WASHINGTON (MNI) – The following are excerpts from Federal Reserve
Gov. Sarah Bloom Raskin’s remarks Friday prepared for the National
Consumer Law Center’s Consumer Rights Litigation Conference in Boston,
Massachusetts:
Our projections remain very grim for the foreseeable future: All
told, we expect about two and one-quarter million foreclosure filings
this year and again next year, and about two million more in 2012. While
these numbers are down from their peak in 2009, they remain extremely
high by historical standards and represent a trauma in the lives of
millions of people affected.
The most recent alarming development in the foreclosure process
that has caught public attention involves improper activities by
mortgage servicers. But let’s remember that, for years, housing
counselors and advocates nationwide have documented patterns of
fraudulent and abusive mortgage servicing practices. Current attention
is focused on so-called “robo-signers,” individuals who appear to have
attested to the validity of documents in a number of foreclosure filings
so large as to suggest that something may be amiss in the recording
process. This development is troubling on its own, but it also shines a
harsh spotlight on other longstanding procedural flaws in mortgage
servicing.
Many may view these procedural flaws as trivial, technical, or
inconsequential, but I consider them to be part of a deeper, systemic
problem and am gravely concerned. During my time as Commissioner of
Financial Regulation for the State of Maryland, I encountered a
Pandora’s Box of predatory tactics that included:
– the padding of fees, such as late fees, broker-price opinions,
inspection fees, attorney’s fees, and other fees;
– the strategic misapplication of payments so that the homeowner’s
payments for principal and interest due on the loan were improperly
applied to the servicer’s fees, sometimes improperly causing the loan to
be considered to be in default; and
– the inappropriate assessment of force-placed insurance, with
premiums of two to four times the cost of standard homeowners’
insurance, which in turn caused servicers to collect these premiums
before applying the payments to principal and interest, precipitating
foreclosure.
Theoretically, it is possible that the robo-signer controversy may
turn out to be a shortterm technical problem that can be addressed
through additional verifications and, when necessary, re-processing of
critical documents. Nevertheless, I believe that serious and sustained
reform is needed to address the larger problems in mortgage servicing.
——-
But the services needed in the current housing crisis are not
one-size-fits-all. Loan servicers likely never anticipated the drastic
need for the kind of time-consuming, detailed work that is now required
in the loss mitigation area, and the payment structures between the
servicers and investors are not sufficient to support large-scale loan
workout activity. As it turns out, the structural incentives that
influence servicer actions, especially when they are servicing loans for
a third party, now run counter to the interests of homeowners and
investors.
While an investor’s financial interests are tied more or less
directly to the performance of a loan, the interests of a third-party
servicer are tied to it only indirectly, at best. The servicer makes
money, to oversimplify a bit, by maximizing fees earned and minimizing
expenses while performing the actions spelled out in its contract with
the investor.
——-
Finally, we face a cluster of problems surrounding loan
modification. Servicers’ significant concerns about the U.S. Treasury’s
Home Affordable Modification Program (HAMP) are well-known. That said,
we do not know enough about how well servicers are complying with the
requirements of that program, or whether all of the HAMP modifications
that should be made are indeed being made. Many servicers, in fact,
currently report that the bulk of their loan modifications are being
done outside of HAMP. Again, we do not know enough about what those
modifications look like or how they are being structured.
——-
So the problems that have been grabbing headlines in recent weeks
are neither new nor amenable to quick fixes. While there may be some
specific practices–“robosigning” among them–that are possible to
isolate and eliminate, chronic, uncured problems continue to plague this
industry. There is a long track record of actions and cases brought by
attorneys general, which some of you in this room have no doubt
litigated, demonstrating the harm done to consumers by sloppy or
unscrupulous practices. Because consumers cannot choose to hire or fire
their servicers (other than by paying off the loan), the industry lacks
the level of market discipline imposed in other industries by the
working of consumer choice. For this reason, if servicers do not
actively maintain adequate and trained staff and do not establish and
heed internal controls, if investors do not monitor their servicers’
behavior, if regulators do not conduct meaningful examinations, if
courts do not stand guard against unfair practices, both substantive and
procedural, then it will be much less likely that a well-functioning
housing market will reemerge from this crisis. Because the very
structure of the loan servicing industry as it currently operates
inevitably leads to misaligned incentives and a propensity to defer
costly investments, a more significant re-thinking of the basic business
model must also be undertaken if we are to avoid repeating prior
mistakes.
I realize that I’m painting a rather gloomy picture. But be assured
that I do believe that we can make real progress on the ground through
coordinated public and private action. Let me conclude by talking a
little bit about what the Federal Reserve and others are doing to
address these issues.
Although foreclosure practices have traditionally been–and
rightfully should remain–a domain of the states, the Federal Reserve
has been expanding its expertise in working with the industry–first, in
a review of non-bank subsidiaries in conjunction with other state and
federal regulators, and, currently, with a review of loan modification
practices by certain servicers. As the current servicing issues began to
emerge more clearly, the Federal Reserve and other federal banking
agencies initiated an in-depth review of practices at the largest
mortgage servicing operations. The review focuses on foreclosure
practices generally, but with a concentration on the breakdowns that
seem to have led to inaccurate affidavits and other questionable legal
documents being used in the foreclosure process. When the interagency
review is completed, we will have more information about the extent and
significance of these very troubling practices, as well as an
understanding of what must be done to prevent them in the future. We
have also solicited information and input from other knowledgeable
sources, including NCLC, to help us better direct our actions to detect
possible systematic problems at specific servicers or within the
industry at large.
——-
Given the potential ramifications for consumers, the housing
market, and the economy as a whole, I believe it’s fair to say that
every relevant arm of the federal government is taking the underlying
dynamics of the mortgage foreclosure crisis very seriously. I also hold
out hope that the multi-state work engaged in by the 50 state attorneys
general will prove to be a vehicle for resolving the underlying
problems. The coordination and expertise at the state level in these
matters is an essential corrective. To the extent that legal settlements
are structured in such a way as to generate a broader underlying reform
of servicing processes, it will be more likely that we can assure
consumers that they will not encounter other mortgage harms moving
forward.
The complex challenges faced by the loan servicing industry right
now are emblematic of the problems that emerge in any industry when
incentives are fundamentally misaligned, and when the race for
short-term profit overwhelms sustainable, long-term goals and practices.
Responsible parties within the industry are no doubt already scrambling
to fix some of the problems that have surfaced. However, because so much
is riding on getting these systems right, and because consumers have
such little measure of individual choice or recourse, reliance on
pledges from market participants will not be enough. Many of you have
been doing your part for years to point out problems in the industry and
to give consumers some protection and redress when wronged. The public
sector too is stepping up its efforts to monitor firms’ actions and
systems. Until a better business model is developed that eliminates the
business incentives that can potentially harm consumers, there will be a
need for close regulatory scrutiny of these issues and for appropriate
enforcement action that addresses them. Thank you.
** Market News International Washington Bureau: 202-371-2121 **
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