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Fed Looking to Slap Wrists of Smaller Mortgage Servicers

Because we know that foreclosure fraud is a pervasive and industry-wide problem, we know that other servicers beyond the big 5 would eventually get sanctioned in some way for their role in it. Wells Fargo, Bank of America and JPMorgan Chase made up over 46% of the mortgage servicing market by the end of 2011, and no other servicer controls more than 5%. But that’s still roughly 40%-45% not covered by the settlement, and some impressive-sounding slap will have to be performed on their wrists. The Federal Reserve will do the honors.

Federal regulators are poised to crack down on eight financial firms that are not part of the recent government settlement over home foreclosure practices involving sloppy, inaccurate or forged documents.

Last week, a senior Federal Reserve official recommended fines for these additional firms, raising questions about how deep foreclosure problems run through the banking industry.

In addition, judges, lawyers and advocates for homeowners say that people are still losing their homes despite improper documentation and other flaws in the foreclosure process often involving these firms.

The eight servicers are: HSBC, SunTrust Bank, MetLife, U.S. Bancorp, PNC Financial Services, EverBank, OneWest and Goldman Sachs. Goldman already sold its servicing portfolio, Litton Loan Services.

The most likely outcome is that they get folded into the settlement at a much smaller penalty, given their share of the market. I’m sure that’s what the Fed is pushing for, to make it turnkey. Some of these banks have already reserved for future penalties.

The larger point here is that these servicers – and as we’ve seen, ALL servicers – are still robo-signing, delivering faulty documents to court, using spoofed senior officers, back-dating and forging documents, and generally misbehaving when they come to take somebody’s home. The Times article recounts the experience of Judge Arthur Schack in Brooklyn, one of the few to take this issue seriously, and his case where he stopped a foreclosure by US Bancorp after finding the same employee signed as two separate officers on documents.

These problems continue. And state and federal regulators are wholly uninterested in stopping them. Even this Fed action will be a cost of doing business and little more, in all likelihood. One hope, at least in Colorado, is that the people will step in where the regulatory apparatus failed:

res can’t happen unless all loan papers are properly recorded with the county first.

That means anytime a lender sells or transfers a note, as has been the practice for several years in the mortgage-backed securities business, the holder must file it with the county recorder of deeds.

Colorado has not required assignments — the legal word for when a mortgage or note exchanges hands — to be recorded for years, a critical part of the problem in determining who actually owns a note during a foreclosure, proponents of the initiative say.

“The intent is to ensure there are no gaps in the line of title,” attorney Stephen Brunette said. “Title records now are being totally messed with. Colorado’s foreclosure process today is fundamentally unsound.”

To my knowledge this is the first ballot initiative in the country to address foreclosure fraud and chain of title. Let’s hope that what happens in Colorado moves through to the rest of the nation.

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David Dayen

David Dayen