The Stop Servicer Scams fight is an important one. Servicer abuse is not the only fault in foreclosure fraud, and getting some standards of conduct for servicers will not fix the standing issues, the blighted title issues and the litany of other problems. But clearly, the servicers have been unbelievably abusive to their customers and even to the investors they purport to serve. They have driven defaults through illegal fees and unwillingness to modify. They have used fraudulent documents to foreclose once they make the decision to do so. They have habitually lost documents, failed to notify borrowers and even broken into occupied homes to change the locks. They are at the heart of the issue, the first line between the borrower and the bank, and they are basically unaccountable at this point.
Mike Konczal breaks down why servicer abuse is such a crucial issue. He notes that Lewis Ranieri, the creator of the mortgage-backed security, saw this coming almost four years ago when he predicted that servicers, which manage securitized loans, would not be able to engage in the mass modifications needed to deal with a housing bubble. But nothing has been done to restructure the system, and borrowers suffer from the inaction.
There is an extensive empirical debate over whether or not the lost value of lack of modifications is a problem of servicers being too “thin”, too poorly resourced to be up for the job, or if they are purposely pushing mortgages into foreclosures for their own profit or keeping them in limbo to collect second-lien income. The numbers say it is a matter of both […]
This isn’t going away as a problem in two important ways. The first is that, with current estimates, there will be 2 million foreclosures next year, same as there was this year. There will be 2 million foreclosures the year after that. Foreclosures will remain very high after that – we can easily imagine ourselves being here in 2013 saying “Why won’t our government get off their butts, stop protecting the biggest banks, and do something about this problem?” It is time to act.
The second way is more disturbing. Even after a recovery the housing markets will still be broken. Consumers will have to worry their documents are not transfered and recorded to the correct place. Consumers could have their payments misallocated by a servicer, and there is little recourse they’ll have other than to pay massive, illegal fees or lose their home.
What’s so interesting about this fight is that it puts multiple federal agencies on opposite sides. The FDIC wants to write new servicing standards as part of risk retention guidelines, which are obligated under Dodd-Frank. They have released a compelling legal analysis for why it belongs in the risk retention rulemaking. The Federal Reserve and the Office of the Comptroller of the Currency are resisting this.
“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.”
Regulators largely agree on the need for new servicing standards, but disagree on how and when to create them. Fed Gov. Dan Tarullo first called for such standards at a Dec. 1 hearing, and the concept has been endorsed since then by Treasury Secretary Tim Geithner and lawmakers such as Rep. Barney Frank, D-Mass.
FDIC officials argue the risk retention rules are the perfect opportunity to write servicing standards.
Aside from the fact that waiting for Congress to act is a sure sign that practically no enforceable standards will come about, it will be impossible to deliver risk retention regulations (ensuring that the originating bank has “skin in the game” on loans, with a stake in the downside) without addressing the securitization markets and the loan servicers that are part of them.
Congress has insinuated itself into this debate. Rep. Brad Miller is circulating a letter taking the FDIC’s position in the fight, calling for servicer standards to be included in the risk retention rulemaking. They are also backing the open letter from Josh Rosner and Chris Whelan calling for servicing standards. The SEC is caught in the middle, siding with the FDIC generally but looking for more modest rules. The final list of cosigners to the Miller letter include outgoing Financial Services Committee chair Barney Frank, John Conyers, George Miller, Maxine Waters, Laura Richardson, Dennis Cardoza, Stephen Lynch, Keith Ellison and Sam Farr.
With each passing day, we learn more about servicer abuse as the data emerges. While it isn’t the only problem with foreclosure fraud, it’s a huge chunk, and it’s been going on for years. If the FDIC can win this fight, we can see some real crackdowns on the servicers, which will have resonance for future fights. And servicers doing their job will actually get us more modifications, keep more people in their homes and add to economic recovery, rather than subtract from it.