The "robo-signing" scandal unearthed substantial regulatory meddling into the practices of the mortgage servicing industry, which has only further exasperated any hope of a recovery in the housing industry. In October 2009, the 50 Attorneys General allegedly joined forces with the Justice Department, the Federal Trade Commission, the Treasury Department, and the Department of Housing and Urban Development to investigate whether home-loan servicers violated state laws against deceptive practices by submitting affidavits and foreclosure documents without confirming the paperwork’s accuracy. The investigation also looked into loss mitigation practices by the servicers.
It was not long before the coalitioin of attorneys general began to fracture and word of a separate federal investigation involving the Federal Reserve and the Office of the Comptroller of the Currency began to take shape.
The AGs prepared a 27-page "Term Paper" that reads like a wish list of changes to the servicing industry, many of which do not take into account the inherent restrictions that servicers face in their relationship with the mortgage pool trusts they serve and their own vested financial interests.
Federal regulators have just announced a consent agreement with 14 of the largest servicers. The consent agreements require these companies in part to comply with state law (imagine that!) and retool their loss mitigation processes to give homeowners a chance at modification before foreclosure. While the federal regulators made room for monetary sanctions, they have yet to release an exact amount. Early talk by the FDIC and the AGs of a $20 Billion sanction seems to have been undercut by this consent agreement.
Iowa Attorney General, Tom Miller, who has been leading the investigation and settlement on behalf of the 50 AGs commented that the federal consent agreements "will not impact our investigation of the nation’s largest servicers and pursuit of a joint settlement."
In apparent frustration of how the federal regulators have undercut the AGs settlement, Housing Wire reports that Rep. Elijah Cummings (D-Md.) introduced a bill in the House of Representatives pushing for more requirements such as modifications and disclosures before servicers can file a foreclosure case. The bill, H.R. 1477, is a companion to S.489 introduced by Sen. Jack Reed (D-R.I.). Both bills would apply to loans not only covered by the U.S. government, but to all mortgages falling under the supervision of the Consumer Financial Protection Bureau.
The mortgage service industry is under severe scrutiny right now (and rightfully so), and it will be very interesting to see how the AG’s collective efforts, the federal consent agreement, potential federal legislation, class actions, and individual borrower lawsuits will will reshape how securitization of mortgages and the attendant servicing rights evolve. The turf battles will have their own story line, but it is clear that changes to how servicers approach loan modification is long overdue.