While loan servicers get much of the blame for improperly following foreclosure procedures, some others are pointing to another culprit: the patchwork of state standards.
Foreclosures have historically been a state issue, but several industry observers said there has to be a national standard governing the process.
"It just screams out for it," said L. Richard Fischer, a partner with the law firm Morrison & Foerster.
Foreclosure rules vary widely state to state, with 23 requiring a judicial foreclosure process. They differ on required affidavits, documentation, and even the timetable for starting a foreclosure.
For example, California has one of the strictest foreclosure processes; unless a lender there has offered a modification, it must delay a foreclosure proceeding by at least six months. In Massachusetts the attorney general can review any foreclosure where the property is the primary residence of the borrower.
Some said the current system makes little sense. While banks can use federal standards governing much of the lending process, they are still subject to local laws governing foreclosures.
"There are huge disparities in the time lines themselves, whether judicial or nonjudicial. … From that standpoint it's a disparity in borrower treatment across the board," said Cliff Rossi, a former banker who is an executive-in-residence at the University of Maryland's Center for Financial Policy. "Why should borrowers be subject any more to disparities in the foreclosure time lines than they are to the mortgage rates? We pay pretty much uniformly on mortgage rates, so why wouldn't someone in North Carolina be subject to the same time line as someone in California?"
Observers said it is this type of confusion that has led to problems in complying with various foreclosure statutes.
Some said national bank preemption, which does not currently cover foreclosures, should be applied. Under the law, nationally chartered banks do not have to follow state laws that significantly interfere with the business of banking. That test has already been met, Fischer said.
"There is no question that the existence of all of these state foreclosure laws significantly interferes with the exercise of the banks," he said.
State regulatory advocates contend that the foreclosure process should remain a local issue.
"Nothing is more fundamental to a local community than property rights," said John Ryan, executive vice president of the Conference of State Bank Supervisors. "It goes back to one of the fundamental principles of our country. Federalizing laws around property rights is a very significant leap."
Alan Kaplinsky, a partner at Ballard Spahr, said states would revolt if the federal government attempted to dictate foreclosure proceedings.
"I think it would be a major incursion by the federal government to interfere with what over the years has been a matter that is dealt with by the courts all over the country," he said. "Every court and every state has different procedures that need to be followed and tailored to the needs of the state."
Policymakers appear to be steering well clear of the idea for now. But some industry representatives said it could be addressed as part of housing finance reform next year.
"There will be a debate about mortgage servicing on whether there should be changes in mortgage servicing in the future," said Paul Leonard, vice president of government affairs for the Housing Policy Council. "It could be a part of GSE reform. … I don't think you can impose a new framework until we are a little further through the current situation."
The idea even enjoys support among some consumer advocates, who traditionally fight any press for federal preemption, preferring to let states write lending laws that could be more progressive.
"There should be a standard that ensures for responsible management of the foreclosure process with documentation and processes that ensure there is fairness and opportunities to avoid foreclosure, if that is possible," said John Taylor, president of the National Community Reinvestment Coalition. "In some of these red states the protections for the people relative to financial institutions are abysmal, so having a federal standard is the right way."
Other supporters of the idea argue that foreclosures should no longer be considered a local issue given the domination of the mortgage market by national banks and the government-sponsored enterprises.
The current problems are "exactly why preemption makes sense," said Andrew Sandler, a co-chairman of BuckleySandler.
The current process was never properly tested prior to the financial crisis, which has only now laid bare its flaws. "I don't think anyone focused on that in the foreclosure process, because there weren't that many foreclosures," Sandler said. "Maybe what we learn from this crisis is we need one national standard."
Laurence Platt, a partner at K&L Gates, said a federal standard could be helpful in specific situations, noting that states differ in how they define what level of knowledge a signer of an affidavit must have of the foreclosure documents.
"It would be useful to have a uniform set of rules on the process," Platt said. "For example, there could be a requirement that the states adopt a rule on definition of knowledge."
Some said policymakers need not establish a federal standard for the entire foreclosure process, but should seek more limited redress.
John Funk, a partner at Gallagher, Callahan & Gartrell, said that a uniform foreclosure procedure would contradict property laws, but that a federal standard clarifying who has the right to a mortgage might be beneficial.
"If there were a standard that clarifies who is eligible to proceed with a foreclosure and what type of documentation they need to produce that might be helpful," Funk said. "That to me would not interfere with the interest the individual states have in picking a process that is fair and balanced for the people in a state."
Others said the states would resist any effort to cut into their turf.
"I think you would probably find states taking significant objections to any kind of federal override," said Joe Lynyak, a partner at Venable. "The issue is not whether or not those protections were adequate, but whether the legal standards were sufficient."
Ryan said the entire debate is missing the point.
"Would one law versus 50 laws make this any different? I don't know," he said. "I'm sensing they built a machine that wasn't meant to handle foreclosures at this level, this magnitude for many reasons. … There are lots of ways the servicing model has not been a success, and that is not a matter of 50 state laws. It's a matter of a system that was built of a collection and distribution model."
Others said Congress was unlikely to attempt to tackle the issue.
"If you could have the federal government come in and prescribe some elemental standard and have the states go beyond that, that could be a way to do it," said Stephen Ornstein, a partner at Sonnenschein Nath & Rosenthal LLP. "Ideally you'd love to have a federal standard in a lot of aspects of lending, but it's traditionally been carved out, and I don't see the federal government going that way. It's such an emotional issue … and I don't see them intervening what the states want to do."
Finally, there are questions about whether the work itself is too difficult. "Real property law is just so local in nature," Platt said. "It would be a task to come up with a uniform law on foreclosure. And it's the same thing with local court rules. The rules implicated here such as what level of knowledge for an affidavit or how a notary gets released are not solely for a foreclosure law. It's the regular rules for a state."