WORD ON THE STREET: If we are to successfully respond to today's foreclosure crisis, all parties involved must recognize some important principles. Loss mitigation is not just a socially desirable practice to preserve homeownership where possible; it is wholly consistent with safe and sound banking and has macroeconomic consequences. Fair dealing with borrowers and adherence to the law are not optional. They must be viewed as mandatory if our servicing and foreclosure process is to function in the interest of all parties concerned.
The bottom line is that we need more modifications and fewer foreclosures. When foreclosure is unavoidable, we need it to be done with all fairness to the borrower and in accordance with the law. Only by committing to these principles can we begin to move past the foreclosure crisis and rebuild confidence in our housing and mortgage markets.
First, in order to remedy failures endemic to the largest mortgage servicers, I hope to see enforceable requirements that will significantly improve opportunities for homeowners to avoid foreclosure. The first such requirement is that servicers must provide a single point of contact to assist troubled borrowers throughout the loss-mitigation and foreclosure process. In order to prevent costly miscommunication, this person – and it does need to be a real person – must be well trained and adequately compensated. This person must have access to all relevant information and be authorized to put a hold on any foreclosure proceeding while loss mitigation efforts remain ongoing.
Second, servicers must commit to adequate staffing and training for effective loss mitigation. There is no question that the fee structure currently in place for most servicers provides insufficient resources for effective loss mitigation and has led servicers to cut corners in their legal and administrative processes. While we cannot fix these incentives after the fact, we should insist that servicers do the right thing now and devote a level of resources that is commensurate with the scale of the problem. We need to establish industry benchmarks – based on a maximum number of delinquent loans per representative – and insist on a minimum standard of training to ensure that staff are up-to-date on the latest loss mitigation programs.
In addition, to expedite the loan modification process and help clear the market, we should look for opportunities to greatly simplify loan modification offers in exchange for waivers of claims.
A broad agreement must also deal head-on with the second-lien problem. Throughout the mortgage crisis, the competing interests of first- and second-lien holders have been a source of conflict for servicers. Early in the crisis, many servicers were unwilling to modify first mortgages unless second liens were written down or extinguished. More recently, investors in first mortgages have complained that they were accepting losses without meaningful participation of second-lien holders. This complaint is especially pronounced when the servicer of the first mortgage is also the owner of the second.
While big banks and big investors can handle themselves, the uncertainty around the treatment of second liens has reduced opportunities for effective foreclosure prevention. As part of any resolution of claims regarding large servicers, a fixed formula should be established to govern the treatment of first and second mortgages when the servicer or its affiliate owns the second lien.
At a minimum, this formula should require that the subordinate lien be reduced pro-rata to any change in the first mortgage. Any credible settlement should provide for independent monitoring of servicer compliance to supplement oversight by federal and state regulators.
We also need independent review of loss mitigation denials. Borrowers should have the right to appeal any adverse denial of a loan modification request to an independent party who has the proper information to conduct an immediate review and the power to correct erroneous determinations. Weak practices associated with title documentation must also cease. This means that banks and other servicers must foreclose in their own names instead of allowing MERS to foreclose, and provide complete chain of title and note transfer history in the notice of default.
And while the financial incentives that govern servicers are, in many cases, embedded in contracts that cannot be altered, some practices and incentives in the process can be addressed now. For example, a broad settlement could eliminate incentive payments to law firms for speedy foreclosures, as well as the use of lost-note affidavits, except where the servicer has made good-faith efforts to obtain the note. Most importantly, such a settlement should prohibit foreclosure sales when a loan is in loss mitigation, except in specific situations where delay would disadvantage the investor, violate existing contracts or reward a borrower acting in bad faith.
Finally, we need to provide remedies for borrowers harmed by past practices. A foreclosure claims commission, modeled on the BP or 9/11 claims commissions, could be set up and funded by servicers to address complaints of homeowners who have wrongly suffered foreclosure through servicer errors. Â
Many in the servicing industry will resist a settlement such as this because it would impose much of the immediate financial cost on the major servicers themselves. But this would be short-sighted. The fact is, every time servicers have delayed needed changes to minimize their short-term costs, they have seen a deepening of the crisis that has cost them – and the rest of us – even more.
It is time for government and the industry to reach an agreement that will finally bring closure to the crisis and pave the way for a lasting recovery in our housing and mortgage markets.
Sheila C. Bair is chairwoman of the FDIC. This article is adapted from a speech given at the Summit on Residential Mortgage Servicing for the 21st Century held last week in Washington, D.C.
