Multiple Fronts in Mortgage Industry War

If you have a mortgage, or if you ever plan on buying a home, big changes are afoot that could change how much you pay, and in the repercussions for falling behind on your payments.

At the state level, a coalition of attorneys general and other state banking regulators has issued the mortgage servicing industry a list of demands that would streamline the process of handling foreclosures, eliminating opportunities for abuse and fraud. But two states already are pulling out of the deal, saying it imposes overly strict regulations on the banking industry.

[Related article: The CFPB and Congress’ Need for an Adult Conversation]

At the federal level, the Obama administration is considering an effort to pressure the industry into accepting parts of the states’ proposed demands in exchange for more limited legal investigations into the industry’s allegedly illegal practices.

The changes could come soon.

“It’s very important that we try to bring this to bed as quickly as we can,” Treasury Secretary Timothy Geithner said to the Senate Banking Committee recently.

The industry’s problems started with the “robo-signer” scandal. Employees of various large mortgage servicers admitted to signing foreclosure documents without actually reading them to make sure the foreclosures were legitimate, as required by law.

That rather limited scandal grew quickly, however, as judges in civil court cases discovered that robo-signers were actually just covering up deeper problems with mortgage paperwork. In many cases, when a bank gives a mortgage, it bundles that loan with many others and sells the package to investors. That process can involve seven different title transfers, and sometimes more. Each transfer of each loan requires an “assignment” document to track the change of ownership.

In many cases, that assignment system broke down, according to a report by the Florida attorney general. The result: Servicers foreclosing on mortgages they couldn’t even prove they owned.

[Related: Consumer Advocates Sue for Big Banks’ Robo-Signing Records]

Along the way, other problems were discovered. Servicers often make more money when houses fall into foreclosure, even if it hurts homeowners and investors, as reported here.

So the 50-state investigation by attorneys general and state bank regulators quickly grew to address these problems, too. On March 3, the coalition sent a 27-page letter to the largest servicing companies with a list of demands including better documentation, and requirements that servicers cannot keep a homeowner in foreclosure while simultaneously negotiating with her about changing her loan.

“We’re going to move as fast as we can” to implement the proposed new rules, said Tom Miller, the Iowa Attorney General who is leading the coalition, said in a press conference.

Multiple Fronts in Mortgage Industry War (cont.) »

Image: Jeff Turner, via Flickr.com

Multiple Fronts in Mortgage Industry War (cont.)

The proposal has elicited howls of protest from the banking industry, who accuse the state regulators of using the investigation as a backdoor method of imposing new regulations. The AG’s in Virginia and Oklahoma have broken with the coalition, saying the proposal goes too far. They also say that leaders in other states oppose the measure as well.

“My concerns, and I know other AG’s have similar concerns, is that there appears to be an attempt by some to essentially rewrite certain banking and servicing laws,” Virginia Attorney General Kenneth Cuccinelli told American Banker.

Meanwhile, there are signals that the Obama administration supports many parts of the state regulators’ proposal. It is pushing the five largest servicing companies to accept the states’ deal, and to reduce mortgage payments for up to 3 million people, according to unnamed sources cited by the Huffington Post.

[Related: Florida AG Details Forgery & Deceit in Mortgage Process]

The deal could cost the companies $30 billion, according to Inside Mortgage Finance, an industry newsletter.

Even though the Obama administration’s push in favor of the states’ demands has not been officially announced, banking officials and Congressional Republicans already are pushing back. The Consumer Financial Protection Bureau was involved in negotiations over the states’ proposal. That raised the ire of Republicans, who pointed out that the bureau’s power to enforce regulations doesn’t begin until July.

“The involvement of bureau employees in these discussions raises serious questions,” Rep. Shelley Moore Capito (R-WV), chairwoman of the Subcommittee on Financial Institutions and Consumer Credit, said in a hearing.

Elizabeth Warren, President Obama’s adviser charged with starting the new agency, fired back, saying that her workers did not overstep their bounds.

“We’ve been asked for advice. . . and wherever we can be helpful we are not only glad to be helpful we are proud to be helpful,” Warren said.