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.”
So you bought a home for X dollars and you promise to repay the loan. The economy tanks and then you expect the government to force the servicers to readjust the loan so the asset matches current prices?
Am I missing something here?
How about modifying loans upwards when prices rise…..heads I win, tails you lose….
I’ve been liking the idea of modification that reduces the principle down to current market value, but any increase in value over time goes back to the bank on the sale. Owner cannot do a cash-out refi at any point in the future. If they attempt to pull money out of the house, loan total reverts to the original amount.
I would bet this would be be a non-starter for a lot of borrowers who would think it unfair that they not be allowed to participate in any price gains if prices recover and begin to rise again. But, dang, they want to be bailed out of a bad decision to over extend themselves and then they want the benefits of price gains over time? That ain’t happening.
Something like this would keep people in their homes, keep them paying on the note since they are no longer “underwater” but they would not be able to use the home as an ATM or an investment vehicle.
So, it would look like:
Current loan: $600k
Current assessed value: $450k
Loan principle reset to: $450k – no cash out refi or loan principle resets to $600k
Owner sells in 10 years, assessed value of $500k
Lender takes the $50k in price appreciation as part of the loan payoff.
Art – How about restructuring a the loan as follows: 1st at $450k and 2nd at $150k. No interest on the 2nd, due at some point in the future (10+/- yrs). Thus they pay on the low amount, cannot refi cash out because of the 2nd, and if they fail to pay, the 2nd position has recourse now to go after them. The lender is also assured at getting 100% of value through the 1st+2nd combo pack until the value reaches at least $600k.
Clearfund,
What do you do about all the underwater loan modders who already have a 1st, a 2nd and an HELOC in 3rd position? Those junior liens are not going to agree to subordination.
Foreclosure is the solution, not the problem.
we need it to be done with all fairness to the borrower and in accordance with the law.
Completely agreed. Lets start by looking at how many people fudged their stated incomes and prosecute accordingly.
Sheila Bair has consistently been a sane voice in this insane period.
guys, this variation of the write down of principal and shared appreciation feature was tried and failed in a prior government program.
Remember “Hope for Homeowners”?
http://www.calculatorplus.com/mortgage/advice_mortgage_homeowners.html
“Sheila Bair has consistently been a sane voice in this insane period.”
Mozart, don’t you think that it is a bit bizzare that the head of the FDIC, an agency that is supposed to be concerned with safety of the insurance fund and the solvency of banks, is trying to be a consumer advocate?
Sheila Bair to me is at the forefront of the insanity.
“claims submitted by homeowners who have wrongly suffered foreclosure through servicing errors. ”
Why not let them sue under state law?
Why create a commission?
why should the idiots who bought (and couldn’t afford) at $600k be allowed to stay in a house that I would buy at $450k?
you realize that the courts can do this today for 2nd homes, right?
Those were not servicing errors,there was widespread criminal fraud on top of almost unbelievable negligence on the part of the banks and servicers. I have no problem with upholding the law,but think ALL parties should be held to the same standard.
>Am I missing something here?
Your missing the part where the taxpayers have already given $ equal to all the subprime mortgages and have pocketed it themselves.
That banks have pocketed it, that is.