The Wall Street Journal
April 15, 2011
Fair and orderly mortgage servicing vs. political points.
When last year's mini-scandal about sloppy mortgage practices erupted, two public policy approaches emerged: Banking regulators wanted to identify mortgage servicers' bad practices and fix them. The Department of Justice, state Attorneys General, the Consumer Financial Protection Bureau and others wanted to use the episode to punish companies and score political points. That distinction became clearer Wednesday when banking regulators released their findings and enforcement actions.
The Comptroller of the Currency, the Federal Reserve and the Office of Thrift Supervision spent about three months investigating 14 institutions, including big banks that service mortgages and clearinghouses that manage the paperwork. They found "critical weaknesses" in "governance processes, foreclosure documentation preparation processes, and oversight and monitoring of third-party vendors," though no evidence of widespread, wrongful foreclosure. The regulators will eventually levy monetary fines.
Meantime, the companies have two months to fashion a comprehensive reform plan. Servicers will have to overhaul their internal processes and staffing procedures to fix foreclosure practices; put in motion a third-party review of potential wrongful foreclosures--since the regulators couldn't examine every loan--and take remedial actions when needed; and establish teams to report back to the regulators on compliance with these rules in perpetuity. As OCC chief John Warsh put it, the feds want "to fix what is broken, identify and compensate borrowers who suffered financial harm, and ensure a fair and orderly mortgage servicing process going forward."
That may seem like a logical solution, but not to so-called "consumer advocates." Last week 53 groups, including the NAACP, the American Federation of State, County and Municipal Employees, and the Center for Responsible Lending, sent a letter to the regulators complaining that the draft enforcement action permitted servicers to "design a plan to comply with existing laws and contracts." No, you didn't misread that quote.
The hard truth is that these groups don't want merely to fix the original "robo-signing" problem or they'd support the banking regulators' approach. They back the state AG, Department of Justice and Consumer Financial Protection Bureau team that wants, as Iowa state Attorney General Tom Miller told Congress in November, to transform "the loan modification system" and "change the paradigm within the current system." They want to force servicers to modify loans for distressed borrowers, even if those borrowers are still paying their bills. They can then claim the political credit for beating up on the banks, just in time for an election year.
There's ample evidence that this approach would do nothing to revive the housing market. Three years into the crisis, most delinquent borrowers simply can't afford to live in the homes they're in. In a new paper, economists Charles Calomiris, Eric Higgins and Joseph Mason point out that mandating banks to modify loans would encourage some borrowers to strategically default, delay foreclosures, slow new home construction and increase interest rates for every borrower as banks pass on the additional costs--which would hurt poorer borrowers the hardest and prolong the housing market pain.
Without that second group agitating for extrajudicial punishment and behind-closed-doors regulation, the mortgage servicers might have breathed a sigh of relief to have the banking regulators' action behind them. Instead, they have to worry about possible additional action--and then, come July, a Consumer Financial Protection Bureau that may want to punish them further. Is it any wonder that foreclosures are stalled, excess capacity is weighing down the housing market, and home prices are still falling?