Lenders should face penalties for violating representation and warranty clauses — beyond their obligation to re-purchase the loans — according to Andrew Davidson, president of the New York firm Davidson & Co.
Penalties for poor underwriting and fraudulent loans would encourage better due diligence by investors, instead of waiting for the loan to go into foreclosure when the "damage has already been done," said Davidson.
He spoke at a joint Federal Deposit Insurance Corp. (FDIC)/Federal Reserve Board conference on foreclosures and the future of housing finance. He also said there are problems in enforcing reps and warranties when the loan has been sold multiple times.
Investors sign "knowledge qualifiers" that they are not aware of any fraud and are not liable for any violations, which means the note holder has to go up the chain of ownership to pursue any claims.
To correct this problem, Davidson said the originator of the loan should sign a document taking responsibility for the quality of loan and accept any penalties or re-purchase obligations because of defects or fraud.
This "origination certification would travel with the loan," he said. "Therefore the responsibly would rest where it makes the most difference – where the actual fraud and improper underwriting took place," Davidson said. The certificate also could be used to protect borrowers, he added.
In the same forum, FDIC Chairman Sheila Bair said that if servicing and processing problems continue to bog down foreclosures, there should be a way to permit "necessary and justified" foreclosures to continue.
The FDIC chief said foreclosures should continue to be processed where the properties are vacant or the homeowner has been unable to make his payments even after the servicer reduced the monthly payment by at least 25%.
Such a solution could "triage" the foreclosure mess that "ultimately could be very damaging to our housing markets," Bair said at the conference.
The agency has regulatory authority over all of the nation's top 10 ranked servicers with the exception of one. Together, these firms control about 70% of the market, according to ASR sister publication National Mortgage News.
She noted that all stakeholders involved in the foreclosure process need to come together and work out a solution.
"The regrettable truth is that many of the properties in foreclosure are vacant or occupied by borrowers who cannot make a significantly reduced payment and have been in arrears for an extended time," Bair said.