Anyone expecting a quick and narrow resolution of mortgage servicers' troubles from foreclosure process failures probably hasn't talked to Iowa Attorney General Tom Miller, who heads the 50-state coalition investigating the industry.
In a Dec. 7 interview with American Banker, Miller spoke of the tension between the need for a thorough investigation of industry practices and his task force's obligation to act quickly to curtail perceived abuses.
Miller also laid out a few possible components to a prospective settlement. Some of them may be longer lasting than what the industry had in mind. Rumors in mid-November that the attorneys general would hastily settle in exchange for a victim compensation fund and a few procedural tweaks now appear to reflect servicers' wishful thinking.
Bank executives have frequently described the robo-signing issue and other foreclosure documentation issues as strictly procedural. What's your take?
TOM MILLER: It's a matter of the integrity of the state court process in the 23 states that have judicial processes. You go to court to do something significant, evict someone who previously owned their house, you have to get a court order. And to get that you need to file a summary judgment, with an affidavit necessary to do that. To falsely swear by robo-signing — that's a significant affront to the judicial process. And that's not to be overlooked as a technicality.
But would you agree with the industry's argument that people aren't being removed from their homes who shouldn't be?
MILLER: We don't know that for sure. We may conclude that when our investigation is over, but we're still investigating that. And we think that there were a lot of people who were foreclosed on who should have gotten a modification. We're looking at the servicing in general, and the modification in particular, to see if that's working, if there are problems analogous to the robo-signing.
The industry line in public has been that none of its errors were substantive. Is this their position in discussions with you?
MILLER: I can't describe what's said in the negotiations. I can say that the companies have been forthcoming, and have been engaged in meaningful conversations.
There's been some talk about national servicing standards being necessary — the Federal Reserve's Daniel Tarullo made the case for them on the Hill, though he left the issue of preemption up to Congress. What are your thoughts?
MILLER: If they're talking about sort of a minimum federal standard, that's something that might work and be helpful. But if they're talking about preempting the states, I don't think that's a good idea. A foreclosure action is something very local, and something that the states have traditionally controlled. It's very much a local transaction, and should continue to be a fundamental state responsibility to control state litigation. I don't think that there should be a federal standard that preempts state law.
Foreclosing is something that the servicers do right now and do successfully. Despite the problems banks have created on foreclosures, there's been a lot of them. The rules in the 50 states are really quite similar. And when [something is] done in so many areas, with regard to food, and with regard to insurance to some extent, it's part of interstate commerce, and it's done successfully in so many different areas.
Could the process be improved through simplification? Is there some room for this in a prospective settlement with the attorneys general?
MILLER: There might be. But the problems we have haven't been problems of state law, or that banks were running into trouble in just a few states. It's hard to see how the banks could create a problem by not following state law, and then say, "since we didn't follow state law and caused a mess, you need to change state law."
Consumer advocates have argued that the foreclosure system was designed for portfolio lenders that would much rather negotiate with a borrower than place fees and foreclose. Given how the servicing industry's evolved, how much can you do to address structural incentives in the system at this point?
MILLER: The servicing companies were designed primarily to collect the money and send it on to the investors. Now we're asking them to do a lot more. That's part of their job now, and while it's challenging on a volume basis, they've had three and a half years to work on this and get it better. We feel this is an opportunity to make the system of servicing work right. How we do that is the big question.
Some federal regulators have recently testified that they knew about troubles in the servicing industry and problems with documentation but didn't take action against the companies involved. Have the feds taken too soft of an approach to addressing industry problems?
MILLER: We're working closely with the federal regulators. We have a better, closer relationship with the Obama administration than any in my memory, and I go back five administrations. Treasury, [Department of Housing and Urban Development], [Department of Justice], [Federal Housing Administration] — we are working together. I think it's a very constructive relationship.
You suggested in testimony on the Hill that a resolution to the attorneys general investigation might include the establishment of an independent monitor separate from existing federal oversight. What's the attraction of the idea?
MILLER: We've been back and forth with the servicers for three and a half years. Whatever they've agreed to has to be a mechanism that is complied with and is effective.
One way to do that in combination with other resolutions would be to have some outside monitor.
Would that be like an industry self-regulatory group?
MILLER: It would be an independent person looking into this. You mentioned force-placed insurance in recent Congressional testimony.
Is that something that you see the attorneys general seeking to address through their joint investigation?
MILLER: Force-placed insurance is not a focus of the investigation, but it's not being excluded either. If people are being charged multiples of what the market usually charges for insurance, that's troublesome. And if the servicing companies have some interest in that, and people under stress are being charged two or three times the rightful premiums, it should be apparent to everybody that that's a problem.
Judging from existing discussions with servicers and the attorneys general's own work, what time frame do you think would be necessary to conclude your investigation and reach a potential settlement with the industry?
MILLER: We're trying to move as fast as we can. These issues need to be resolved for a host of reasons. But we have to take the time to do it right. We've started talking to the companies, had good meetings with the five largest servicers, and that's been constructive. We are talking months, we are not talking years.