The retrospective foreclosure reviews mandated by the formal enforcement actions handed down to servicers will help regulators evaluate the extent of the problem and determine the amount of monetary fines that should be assessed, according to John Walsh.
The OCC, along with the Federal Reserve and the Office of Thrift Supervision, issued cease and desist orders Wednesday against 14 mortgage servicers, as well as Lender Processing Services and the Mortgage Electronic Registration Systems, that are intended to correct deficiencies the regulators found in foreclosure processes and the way customers are treated.
The orders laid out a laundry list of procedural reforms and best practices to be implemented, but did not give a dollar amount for monetary sanctions, although officials from both the OCC and Fed said such penalties would be forthcoming.
Speaking to attendees at a meeting hosted by Women in Housing and Finance Thursday, Walsh described the problems uncovered in the investigation as “extensive.” He says servicers will have to absorb “substantial expense” to fix the problems.
One of the provisions laid out in the cease and desist orders is for each servicer to hire an independent, third-party firm to check all foreclosure actions processed in 2009 and 2010. Any cases that are found to identify borrowers that suffered financial harm as a result of foreclosure processing deficiencies, the servicer is obligated to provide restitution.
“This is an open-ended obligation, with no dollar cap, and we will be supervising compliance very closely,” Walsh said, adding that servicers must evaluate the cases of any borrower who asks for a review.
“As we gather additional information from continuing exam work and the look-back about the extent of harm from processing failures, this will inform our decision on civil money penalties,” Walsh said.
Critics of the regulators’ response have voiced concern that although the third-party review firms must be approved by the supervising federal agency, the fact that the hiring
decision rests with the bank will likely lead to skewed results.
“You have an outside reviewer chosen by the bank reviewing things under an uncertain standard and then also deciding what the harm was,” Georgetown University law professor Adam Levitin, who has been critical of the mortgage industry and its record-keeping, opined to Dave Clark of Reuters.
FDIC Chairman Sheila Bair, whose agency participated in the federal probe last fall but is not the primary regulator for any of the mortgage servicers, stressed that the “look-back” exams of past foreclosure actions must be carried out with integrity and transparency in order to return a semblance of credibility to the reputation-tarnished institutions involved.
“There is evidence that some level of wrongful foreclosures has occurred. It is important that servicers identify any harmed homeowners and provide appropriate remedies,” Bair said.
In his speech Thursday, Walsh said, “As bad as the mortgage servicing breakdown was, it was not the cause of mortgage delinquencies that led to the surge in foreclosures. Rather, it was the unprecedented surge in foreclosures that exposed and exacerbated weaknesses that already existed in the process.”
Walsh says even with the changes mandated to solve the processing problem and ensure troubled borrowers are treated fairly, “our actions are unlikely to fundamentally change the trajectory of the foreclosure problem.”
“If there is any reassurance here, and there is sadly very little, it is that borrowers subject to foreclosure in our sample were indeed seriously delinquent,” Walsh reiterated again.
He added that the cases evaluated in the sample also showed that servicers “generally had the documents they needed to foreclose” and that only a “small number of sales should not have gone forward” because they involved active duty service members, a bankruptcy filing, or approved trial modifications.
“In general, we found that servicers had considered whether borrowers facing foreclosures might qualify for some alternative program, such as a modification,” Walsh said.
It’s this type of argument that pundits say gives servicers an edge in the negotiations that are still pending with state attorneys general, who are reportedly pushing for more stringent reforms and a hefty punitive fine, as well as the federal Justice Department.
However, in his remarks Walsh added, “[W]hile the sample of foreclosures we examined was adequate to expose these flaws in the process and provide a basis for developing enforcement actions, it did not capture the full extent of harm to borrowers.”
