Have you caught wind of H.R.5679, the Foreclosure Prevention and Sound Mortgage Servicing Act of 2008?
Introduced on April 2 by Rep. Maxine Waters, D-Calif., the bill seeks to amend the Real Estate Settlement Procedures Act (RESPA) to require servicers to engage in ‘reasonable loss mitigation activities.’
Very interesting. At first glance, the bill's purpose statement seems to indicate one of two things: Servicers do not engage in loss mitigation with defaulted borrowers, or the loss mitigation activities in which servicers have been engaged are unreasonable.
Is either assessment accurate? The servicing industry – as well as most state and federal regulators – would likely offer a resounding ‘no,’ but let's dig into the bill a bit to see what Waters has in mind.
All of the measures the congresswoman envisions fall under what would become a new subsection of RESPA: Section 6A, Duty to Engage in Loss Mitigation. Again, the verbiage is highly connotative. It suggests that servicers must be compelled, by law, to explore and offer loan workouts.
Moreover, mandating loss mitigation as a ‘duty’ implies that servicers have no incentive on their own or on behalf of investors to work with borrowers. Of course, the implication is flatly wrong. A very brief lesson in the economics of default and foreclosure would likely convince Waters that servicers and investors are eager to engage in loss mitigation – not only to assist a troubled customer, but also to protect their financial positions.
Beyond being fundamentally unnecessary, the call for duty-bound loss mitigation is also problematic from a fiduciary perspective. Whether Waters realizes it or not, sometimes expeditious, lawful foreclosure is the only path a servicer can take, based on its fiduciary responsibility to the investor.
Quite simply, some borrowers do not and cannot qualify for a loan workout. While Waters' bill acknowledges that foreclosure is a reality, the emphasis is avoiding foreclosure at all costs. It will be your duty to borrowers and the government.
Among these duties are ‘priority’ and ‘secondary’ loss mitigation activities – both of which servicers will be expected to pursue before considering foreclosure. Priority activities include late-payment waivers, repayment plans, forbearance agreements, refinancings and loan modifications. FYI: The bill insists that servicers ensure that new payments are affordable.
If priority activities do not work, you will move to secondary activities: short sales, deeds-in-lieu, assumptions, and foreclosure-sale postponements or cancellations.
There's more. The bill also mandates that servicers refer borrowers' files to HUD-certified housing counselors and report loss mitigation activities to the Department of the Treasury at least monthly. Offshoring of any kind, at any time, is prohibited.
The bill has no co-sponsors, and no deliberation has been scheduled. I recommend you poke around (www.house.gov) to find the complete legislation. It's guaranteed to be interesting reading.
