Four years after the nation’s largest mortgage servicers were ordered to clean up their foreclosure processes, many are still falling short of their obligations.
Six banks, including JPMorgan Chase, U.S. Bancorp and Wells Fargo, have not fully complied with consent orders related to the independent foreclosure review that began in 2011, the Office of the Comptroller of the Currency said on June 17. The servicers were cited for a variety of issues, including failing to respond to borrower requests for loan modifications, not making a good-faith effort to prevent foreclosures and not having compliance systems in place.
The punishment for these infractions was harsh: Wells Fargo and HSBC Holdings are prohibited from acquiring mortgage servicing rights, entering into new servicing contracts or offshoring servicing activity until the consent orders are terminated.
Four banks - JPMorgan in New York, EverBank Financial in Jacksonville, Fla., Santander Holdings, the U.S. unit of Spain’s Banco Santander, and U.S. Bancorp in Minneapolis - must each get approval from the OCC to acquire mortgage servicing rights.
It’s unclear how the crackdown will affect the broader mortgage servicing market, but at the very least it could slow large transfers of mortgage servicing rights. JPMorgan Chase and Wells Fargo have been active buyers of servicing rights and if they are unable to acquire new portfolios, it could limit the options of potential sellers, observers said.
Dave Stephens, the chief operations officer at United Capital Markets, a mortgage servicing advisory firm in Greenwood Village, Colo., said JPMorgan Chase and Wells Fargo have the strongest appetite for mortgage servicing rights, and are the most likely to do big deals. For deals of $10 billion or less, there are plenty of buyers but larger deals could be problematic.
“If a big hedge fund with $50 billion invested in MSRs decides they want to exit the market, who is going to be the buyer? It would normally have been one of these banks,” Stephens said. “I think the capital is still out there that’s interested, but it’s more of a chance the seller will now get penalized.”
The restrictions will not affect JPMorgan Chase’s purchase in May of $45 billion in servicing rights from embattled mortgage firm Ocwen Financial. A JPMorgan spokesman said the bank expects to comply with the order by the end of the summer.
Those who have followed the independent foreclosure review process said the OCC is exerting renewed pressure on servicers even though the population of delinquent borrowers is on the decline.
Katherine Porter, a law professor at the University of California at Irvine, who is the California monitor of the separate 2012 national mortgage settlement, said that while servicing has improved dramatically in the past four years, there are still problems.
“The OCC brought a lot of firepower to this in terms of being harsh on penalties because this last chunk of servicing work won’t get done unless regulators really push,” she said.
Morris Morgan, the OCC’s deputy comptroller for large banks, said he expects the banks to comply with the latest consent order “within months, not years.” Further delays, he added, could lead to additional enforcement orders.
The OCC said that three banks - Bank of America, Citigroup and PNC Financial Services Group - had fulfilled their obligations and were formally released from their 2011 consent orders.
In the wake of the financial crisis, banks mishandled foreclosures on such a scale that regulators had to step in. But the “look back” reviews became nearly as controversial as the original servicing blunders, with consultants paid far more than what consumers would receive in payouts. The OCC ultimately scrapped the reviews in favor of a $9.3 billion settlement with most of the servicers.
The settlement was designed to compensate borrowers who may have been wrongly foreclosed upon or otherwise harmed. More than $2.7 billion has been distributed to 3.2 million borrowers. — Kate Berry, Rachel Witkowski