Proposed Homeowners “Bill of Rights” A Compendium of Existing Statutes and Initiatives

So the President delivered his remarks on this collection of housing policy announcements today, or should I say stimulus policy. As expected, it included this mass refi proposal, along with the announcement of the beginning of GSE sales of foreclosed properties to investors for them to covert into rentals. There was also this other piece that the Administration is calling a “Homeowner’s Bill of Rights.” Let’s focus on that.

The speech shows the requisite concern for those victims of the housing bubble, while stressing (to a fault) that they’re only talking about those “responsible” homeowners caught up in the mess.

But what’s at stake is more than just statistics. It’s personal. I’ve been saying that this is a make-or-break moment for the middle class. And this housing crisis struck right at the heart of what it means to be middle class in America: our homes — the place where we invest our nest egg, place where we raise our family, the place where we plant roots in a community, the place where we build memories.

It’s personal. It affects so much of how people feel about their lives, about their communities, about the country, about the economy. We need to do everything in our power to repair the damage and make responsible families whole again. Everything we can.

One can debate whether everything possible was being done in the first three years of the Administration to deal with the housing wreckage, and actually anyone saying the Administration did everything they could would lose that debate (in fact, Obama did say today “I’ll be honest — the programs that we put forward haven’t worked at the scale that we hoped.”) But let’s move on from that, reluctantly, to look at this homeowner’s Bill of Rights policy. Here’s the revelant text:

Today, I’m also proposing a Homeowners Bill of Rights — one straightforward set of common-sense rules of the road that every family knows they can count on when they’re shopping for a mortgage. No more hidden fees or conflicts of interest. No more getting the runaround when you call about your loan. No more fine print that you used to get families to take a deal that is not as good as the one they should have gotten. New safeguards against inappropriate foreclosures. New options to avoid foreclosure if you’ve fallen on hardship or a run of bad luck. (Applause.) And a new, simple, clear form for new buyers of a home. (Applause.)

OK, basically we’re talking about a collection of things that have already been initiatives at various federal agencies. Obama focused on the simple and clear new mortgage form; that’s part of the “Know Before You Owe” initiative taken up by the CFPB. It’s absolutely desirable, but it’s going to happen. It’s being put into place. So what else is in this Bill of Rights?

Here’s the Administration’s fact sheet on the plan. It starts by saying, correctly, that “the mortgage servicing system is badly broken and would benefit from a single set of strong federal standards.” So what do they propose? One, the simple mortgage forms, with full disclosure on fees and penalties “in understandable language.” Two, “no conflicts of interest.”

Servicers and investors must implement standards that minimize conflicts of interest and facilitate coordination and communication, including those between multiple investors and junior lien holders, such that loss mitigation efforts are not hindered for borrowers.

There are huge conflicts of interest right now. In addition to servicers having the financial incentive to foreclose, there is a tension between holders of first liens and holders of second liens (a second mortgage or a home equity line of credit). This is a very complex situation and a bit above my pay grade, but suffice to say that the banks want to keep worthless second liens on the books, and often their servicers – under the same corporate umbrella – hold the key to whether those liens get extinguished or not.

Then there’s an “Assistance For At-Risk Homeowners” section. The Administration wants servicers to have to make reasonable efforts at contacting homeowners who are delinquent and provide them options for modifications to avoid foreclosure (they would have to certify in writing that they made this attempt before a foreclosure sale). They want to end dual track, where the servicer starts the foreclosure process while they negotiate with the borrower on a mod. They want a “continuity of contact,” which is like single point of contact, without the impossibility on servicers that connotes. Basically the customer service rep must have all available material on the borrower when they are contacted, so the borrower doesn’t have to start over every time they call their servicer. Finally, the Administration supports “right of appeal,” which gives the borrower a process of formal review for any decision like a denied modification or a foreclosure action.

These are all decent enough ideas that should have been put into place three years ago, before the servicing industry revealed itself to be horribly broken, with major consequences for borrowers. In addition, this sounds suspiciously similar to the OCC consent orders already in process with the servicers to remedy their conduct. That would benefit from a formal standard, and the Administration vows that all relevant agencies will work on this. But it seems like something already in motion, which also makes the “servicing standards” in the foreclosure fraud settlement a bit redundant.

Finally, this doesn’t do what really needs to be done – you have to audit the servicer software that is causing so many problems for borrowers, and throw it out. This amounts to asking the servicers to follow actions already in the law, with the possible exception of right of appeal.

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