Zach Carter

zach.carter@huffingtonpost.com | HuffPost Reporting

Federal Reserve Blocks New Foreclosure

Regulations
First Posted: 12-21-10 08:42 PM   |   Updated: 12-22-10 01:53 PM

Bank Regulation, Fed, Federal Reserve, Foreclosure, Foreclosure Crisis, Foreclosure Rules, Foreclosures,

WASHINGTON -- Top policymakers at the Federal Reserve are fighting efforts to rein in widely reported
bank abuses, sparking an inter-agency feud with the FDIC and the Treasury Department. The Fed, along
with the more bank-friendly Office of the Comptroller of the Currency, is resisting moves to craft rules
cracking down on banks that charge illegal fees and carry out improper foreclosures. The FDIC supports
such rules, according to an FDIC official involved in the dispute.
The new regulations would rein in debt collection, loan modification and foreclosure proceedings at
bank divisions called "mortgage servicers." Servicers have committed widespread fraud in the
foreclosure process. While the recent robo-signing of fraudulent documents has received the most
attention, consumer advocates have complained about improper fees and servicer mistakes that lead to
foreclosure for years.

"Given that we've seen a massive failure in servicing practices and a massive failure to address servicing
in an honest way, I think this is important," says Joshua Rosner, a managing director at Graham Fisher &
Co., and longtime critic of the U.S. mortgage system.

Last week, the National Consumer Law Center and the National Association of Consumer Advocates
published a survey of 96 foreclosure attorneys from around the country, attesting that servicers have
pushed 2,500 of their clients into the foreclosure process, even as the borrowers were negotiating loan
modifications with the same servicers.

Banks have also been extremely slow to permit and process loan modifications for troubled
homeowners. With housing prices down dramatically from their bubble-level peaks, mortgage investors
usually limit their losses by reducing a borrower's debt burden instead of foreclosing. But servicers--
who are supposed to operate in the best interests of investors-- have been reluctant to grant mortgage
modifications, particularly modifications that actually reduce the outstanding balance on the loan.

Servicers have also failed to live up to the rules proposed by the Treasury Department under President
Obama's Home Affordable Modification Plan. According to a recent report by the Congressional
Oversight Panel, a full 29,000 borrowers have been in temporary payment plans for more than a year
without being granted permanent relief. The temporary modifications are supposed to last just three
months under Treasury Department rules.

Regulators at all federal banking agencies are aware of the problems. On December 8, community
outreach officials from the OCC and the Fed met with dozens of housing counselors from around the
country and acknowledged that complaints about mortgage servicing abuses have been coming to their
offices for years. Nevertheless, at a recent hearing, Comptroller of the Currency John Walsh said his
agency didn't know about the outright fraud being committed by servicers until press reports emerged
this fall.

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Mortgage servicing sprang into existence with the invention of mortgage securitization markets in the
1970s and became a major part of the banking business as the housing bubble ballooned over the past
decade. Servicers do not own the loans they handle. Instead, they make their money by skimming from
interest payments they forward to mortgage investors who own the loan and by charging fees to
delinquent borrowers. Critics argue that the arrangement encourages servicers to take actions that hurt
both borrowers and investors, pushing homeowners into unnecessary foreclosures in order to reap
bigger fees.
On Tuesday, more than fifty economists, banking experts and consumer advocates sent an open letter to
banking regulators demanding action on mortgage servicers. Many of the proposed rules are simple
standards of banking conduct, like appropriately crediting borrower accounts when they make
payments. But most mortgage servicers are effectively unregulated at the moment. The OCC, which
oversees the largest servicers, has never taken any formal public regulatory action against a mortgage
servicer, allowing abuses to continue without serious consequences.

"Widely reported servicer fraud, whether in the foreclosure process or in the systematic assessment of
illegal fees against homeowners, is . . . a serious problem," the letter reads, noting that, "problems of
this magnitude are a threat not only to the economic recovery, but to the safety and soundness of all
insured depository institutions."

The Wall Street reform bill signed into law by President Barack Obama this summer requires regulators
to craft new rules to ensure the securitization market functions properly. The FDIC wants those rules to
include standards for mortgage servicer conduct and hopes to have rules ready by the end of next
month.

Nevertheless, the Fed and the OCC are pushing back, according to a source at the FDIC. Spokespeople
from both the Fed and the OCC said their agencies support new mortgage servicing standards but
declined to comment on the new rules being advocated by the FDIC. A spokesman for the Treasury
Department said the Treasury supports regulating mortgage servicers, but was unable to comment on
the FDIC plan by press time.

Reform advocates say that regulators can take action under so called "skin-in-the-game" or "risk-
retention" requirements in the Wall Street reform bill. Banks that package and sell mortgage securities
would be required to keep at least five percent of the credit risk from those securities on their own
books, in an effort to prevent banks from scoring profits by selling garbage securities. The FDIC is on
board.

"The FDIC believes that the risk retention rules are an appropriate vehicle permitted by the statute that
would establish serving standards for the industry as a whole, and we should not miss this opportunity
to set quality servicing standards for the future," FDIC General Counsel Michael Krimminger told The
Huffington Post.

Under the new rules, banks will not have to maintain credit risk for top-quality mortgages, which
regulators must define. Reformers hope to include mortgage servicing standards in the definition of a
top-quality mortgage. The result, reformers say, would be a new industry standard that banks adopt as a
matter of course to limit their own potential losses.

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