Federal regulators issued a tough opening salvo in settlement talks with the largest servicers, presenting them with a 27-page term sheet that would force major changes to the industry and step up loan mitigation efforts.
Under the term sheet, servicers would be pressured to offer principal reductions while revamping foreclosure proceedings, borrower records, and technology processes.
Sources familiar with the situation cautioned that the term sheets are a "beginning shot" to open negotiations with servicers, and will likely change as the process moves forward. The term sheet does not include a monetary penalty because regulators continue to disagree on the proper amount of a fine.
Still, the term sheet appears to be an aggressive starting point for negotiations and would significantly reshape the servicing business if implemented in its current form.
It would also give the Consumer Financial Protection Bureau (CFPB) an even stronger hand in dealing with servicers — four months before the agency officially assumes much of its authority. Under the term sheet, servicers would have to provide details to the CFPB for how they determine the net present value of a home — a key metric that allows servicers to figure out if it is cheaper to foreclose or offer borrowers' some kind of workout. The CFPB would review and monitor those calculations, according to the term sheet.
The term sheet also lays out new timelines for documentations, audits and appeal procedures, which are likely to lengthen the foreclosure process. For example, any documentation referred to in an affidavit would have to be attached to the affidavit. Servicers have been heavily criticized for missing key paperwork as part of the foreclosure process.
The term sheet also calls for new restrictions on servicer fees and forced placed insurance. Nominally purchased to protect the owners of mortgage-backed securities, such insurance products on a borrower's home can be 10 times as costly as regular policies, raising struggling homeowners' debt loads, pushing them toward foreclosure.
Regulators are also proposing new conditions designed to improve the effectiveness of the Obama administration's Home Affordable Modification Program (HAMP). The term sheet would set new conditions to convert a trial modification into a permanent one under the program. Currently, a borrower has to make three consecutive payments on a trial modifications before it is considered permanent. But many borrowers have had problems meeting that test.
According to the last HAMP report, there were 740,240 trial modifications that have been canceled, outpacing the number of permanent modifications, which were at 539,493 at the end of January.
The term sheets were jointly agreed to by the state attorneys general, Justice Department, CFPB, Federal Trade Commission, and the Department of Housing and Urban Development.
The settlement is in response to numerous reports last year of foreclosure problems, including robo-signing, which prompted a large-scale investigation by the state AGs and several federal agencies.
As a result of the investigation, the bank regulators have issued a draft cease and desist order to 14 of the largest servicers, which would force them to improve their processes.
Regulators are hoping to issue both the cease and desist and the final term sheet at the same time as part of a global settlement.