foreclosures" - ones in which small changes might keep the homeowners in their home - benefits all parties involved. The borrower keeps the house. The servicer continues to collect fees, and the investors receive more income than a foreclosure would bring. The community has one less deserted home.
"This is not some bleeding-heart thing," Madigan said. "This is a public policy issue."
The incentives aren't always so clearly defined. In some cases, investors in a security might push for faster foreclosures to close out their investment, and doing modifications certainly means more time and expense for servicers.
But, as Madigan wrote in a paper more than three years ago, "foreclosure no longer makes economic sense for the holders of most mortgages. Instead, investors and servicers should modify loans to keep as many borrowers in their homes as possible. While modifications certainly are not free, lenders must compare taking a severe loss on a foreclosure with a much more modest loss from a modification. As long as the value of the payments on the modified loan are greater than the net recovery of a foreclosure sale, it is the better business decision to do a modification."
If it made such good business sense, then why have large servicers such as GMAC not undertaken more loan modifications for worthy customers? Many haven't beefed up their staffing, Miller said.
"It's also analogous to them not putting enough resources into the modification programs, with the delays and the waits," Miller said. "The servicers have come a long way on the modification, but they still have a ways to go. â?¦ They've committed a lot of resources, but they should commit more."
He added that Iowa's experience in setting up a mortgage hotline has underscored what a costly and frustrating endeavor it can be to help troubled borrowers modify their loans. "We always underestimated how difficult it was and how time-consuming it was," he said.
Miller acknowledges that, unlike with some investigations, speed matters in getting to the bottom of the foreclosure mess because so many cases remain in limbo. But he and Madigan also seem intent on proceeding cautiously.
"We feel some pressure on time because of the impact on the economy," he said. "But you should never go faster in a way that you don't do the right thing, that you don't get it right."