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Series of Panels in House Financial Services Today on Foreclosure Fraud

Right now on C-SPAN3, the House Financial Services Committee is holding a series of hearings on foreclosure fraud. The three panels today are divvied up among regulators, bankers, and homeowner advocates and academics. The current panel includes Phyllis Caldwell, the chief of the Homeownership Preservation Office at the Treasury Department; Elizabeth Duke, of the Federal Reserve; David Stevens, an Assistant Secretary at HUD; John Walsh, the acting Comptroller of the Currency; and Ed DeMarco, the acting Director of the Federal Housing Finance Agency.

Already, Maxine Waters, who’s chairing this hearing, is hammering Phyllis Caldwell, getting her to admit that Treasury has not levied any penalties or sanctions on mortgage servicers for their violations of HAMP. Caldwell tried to duck and dive, but Waters produced a report from November 2009, where Treasury said they would impose monetary penalties on any servicer failing to meet performance obligations. And clearly they haven’t done so. Caldwell is worse than useless.

As for the Fed, here’s a copy of Elizabeth Duke’s testimony. She gives a good summary of the problems homeowners are having in securing loan modifications, and then turns to the issue of systemic risk:

Financial institutions face a number of risks if inadequate controls result in faulty foreclosure documents or failure to follow legal procedures. Recent events have shown that even the possibility of problems can lead to costly delays and reviews. In cases where actual problems are found, regulators will require lenders and servicers to correct not only the faulty documents themselves but the faulty systems that allowed them to occur. Institutions with widespread problems may be subject to fines and fees in addition to the costs associated with correcting the errors.

Cost associated with foreclosure documentation problems, including “robo-signing” (discussed in more detail later), are not the only potential liabilities facing financial institutions. Investors in mortgage-backed securities and purchasers of unsecuritized “whole loans” have begun to explore and in some cases assert contractual and securities law claims against the parties that originated the loans, sold the loans, underwrote securities offerings, or had other roles in the process. The essence of these claims is that the mortgages in the securitization pools or that had been sold as unsecuritized whole loans did not conform to the representations made about their quality—specifically, that the loan applications contained misrepresentations or the underwriting was not in conformance with stated underwriting guidelines.

The Fed, the OCC, the Office of Thrift Supervision and the FDIC are in the middle of what Duke called “an in-depth review” of mortgage servicer practices, which they expect to release in early 2011. She also mentioned the new stress tests, based on the risk to put-backs and other potential losses by the banks. Happily, Duke said that “The Federal Reserve believes that the best way to assist struggling borrowers is with a mortgage modification that allows borrowers to retain their homes with an affordable mortgage payment.” They have had the policy of encouraging loan modifications on loans that the Fed holds through their MBS purchasing programs. However, Duke projected at least 2.25 million foreclosure filings this year and next year, and an additional 2 million in 2012.

Later on today, there is a hearing with top servicers, and a hearing with housing advocates. If anything comes to light I will give it to you.

UPDATE: Stephen Lynch wonders if Treasury is paying servicers that don’t own the loans they’re modifying.

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David Dayen

David Dayen