ENFORCEMENT: IT DOESN’T TAKE A LOT OF DIGGING

COMBO Title and Securitization Search, Report, Documents, Analysis & Commentary COMBO Title and Securitization Search, Report, Documents, Analysis & Commentary

“For years these problems have been the focus of research reports, Congressional testimony and court cases. Regulators, however, looked the other way, which is how we got into the mortgage mess.”

“Take, for example, underwater borrowers — the millions of Americans who owe more on their loans than their homes are worth. For them, the best modification is often to reduce the loan’s principal balance, lowering the monthly payment and restoring some equity. That could be best for investors too, because even reduced payments are often better than a foreclosure sale. A bank’s servicing fee is based on the principal balances of the loan — a strong incentive not to reduce a troubled borrower’s balance.”

October 31, 2010 NY TIMES OPINION

More on the Mortgage Mess

Ben Bernanke, chairman of the Federal Reserve, said recently that federal regulators are “looking intensively” at banks’ foreclosure practices. An investigation is long overdue, though it shouldn’t take a lot of digging.

Consumer advocates, the press, investors and homeowners have already compiled a compelling list of transgressions: conflicts of interest that have banks pushing foreclosures, without a good-faith effort to modify troubled loans. Dubious fees that inflate mortgage balances. The hundreds of thousands of flawed foreclosure affidavits that violated homeowners’ legal protections. The misplaced documents. And it goes on.

For years these problems have been the focus of research reports, Congressional testimony and court cases. Regulators, however, looked the other way, which is how we got into the mortgage mess.

What makes the latest scandals so outrageous is that even after the financial meltdown and taxpayer bailout— and all those vows about accountability — the regulators are still behind the curve. The fundamental problem is that the banks’ drive to profit from the foreclosure process is all too often at odds with the interests of mortgage investors, homeowners and the economy’s health.

That is a big reason that the Obama administration’s antiforeclosure effort, with its voluntary participation by banks, has fallen so short.

Here is the background. The big banks — Bank of America, JPMorgan Chase, Citibank, Wells Fargo — service most of the nation’s home mortgages for investors who own the loans. They are paid a fee by the investors and also make money from fees on delinquent loans.

Servicers are obligated to manage the loans in the best interest of the investors. That means modifying a troubled loan, if reduced payments would bring in more money over time than a foreclosure. Or foreclosing if a borrower cannot make the payments on a modified loan.

If only it worked that way in practice.

Take, for example, underwater borrowers — the millions of Americans who owe more on their loans than their homes are worth. For them, the best modification is often to reduce the loan’s principal balance, lowering the monthly payment and restoring some equity. That could be best for investors too, because even reduced payments are often better than a foreclosure sale. A bank’s servicing fee is based on the principal balances of the loan — a strong incentive not to reduce a troubled borrower’s balance.

Another conflict occurs when the bank that services a primary mortgage is also the owner of a second lien on the same property. Resolving a troubled first mortgage generally requires a write-down of the second lien, a step that banks have been loath to take.

Banks also profit from late fees and other default-related charges assessed on borrowers. And there is an additional incentive to pile on charges, since the bigger the loan balance, the higher the fee to manage the loan. A group of prominent investors — including Freddie Mac, the Federal Reserve Bank of New York and Pimco, the world’s largest bond fund — recently accused Bank of America of fee-padding. The bank denies wrongdoing.

High default charges harm homeowners because they make it increasingly difficult to catch up on late payments and avoid foreclosure. They also disadvantage investors, because the servicer collects the charges from the foreclosure sale before the investors see any money. Everyone loses, except the bank.

Mr. Bernanke said that the regulators’ findings would be released in November. What is also needed is real enforcement — and new rules and possibly new laws — to make banks change their ways.

4 Responses

  1. RHODE ISLAND ATTORNEY GENERALS OFFICE WILL NOT BE INVESTIGATING ALLEGATION OF FRAUD ON FORECLOSURES & ROBO-SIGNERS!
    I was told today that the office of Rhode Islands Attorney General will not be investigating Allegation of Mortgage Fraud by Robo-Signers in which they told the press they were on board and we have proof of wrongdoing on Mortgage Assignments and Affadavits that will prove that these recordings have robo wriiten all over them yet now the Attorney Generals office Heather McLaughlin Director of Consumer Unit announces that they are to busy to investigate fraud committed on our citizens of Rhode Island! Shame on all of you as you are lucky to be that busy as thousands of Rhode Islanders would be willing to take your jobs that are losing their homes daily in a state that is non-judicial and can take peoples homes without even a court hearing.

    KimThomas, on October 24, 2010 at 2:58 pm Said:
    http://www.projo.com/economy/Fighting_Foreclosure_10-24-10_7FIGCK5_v36.503440.html#

  2. “Another conflict occurs when the bank that services a primary mortgage is also the owner of a second lien on the same property. Resolving a troubled first mortgage generally requires a write-down of the second lien, a step that banks have been loath to take.”

    That’s the situation I am in. BofA has both of my loans.

  3. Dying Truth,

    I believe the term ‘white-collar’ is incorrect. I agree with your post if you would use a more precise label for the group. Part of the group in question is the ‘offender-lender-pretender’. Another is the ‘so-called-servicer/. The bloated-bovines from Wall Street and all their cronies is the another part of this mess. And the final part is the bought-and-paid-for politicians and government lackeys such as Geithner and Bernacke.

    Not all people who would generally are in ‘white-collar’ professions are doing ANYTHING related to the banking/mortgage/investment arena.

    I’m a software engineer by profession. I always thought of that as ‘white-collar’. I’m in the same boat with the others here. I never worked by any bank or investment-house for a day of my career.

    I wonder how many professionals such as doctors and dentists have seen their own retirement accounts plummet and their homes drop in value. They have also been harmed.

  4. “the best interest of the investors”. That’s all the media/government cares about, they don’t give a damn about homeowner/Americans. So I say screw ’em, if there is no impartial third party looking out for homeowner/Americans then how is any of this in the best interst of America’s economy. White collars seem to be appauled at the idea of someone who’s been paying for a house for almost 30 years and nothing else to show for it escaping the jaws of insidious unjustified debt collectors and think of it as them getting a “free house” (HOW THE HELL IS THAT FREE!!!!). But they have no problem with illegal collection tactics in order to justify unlawful property seizures by persons who never paid a dime for them. To hell with all the white collars, they have no purpose in society but to cause the rest of us misery and that WE DON”T NEED.

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