Residential servicers are under siege from regulators, state attorneys general and legislators for messing up the foreclosure process.
But instead of focusing strictly on fixing that problem, these officials are taking aim at servicers' business models and their disappointing efforts to modify loans.
Iowa AG Tom Miller told a Senate panel recently that "robo-signing is only a symptom of a much larger problem with the mortgage servicing system."
He noted the robo-signing investigation by the 50 AGs also is looking at various servicing fees, force-placed insurance as well as well as the problems servicers and investors are having showing a proper chain of title and ownership of securitized mortgages. "However, the biggest issue is fixing the loan modification system," Miller said.
Critics are quick to acknowledge that the mortgage servicing system was designed to be a lean money collection machine and is presently not equipped to take on the time-consuming process of loan modifications.
However, they have also run out of patience with the servicers.
"Servicers have been publicly pledging for several years to increase their servicer capacity, and many have," Federal Reserve Board governor Sarah Bloom Raskin told a National Consumer Law Center conference. "Unfortunately, there is plenty of evidence to suggest that many servicers' workforce lack the knowledge and capacity to deal with immensity of the mortgage crisis."
She also noted a common complaint that servicers and investors aren't doing enough to modify loans.
The Amherst Securities Group recently released figures showing that 80% of all nonperforming private-label mortgages have not been modified after 12 months.
As of Sept. 30, the Fannie Mae servicers had completed 321,800 modifications including 158,800 restructurings that meet Home Affordable Modification Program (HAMP) specifications. (Fannie has 60,500 borrowers in HAMP trials, which represents 6% of its seriously delinquent loans.)
A Federal Housing Administration (FHA) review of the loss mitigation operations of its five largest servicers was an eye-opener for FHA commissioner David Stevens. The FHA initiated a review in May and is still analyzing its findings. "The field analyst reviews suggest that some servicers may lack knowledge of the FHA loss mitigation process," Stevens told a congressional panel.
The review also discovered that some servicers did not have the technology to expedite the processing of loan modifications or experienced staff necessary to deal with the backlog of requests.
The FHA is now working with its top servicers to address the problems and improve their loss mitigation performance. (Its top five servicers include Wells Fargo Home Mortgage, Bank of America, JPMorgan Chase, CitiMortgage and GMAC Mortgage.)
The federal mortgage insurer plans to conduct reviews of the next five largest FHA servicers in the winter and early spring.
In her speech, Raskin said servicers have little incentive to support large-scale loan workout activity.
The new Fed governor and former Maryland financial services regulator expressed hope that the efforts by the 50 state AGs to fix robo-signing problems will lead to structural reforms in the servicing industry.
"Until a better business model is developed that eliminates the business incentives that can potentially harm consumers, there will be a need for close scrutiny of these issues and for appropriate enforcement action that addresses them," Raskin said.
The Mortgage Bankers Association (MBA) is starting to yield to this pressure to change. At a REO property preservation conference, MBA senior vice president Steve O'Connor responded to the Fed governor's remarks, saying the crisis presents an "opportunity to take stock of lessons learned and figure out how we can do it better. At MBA, we welcome that challenge."
Meanwhile, the state AGs are trying to reach a broad agreement with the nation's megaservicers to fix the foreclosure mess and improve the loan modification process.
"Our goal is to change the paradigm" to make the current servicing system a "better system," said AG Tom Miller. "We are struggling," he admitted, in finding ways to ensure borrowers that pass a "strict economic analysis" will get a loan modification.
As part of an agreement, the AGs want servicers to provide one contact person for each borrower that is being considered for a loan modification and to stop dual tracking — where borrowers in modifications are also being processed for foreclosure.
At the same time, fears are growing in Washington that the foreclosure mess could lead to more loan buyback risk for major banks.
A congressional panel that oversees the Troubled Asset Recovery Program has raised concerns that the rapid growth of mortgage securitization outpaced the ability of the legal and financial system to track mortgage loan ownership.
The panel's report suggests robo-signings of affidavits served to cover up the fact that loan servicers cannot demonstrate who legally owns a loan or who can order a foreclosure.
In a worst-case scenario, a Wall Street bank may find it still owns defaulted loans that it securitized and sold years ago, the Congressional Oversight Panel report said.
Meanwhile, a federal interagency foreclosure task force is now investigating the nation's largest servicers, focusing on foreclosure procedures and whether the affidavits and claims are accurate.
The review has been expanded to address concerns that documentation problems may exist with loans in securitization trusts, said outgoing Treasury assistant secretary Michael Barr.
"Regulators have begun to review compliance of servicers, custodians and trustees with procedures required by the pooling and servicing agreements," Barr said.
At the Federal Reserve Board, there is a growing concern that put-backs are accelerating and pose a potential risk to the banking system. "The Federal Reserve has been conducting a detailed evaluation of put-back risk to financial institutions," said Fed governor Elizabeth Duke.
"We are gathering information to ensure that institutions we supervise have adequately assessed these risks and have accounted for them properly," Duke said.