On Friday, the Wall Street Journal reported that many large U.S. mortgage servicers received a document proposing changes in foreclosure policies from state attorneys general (AGs) and federal regulators. These mortgage servicers include names like JPMorgan Chase & Co (JPM), Bank of America Corporation (BAC), Ally Financial Inc., Wells Fargo & Company (WFC) and Citigroup Inc. (C).
The document has been designed to lay the groundwork for certain permanent changes in mortgage servicing practices and summarizes a mandatory code of conduct. The proposal has been backed by the Justice Department, the U.S. Housing and Urban Development Department, the Federal Trade Commission and Treasury Department. This, however, is not part of any settlement deal related to financial penalties, which regulators are supposedly working on.
What’s the Proposal?
At present, the government’s foreclosure programs are mostly voluntary with very few rules monitoring mortgage servicers’ practices. The latest move reads more like a regulatory blueprint for property foreclosure, most likely to be imposed on mortgage servicers.
Here are the highlights of the proposal:
- The receipt of the loan modification application has to be acknowledged within 10 days. In case an application is rejected, banks will have to notify the concerned borrower within 30 days.
- While a borrower is being evaluated for mortgage modification, banks will be barred from starting foreclosure proceedings.
- Banks will be required to verify the amount owned and there will be limits on fees they can impose on delinquent borrowers.
- A permanent modification would be given to a borrower who has made three payments in the trial modification.
- When a modification is denied, it will be reviewed by a third party or an independent review panel.
These changes, pending a discussion by AGs next week, would enforce banks to treat each default borrower separately. Banks would be subject to fines and penalties for not adhering regulatory commandments. Also, there will be third party supervision to ensure compliance.
Reasons for Change?
In September-October last year, U.S. lenders like JPMorgan, BofA and Ally Financial had temporarily suspended foreclosures across the country. The main reason for the halt was a bundle of faults discovered in the documents as a result of using “robo-signers”: employees who sign hundreds of documents a day without verifying decisive information like the previously outstanding amounts of borrowers.
The proposed document is a damage control measure that federal agencies are trying out in their desperation to prevent further foreclosures and settle deficiencies in the process. It also shows regulators’ intent to help distressed homeowners by making the foreclosure drill stricter than it currently is.
Last month, U.S. bank regulators’ initiatives to settle critical deficiencies related to the foreclosure process were delayed due to disagreements within groups involved over the strictures of a defrayal. However, the regulators are trying to sketch a plan to penalize mortgage servicers by mid-March.
Among many proposals, negotiators had suggested that this ought to be the biggest monetary settlement, amounting to as much as $20 billion. Other alternatives were also considered and differences in opinion sprouted. Eventually, the penalty could be also in the form of a waiver of principal without forcing mortgage servicers to pay a fine.
Though the extent and timing of punishment is yet to be finalized, we can presume that it would come as a lesson to mortgage servicers and dilute the looming threat on housing recovery.
The new proposal would provide some relief to wronged homeowners. It will also be a decisive step in restoring confidence to businesses and rejuvenate the sagging housing market. However, we expect the problem to linger as in some cases lenders have no information about the owners of loans. As a result, significant stress will persist in the road to a housing recovery.