As questions have mounted about the legality of thousands of foreclosures across the country, lawmakers have ratcheted up the rhetoric in criticizing lenders and urging them to take actions to help homeowners. But a key issue remains: What will Congress do about it?
Distracted by the midterm elections and facing continuing uncertainty about the extent of the foreclosure problems, it appears — for now at least — that Congress will weigh in only tentatively.
The Senate Banking Committee has scheduled a Nov. 16 hearing on the matter, and the House Financial Services Committee is widely expected to follow suit.
Beyond that, it is unclear how Congress will react until lawmakers have a better grip on the situation.
"We still just do not know what exactly is going on, how pervasive it is, if it is matter of technicality, of not crossing 't's and dotting 'i's or something much bigger than that and something that needs a fix," Rep. Brad Miller, a North Carolina Democrat who has long championed stronger consumer protections, said in an interview.
Lawmakers are pushing to do their own investigation even as all 50 states have launched foreclosure probes.
It is unclear which party will be in charge by the time lawmakers have a chance to consider legislation, or how differently the two parties would seek to treat the issue. While some Democrats like Rep. Maxine Waters, D-Calif., are pressing lenders for a blanket foreclosure moratorium, others like President Obama and Sen. Chris Dodd have warned such a move could damage the economy.
Republicans have also called for investigations into the foreclosure problems but have mostly steered clear of specific policy recommendations.
Sen. Bob Corker, a Tennessee Republican who serves on the Banking Committee, said it would be a mistake for Congress to interfere.
"I don't think Congress should respond at all," Corker said in an interview. "Hopefully this is something that can be worked through fairly rapidly."
He said the paperwork controversy should be a lesson to MBS investors about variance in foreclosure proceedings and a reminder that Congress needs to address the future of the housing finance system.
"What this whole episode has shown is that each state handles foreclosures in different ways, and that matters to those who invest in housing securities," he said. "This whole process has been enlightening. It's unfortunate that some of the entities involved in the foreclosure process have not done everything necessary from a technical standpoint. At the same time, I've seen no evidence that has shown people who have been put out of their homes that shouldn't have been."
Corker said he was pleased by the administration's opposition to a blanket foreclosure moratorium, agreeing it would damage the economy.
"Congress should not be involved in passing legislation period as it relates to foreclosures," he said. "I hope we will not create some sort of knee-jerk reaction to this, which often is the case."
But, like other Republicans, Corker saw a lesson in the situation for reform of the housing finance sector, an issue Congress is expected to take up next year.
"I do think this should be taken into account as we look at housing finance," he said. "Hearings would be beneficial … there is a lot to be learned, but hopefully what will be learned is how we deal with housing finance in the future."
In an e-mail to American Banker, Sen. Richard Shelby, the lead Republican on the Senate Banking Committee, also referenced housing reform, noting he unsuccessfully pushed for a revamp of the system as part of regulatory reform.
"It's interesting to hear Democrats cheerleading foreclosure moratoriums after the fact when they refused to join our attempts to reform the housing finance system over the last several years," Shelby said.
Still, he requested that the committee conduct its own investigation focused specifically on why regulators did not do more to prevent the current situation.
"We need to get to the bottom of this," Shelby said. "What were the regulators doing while all of this was occurring? How can they possibly handle the additional power Dodd-Frank grants them if they are incapable of regulating banks under their existing authority?"
House Financial Services Committee Chairman Barney Frank said he is concentrating more on where the federal government, such as the Federal Housing Administration and the Federal Housing Finance Agency, has jurisdiction.
"The mortgage industry has an obligation to conduct accurate reviews before proceeding with foreclosures, which can devastate families and seriously harm our neighborhoods," Frank said in a prepared statement. "I am particularly focused on making sure that all entities under federal jurisdiction are following all proper procedures and treating all homeowners fairly. Institutions in which the government holds a stake — including Fannie Mae, Freddie Mac and Ally — have a particular responsibility to ensure the fairness and appropriateness of all foreclosure proceeding."
Although many lawmakers have sent out press releases on the issue, Miller acknowledged that few are focused on the issue given the upcoming elections. But he rejected arguments that lawmakers are reacting with concern just for political gain.
"I think that's not right," he said. "There may be a little of election-year pandering going on, but it sounds like a problem that really does deserve our attention, and we should figure just how much turmoil this is creating."
The North Carolina Democrat said the issue clearly warranted Congress' scrutiny.
"Are homeowners really being mistreated, or are these technicalities?" he asked. "I suspect this is going to create a great turmoil in the housing market and a great more uncertainty on the potential liability of the banks and securitizers. I think the implications of this are pretty big and it does merit Congress' attention."
Others are touting more specific remedies. Waters, for one, has used the situation to promote her Foreclosure Prevention and Sound Mortgage Servicing Act, which she introduced last year to prohibit the start of foreclosure proceedings without offering the homeowner loss mitigation first.
Miller, too, has been frustrated that more homeowners did not receive loan modifications. But he said for the most part, it appears the paperwork problems are not cases where lenders improperly foreclosed on borrowers. He said a larger concern is the relationship between the different entities in the mortgage chain.
"The bigger liability issues I would think are probably the liability of the securitizers, and I think most of these were private-label securitizers, not Fannie and Freddie — whether they are now in a position under their contract with the bondholders, the holders of the MBS to buy back securities that weren't properly documented," he said.
Laurence Platt, a co-leader of the mortgage banking and consumer finance practice at K&L Gates, said that he expects some lawmakers to take advantage of the situation to make a push for stalling foreclosures but that it is unlikely much will come from it.
"My suspicion is that it will be more hearings than it is legislation," he said. "Foreclosure really is a local, state-law phenomenon. It will be hard to come up with a federal law regulating foreclosures. They could try to impose a moratorium. That might raise constitutional issues, but I think more than anything they will try to jawbone servicers to modify more loans."
But Joe Engelhard, a senior vice president with Capital Alpha Partners, said eventually Congress might need to set federal standards for transferring title electronically to prevent problems like this from recurring.
"It's a very complicated issue," he said. "What appeared initially as just an issue of robo-signers and whether the proper person was reviewing or just signing documentation potentially exposed a larger issue which has to do with the ability of largely state laws to keep up with the administrative practices with respect to mortgages."
Congress is "going to have to do a lot of oversight and figure out what is the best way to go forward on this," Engelhard said.
"In a modern world we should be able to have electronic transactions be able to be recognized by the court system," he said. "It's more of a question of how do you update state laws to accommodate the e-marketplace, and ultimately I think that's what is going to happen. I think the best solution would be to have some kind of federal standard for what is acceptable in recognizing title and making sure that originators, securitizers and investors can have clear title."