She doesn’t say it specifically, but this should be the first step in resolving the MERS/robo-signing debacle with well-rounded settlements for all – from MND:
Federal Deposit Insurance Corporation (FDIC) Chairman Sheila C. Bair called today for a “foreclosure claims commission” to address complaints from homeowners who have been harmed by flaws in the foreclosure process. This was one of several improvements suggested by Bair, an outspoken critic of the servicing industry, at a “summit” on Mortgage Servicing for the 21st Century sponsored by the Mortgage Bankers Association (MBA).
Bair said that throughout the mortgage crisis “the most persistent adversary has been inertia in the servicing and foreclosure practices applied to problem loans,” and that prompt action to modify unaffordable subprime loans in 2007 could have helped to limit the crisis in its early stages. Still, 18 months into an economic recovery and with hundreds of thousands of mortgage modifications completed, “mortgage markets remain deeply mired in a cycle of credit distress, securitization markets remain frozen, and now chaos in mortgage servicing and foreclosure is introducing a dangerous new uncertainty into this fragile market.”
Bair spoke, as she has several times in recent months, of misaligned incentives in the servicing business model which she said drove the origination of trillions of dollars of unaffordable subprime and Alt-A mortgages that triggered the crisis. Now, she said, the fixed fee structure based on volume does not provide sufficient incentives to effective manage large volume of problem loans during a period of crisis. “Mortgage servicers have remained behind the curve as the problem has evolved to include underwater mortgages and, now, foreclosure practices that sow confusion and fear on the part of homeowners and fail to fully conform to state and local legal requirements.”
This compensation structure drove automation, cost cutting, and consolidation to the point where the market share of the top five servicers has gone from 32 percent to almost 60 percent since 2000. “When mortgage defaults began to mount in 2007 and 2008, third-party servicers were left without the expertise, the contractual flexibility, the financial incentive, or the resources they needed to engage in effective loss-mitigation programs.”
Responding to the crisis, Bair said, requires all parties involved to recognize that loss mitigation is not just socially desirable, it is wholly consistent with safe and sound banking and has macroeconomic consequences. “The bottom line is that we need more modifications and fewer foreclosures. When foreclosure is unavoidable, we need it to be done with all fairness to the borrower and in accordance with the law. Only by committing to these principles can we begin to move past the foreclosure crisis and rebuild confidence in our housing and mortgage markets.
The foreclosure claims commission envisioned by Bair would follow the model used to settle claims arising out of the BP oil spill and the events of 9/11. It would be set up and funded by servicers to address claims submitted by homeowners who have wrongly suffered foreclosure through servicing errors. Bair said that many in the servicing industry will resist such a settlement because of the immediate financial cost, “but every time servicers have delayed needed changes to minimize their short-term costs, they have seen a deepening of the crisis that has cost them – and the rest of us – even more.”