Tuesday, April 12, 2011

State Officials and Federal Regulators at odds about Foreclosure Reform

The rift continues to widen between state and federal officials over foreclosure reform.

Since the 50 state attorneys general first issued their proposal to aggressively overhaul the foreclosure process and penalize servicers, the two sides have clashed over the specifics, with states reportedly advocating for stricter measures than federal regulators.

Disagreements have now become pronounced enough to leave open the prospect that the states could eventually issue their own orders for reform, independent of the Comptroller of the Currency and Federal Reserve -- two government agencies charged with reforming the foreclosure process, according to the Wall Street Journal.

In a letter sent on Monday to the Federal Reserve, the WSJ reports, 22 current and former board members of the Fed's Consumer Advisory Council said federal regulators' potential proposal appears to be "profoundly disappointing," leaving "too much discretion" to mortgage companies without imposing strict enough penalties for foreclosure abuses.

America's five largest mortgage firms have saved over $20 billion since the start of the housing crisis by shortcutting the home loan process of struggling borrowers.

In a report last month that drew the ire of housing and consumer advocates, the Fed found no evidence of wrongful foreclosures.

Still, other regulators have advocated hitting the 14 largest mortgage firms with upwards of $30 billion in penalties for past abusive practices.

Amid the debate, a new paper entitled "The Economics of the Proposed Mortgage Servicer Settlement," funded in part by the financial services industry, disputes the notion that the state attorneys generals' proposal will protect homeowners, arguing that it would instead "generate significant unintended negative consequences" by raising "the number of defaults and servicing costs." Most consumer advocates agree that this is a ridiculous notion and that the federal agencies involved are only working to protect the Mortgage Industry.

The federal debate over the foreclosure process has heated up in recent weeks, with the Obama administration backtracking on an earlier, more dramatic proposition more in line with that of the states attorneys general. The president's earlier proposal would have required mortgage lenders to reduce monthly payments for millions of U.S. homeowners.

This is another case where the federal Government is placating to large financial institutions while state regulators are trying to impose tougher standards. A scenario similar to this has already played out in the financial sector, where state and community banks who were held to stricter regulatory standards than national banks. This allowed National Banks to participate in risky financial dealings like credit-default swaps, hedge-fund operations and other shady financial practices. State Regulators and the FDIC tend to be tougher on banks than the Office of the Comptroller of the Currency and Bank Holding companies which is a part of the Federal Reserve, which tends to be more favorable to the banks because the Federal Reserve is actually a privatively held company whose board members are members of the international banking community.

The decision here is clear, Individual states should be put in charge of overseeing foreclosure reform because for the most part their findings make sense, because if the banks did not do anything unlawful, why are we seeing a record number of foreclosures?

Secondly, the federal reserve is a privately owned bank based in Delaware, the board members are prominent bankers from all over the world, this is a conflict of interest in my opinion because the Federal Reserve which comprised of Bankers is not going to be critical of other bankers. State regulators are more likely to take a more objective approach when investigating such matters.