Somewhere between addressing predatory lending, mortgage origination, and what to do with the onslaught of vacant and abandoned properties, we failed to really address everything in the middle. Maybe that is a little harsh. Several academics, state Attorneys General, and media outlets reported problems in mortgage servicing, scary trends like the difficulty of reaching someone with authority on the phone or the consistent loss of paperwork. The robo-signing scandal in the fall of 2010 really blew the door wide open on how bad things have gotten. I recall reading about a man who was hired to sign thousands of documents with a random woman’s name that he had never met. If that wasn’t scary enough, he hadn’t a clue what he was signing. If robo-signing didn’t capture national attention, certainly the recent improper charges and foreclosure actions against military families did.
I hail from Ohio, where foreclosures grew for the last 15 years and seemingly “stabilized” at more than 80,000 new filings per year. We were early in feeling the pains of the foreclosure crisis, seeing predatory mortgages and second lines of credit that stripped wealth and assets out of communities in record numbers. In talking with the HUD approved counseling agencies that help families with mortgage modifications and foreclosure related issues (talk about yeomen’s work), they continuously stressed that servicers were overwhelmed. The first series of complaints were about how families could not identify who owned their loans or who to even contact for help. Reminder, Rep. Maxine Waters (D-CA) spent hours on the phone trying to get to loss mitigation on behalf of a constituent. In the end, she was disconnected.
The problems have worsened in recent years as more and more borrowers are in default on their loans. The disconnects between lenders and servicers are astounding and are more evident as the number of delinquencies swell. One director of a modification program told me years ago that “the lenders and servicers have totally different agendas.” Only now do I realize that he meant they have different monetary incentives and price points. Just last week, another counselor laughed in utter disbelief that they had to re-fax, for the fifth time, the same paperwork for a loan applicant. And then, the paperwork was no longer valid as time had expired on the loan application.
The most recent development, and not just in Ohio, are the “dual track” foreclosures. While working through a foreclosure modification, often a federal program like HAMP or Hardest Hit Funds, a servicer moves forward on repossession of the home. A counselor told me that just last week, “a family is in a trial modification and someone knocks at their door telling them the house is going to auction.” The insanity of this situation is that people are recording conversations, saving every correspondence, and spending hours each day to save their homes…and it ends up being useless. It is also a waste of federal and state dollars.
To be clear, not all servicers are bad, just like not all banks are bad. Much of the problem stems from the set-up. Adam Levitin, an associate law professor and blogger on Credit Slips, writes about the principal-agent conflict that is inevitable when securitized loans are serviced by third parties. Loan originators and servicers have little stake in the present value of the loan or reducing principle payments. Servicers make a good deal of money from late fees and a host of other charges (check the back of your monthly mortgage statement). FDIC Chairman, Sheila Bair, echoed these concerns while addressing mortgage servicers directly calling for a realignment of incentives.
Kathleen Engel, a law professor and co-author of the Subprime Virus (and past New America guest), provides a history of just how many loans, securitization packages, and layers of banks are involved. It is a maze inside a labyrinth! For many, including policymakers, it is very hard to adjust from the mentality of borrowing from a bank and repaying that particular bank. Most loans are chopped up from a securitized pool of capital among investors, held by a few banks, and serviced by a company.
Enter a common sense piece of bi-partisan legislation co-sponsored by Sen. Merkley (D-OR) and Sen. Snowe (R-ME) that would regulate mortgage servicers. The Regulation of Mortgage Servicing Act (S. 967) addresses “dual track” foreclosures, requires a single point of contact for borrowers, and a third-party, independent evaluator before entering into foreclosure. If not passed in legislation, these rules should be implemented through the Consumer Financial Protection Bureau. The bottom line is that we desperately need transparency and fairness in the modification and mortgage process. Unfortunately, not everyone will be able to keep their homes outright. But we shouldn’t make it impossible for them to try.
The data suggests that delinquencies and foreclosures have slowed but they are hovering around peak levels year after year. RealtyTrac estimates that 28% of last year’s home sales were foreclosures, nearly six times what we would see in a healthy market. The failure of the housing market to rebound hampers real economic progress. An executive director of a successful HUD approved nonprofit warns “the good news is that the fire is not spreading, the bad news, your house is on fire.” This bill gives families a better chance to stay in their homes, period. It levels the playing field, which is historically slanted toward lenders and servicers.