Senate Banking Committee Examines Loan Servicing Problems

by devteam December 2nd, 2010 | Share

The SenaternBanking Committee is holding the second in a series of hearings on Problems inrnMortgage Servicing from Modification to Foreclosure on Wednesday.  Part One of the hearings held in mid-Novemberrnfeatured testimony from witnesses representingrnconsumers, state’s attorneys general and the mortgage industry.  On Wednesday committee members are slated tornhear from federal regulators, representatives of the government sponsoredrnenterprises, and the legal profession. </p

Opening the first hearing, SenatorrnSherrod Brown (D-OH) said that the most complaints he receives are related tornthe four largest servicers.  He blamedrnthe consolidation of the industry following the failure of several major banksrnand mortgage lenders for creating institutions that “are now so large thatrntheir executives apparently don’t know what’s happening deep in their ownrnsecuritization and servicing departments.” </p

The Senator cited a ClevelandrnFederal Reserve study that said most loan modifications take between 120-240rndays to work out, and a Government Accountability Office report that betweenrn14,000 and 34,000 families in Ohio have been unnecessarily forced out of theirrnhomes.</p

R.K. Arnold, President and CEO ofrnMortgage Electronic Registration Systems spoke at this hearing as well as arnsimilar House hearing.  His testimony wasrnbriefly summarized earlier nn MND. READ MORE</p

Tom Miller, Attorney General ofrnthe State of Iowa said his 50-state working group of attorneys general had triedrnto collaborate with the mortgage industry on problems hindering the loanrnmitigation process but were frustrated by the servicers’ denial of their lackrnof preparedness.  </p

Because of the massrnsecuritization of loans the structure of the industry has changed to the pointrnwhere ownership is no longer aligned with the servicing of the loan, he said, andrnthe system “was not designed for any of the tasks it is being asked tornperform,” especially at the scale of the current crisis.  What is supposed to be a no- or low-touchrncollection system is simply not equipped to re-underwrite a massive number ofrnloans. </p

Loss mitigation and foreclosuresrnexist simultaneously on parallel tracks and thus the left hand may not knowrnwhat the right hand is doing.  “Thusrnwe all hear stories of borrowers who thought they were approved for a loanrnmodification receiving a notice of a foreclosure sale.”</p

Attempts to describe the issue ofrn”robo-signing” as a mere technicality, Miller said, “show arncertain type of arrogance.”  Thernhome is too important to families and state foreclosure laws govern the methodrnby which is can be taken away.  Thernstakes are high and compliance is expected. rnClaims that the only relevant fact is that the borrower owes money andrnhas to pay it back miss the point entirely. rn”We do not say in a criminal prosecution that it is ok for thernprosecutor to fabricate evidence, so long as the defendant is in factrnguilty.”</p

He stressed that the currentrnmulti-state investigation is not limited to robo-signing.  The AGs intend to look at issues such as thernaccuracy of the information used by servicers in foreclosing, the imposition ofrnservicing-related fees and force-placed insurance and at some of the issuesrnbeing raised about proper chain of title.</p

Miller said however that thernbiggest issue is fixing the loan modification system which he calledrn”Russian roulette.” “Whether or not a borrower receives arnmodification that will save the family home depends in large part on who picks uprnthe phone on the other end.”  </p

DavidrnLowman, CEO of ChasernHome Lending and Barbara Desoer, President of Bank of American Home (BoA) Loansrnrepresented the servicing industry at the hearing.  Both outlined their companies’ efforts tornwork with borrowers to avert foreclosure both within and outside of federalrnprograms such as HAMP.  Lowman said thatrnChase had prevented a total of over 429,000 foreclosures since January 2009rnwhile BoA has completed over 614,000 proprietary loan modifications.  The bank’s portfolio, primarily acquired fromrnCountrywide Mortgage, is largely ineligible under HAMP guidelines, Desoer said,rnbut the Bank has completed over 85,000 permanent HAMP modifications. </p

Lowman denied recent chargesrnthat servicers are responding to a system of misplaced incentives. “It isrncritical to note that the analysis we use in deciding whether to proceed with arnmodification or foreclosure does not take into account servicerrncompensation.  Furthermore, if it werernconsidered, servicer’s compensation would tend to favor modification overrnforeclosure.  Indeed, the cost forrnservicers to take a loan to foreclosure generally is significantly greater thanrnthe cost of a modification.  With arnsuccessful modification, Chase is able to continue to service the loan and earnrnservicer fees, but when a property is sold as a result of foreclosure, Chase’srnrole as servicer ends and Chase receives no further fees.”</p

Desoer said BoA has used the recent nationwide moratorium onrnforeclosures to review procedures and, even though that review “indicatedrnthe basis for our foreclosure decisions has been accurate, we have identifiedrnareas for improvement.”   Goingrnforward, every affidavit will be individually reviewed by the signer, properly executed,rnand promptly notarized.  The Bank is alsornworking to replace previously filed affidavits in up to 102,000 pendingrnforeclosures.</p

DianernE. Thompson, Counsel, National Consumer Law Center ripped the servicing industryrnsaying, “The current robo-signing scandal is a symptom of the flagrantrndisregard adopted by servicers as to the basic legal and business conventionsrnthat govern most transactions.  Thisrnflagrant disregard has been carried through every aspect of servicer’s businessrnmodel,” and “is at odds with notions of due process, judicialrnintegrity, or transparent financial accounting.”</p

 She outlined a number of steps torn”restore rationality to our market.” rnAmong them:</p<ul class="unIndentedList"<liProvidingrntools for homeowners including mediation programs and funding for legalrnservices.</li<liMakingrnthe Net President Value test an absolute defense to foreclosure where loanrnmodifications have not been offered.</li<liEliminatingrnthe two-track system so that homeowners are evaluated for a loan modificationrnbefore foreclosure in initiated and fees are incurred.</li<liMandatingrnprincipal reductions under HAMP.</li<liLimitingrnservicer fees to the reasonable and necessary and eliminating default fees asrn"unconstrained profit centers."</li</ul

The most startling suggestion torncome out of Part One of the hearing, however, was made by Mr.rnAdam J. Levitin Associate Professor of Law, Georgetown University Law Center.  Levitin’s testimony revolved around legalrnissues surrounding the Chain of Title, servicing, and foreclosure.  However, in his conclusion Levitin stated itrnwould be impossible to fix the housing market unless the number of foreclosuresrnis drastically reduced and called for “a global settlement on mortgagernissues, the key elements of which must be (1) a triage between homeowners whorncan and cannot pay with principal reduction and meaningful modifications forrnhomeowners with an ability to pay and speedier foreclosures for those whorncannot, (2) a quieting of title on securitized properties, and (3) arnrestructuring of bank balance sheets in accordance with loss recognition.</p

A summary of Part Two ofrnthe hearings will be provided as testimony becomes available.

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About the Author


Steven A Feinberg (@CPAsteve) of Appletree Business Services LLC, is a PASBA member accountant located in Londonderry, New Hampshire.

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