As the U.S. economy dips nearer recession level and the housing market continues shouldering much of the blame for it, the mortgage industry is undergoing an unprecedented degree of scrutiny from all sides – consumer advocacy groups, law enforcement agencies and politicians included.
Tack on rising foreclosure rates that have been, and will undoubtedly continue to be, a centerpiece among the issues debated by this year's presidential candidates, and the climate has never been more appropriate for major legislative changes.
‘These interesting times have led us to several key issues that certainly stand the chance to overhaul this industry in ways perhaps we'll never see again in our generation,’ said Erick Gustafson, senior vice president of legislative and political affairs for the Mortgage Bankers Association (MBA), at the MBA's recent National Mortgage Servicing Conference & Expo in New Orleans.
However, the mortgage industry's response to increased scrutiny, claims of predatory lending and accusations of deceptive practices has been a refreshingly – and possibly, necessarily – cooperative one.
‘There are two ways to react to this,’ Gustafson noted. ‘We chose the one I believe is the right way to go, but we could just have easily chosen the other way â�¦ [we] could've gone into a defensive mode and not have embraced lawmakers and not tried to explain exactly where the market is.’
Paul Hancock, a partner with K&L Gates, observed that while policy change is often effectuated through legislation, regulatory enforcement and litigation can also achieve similar ends.
States often apply these practices via their attorneys general. State attorneys general, he noted, have revealed themselves to be unexpectedly powerful figures in cultivating today's cooperative environment.
Led by Iowa Attorney General Tom Miller, the State Foreclosure Prevention Working Group – a multistate group of 37 attorneys general – has aggressively targeted it sights on the mortgage industry by meeting with and requesting data from servicers responsible for the bulk (97%) of the nation's subprime loans.
‘State AGs historically have not been involved in the mortgage lending process to a great degree until recent years, but they always have been very aggressive in protecting consumers' rights,’ said Hancock, a former deputy attorney general for South Florida.
Although state attorney general offices' responsibilities are widespread – including everything from tobacco to gravesites – and their knowledge of each specific issue is typically somewhat limited, he was quick to note that the State Foreclosure Prevention Working Group's expertise on the housing crisis is well-founded.
‘You might agree or disagree with them, but you're not going to challenge them in this area on their lack of knowledge,’ he stressed. ‘Banking commissioners who are involved in this project know the industry.’
He added that the multistate working group is looking for long-term loan modifications rather than short-term solutions to borrower default.
In February, the group released its Analysis of Subprime Mortgage Servicing Performance report, the result of conversations with and data received from servicers.
The data, dated October 2007, prompted the group to conclude, among other findings, that seven out of 10 seriously delinquent borrowers are not on track for loss mitigation efforts; servicers have increased use of loan modifications and other retention options; resets on adjustable-rate mortgages (ARMs) are not yet driving foreclosure, meaning problems other than ARM resets are responsible for the delinquency; and the refinance option has nearly evaporated.
Hancock cautioned that although cooperation appears to be the defining characteristic of the multistate working group/mortgage industry relationship thus far, that doesn't mean things can't change – fast.
While federal litigation efforts typically drag on – costing clients money but also enabling litigators to battle it out in the courtroom, delaying action – state attorneys general are ‘much quicker on the draw,’ he mentioned.
‘Tom Miller has been sincere in his pledge to work cooperatively with the industry. He hasn't said he'll continue to be if the industry doesn't work cooperatively with him,’ Hancock said.
‘If this falls apart, this could turn into the same kind of multistate enforcement effort we've seen in other areas, where the focus switches very rapidly from one of cooperative effort to one of contentious investigation and litigation,’ he added.
