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.

Mortgage Industry to undergo drastic changes but is it too little too late?

Federal regulators and the top law enforcement officers in all fifty states are eyeing big changes to the dysfunctional home loan industry. If these officials have their way, borrowers who take out home loans and the investors who buy them will work closer together and find common ground to minimize foreclosures, while the middle men who are supposed to be performing that job will see their power diminished.

That's the takeaway from a 27-page proposed settlement agreement a coalition of all 50 state attorneys general and five federal agencies sent last week to the nation's five largest home loan firms. The document details how mortgage companies should treat borrowers who fall behind on their payments.

It's the opening salvo in what will be a months-long negotiation between the nation's largest banks and the officials who oversee them to settle state and federal claims that they abused borrowers and illegally foreclosed on homes.

"Laws were not being followed by the servicers," Illinois Attorney General Lisa Madigan said Monday. "That absolutely has to change."

Regulators, investors and consumer advocates have long complained of a crooked system in which the firms that are supposed to collect payments from borrowers and distribute the proceeds to investors, known as mortgage servicers, have worked to their own advantage rather than working for those they're supposed to represent -- investors.

The proposed checklist of changes, the result of federal and state probes into big banks' foreclosure practices, tries to fix that. The Departments of Justice, Treasury, and Housing and Urban Development support the proposal. So do the Federal Trade Commission and the nascent Bureau of Consumer Financial Protection.

Currently, servicers have wide discretion in how they process payments and treat distressed borrowers and the investors who own those mortgages. If the state attorneys general had their way, that discretion would be narrowed, incentives would be altered, and a new system would emerge in which deserving homeowners would see their payments reduced and investors would experience decreased losses as a result of avoiding foreclosure.

But state and federal officials face an uphill climb. The banking industry and its allies in Congress howl that costs will skyrocket and the housing market will slide again as necessary foreclosures are delayed, threatening the recovery. The uncertainty of the final shape of a settlement also weighs on the market, undercutting efforts to fully investigate banks' loan files and possible wrongful foreclosures. Regulators don't want a dragged-out process. Iowa Attorney General Tom Miller, who's leading the 50-state effort, said Monday that he hopes the negotiations will only take a couple of months.

"We don't want uncertainty to linger too long," said North Carolina Attorney General Roy Cooper.

The preliminary term sheet is just one part of a comprehensive settlement. Fines will be levied, banks have said, and regulators are pushing for additional loan modifications. Those details were not disclosed Monday.

Some regulators are looking to levy up to $30 billion in penalties on the nation's 14 largest mortgage firms for their abusive practices. The penalties would come in the form of civil fines and losses from modifying home mortgages, according to people familiar with the matter. But the national bank overseer, the Office of the Comptroller of the Currency, is fighting that approach. The OCC wants a settlement that would cost the industry just a few billion dollars, sources said.

The state attorneys general want to penalize the industry for past misdeeds, and levy fines and change industry practices to minimize the chances that such transgressions will pop up again.

"We want to remedy losses that have occurred as a result of those problems," John Suthers, Colorado's attorney general, said of restitution due to bank errors.

The changes they're pursuing appear basic to those outside the industry: homeowners shall be afforded basic rights, investors will no longer have to jump through hoops to get the most basic information, mortgage servicers will be required to prove they have the necessary documentation to repossess a home, and banks shall subject themselves to regular audits to ensure compliance.

To those who work inside the industry, or help troubled homeowners navigate through it, the changes regulators seek appear to be the equivalent of a whole new mortgage system. That's how dysfunctional the industry has become.

Instead of an industry geared towards maximizing the value of a mortgage -- like modifying a home loan so investors lose $0.20 on the dollar rather than the $0.50 they'd lose if it was repossessed -- servicers are instead forcing through foreclosures, racking up fees through prolonged foreclosure proceedings, and effectively disregarding the rights of investors and borrowers in pursuit of their own profit.

By bringing investors and homeowners closer together, regulators are trying to minimize the power wielded by servicers.

The nation's five largest mortgage servicers -- Bank of America, Wells Fargo, JPMorgan Chase, Citigroup and Ally Financial -- handle about three out of every five home loans, according to newsletter and data provider Inside Mortgage Finance.

The document was posted online Monday by American Banker. Its authenticity was confirmed by regulators involved in the process who asked not to be named.

Among regulators' proposals:

-Mortgage servicers shall not use incentives that encourage their employees to take shortcuts, like the robo-signing debacle that forced firms to halt home repossessions once evidence emerged that banks were at times breaking the law in their rush to foreclose on distressed borrowers;

-Foreclosure documents will require hand signatures, rather than simple stamps or electronic signatures;

-Mortgage servicers will have to prove they have the original loan files in order to repossess a home (a recent study of foreclosures in bankruptcy by Katherine M. Porter, a visiting professor at Harvard, found that in 40 percent of cases creditors foreclosing on borrowers did not show proper documentation);

-Servicers will have to create divisions separate from their foreclosure units to mediate complaints from aggrieved homeowners, and those units will be subject to audits from other companies, which will then produce reports for regulators detailing servicers' efforts;

-Servicers will be required to create and pay for websites that will allow borrowers to track their individual cases when trying to get their loans modified, as well as websites that will allow borrowers to easily get in touch with housing counselors;

-New incentive structures within servicers will be mandated that encourage loan modifications over foreclosure;

-Servicers will have to operate under strict timelines when processing loans, requests for loan modifications, and pursuing foreclosures;

-Servicers will have to disclose specific reasons why homeowners weren't offered loan modifications;

-Conditional forgiveness of mortgage principal will be required in situations in which balloon payments are due at the end of a modified loan's term;

-Equivalent forgiveness of second mortgages will be required when part of the first mortgage is written off;

-Servicers should consider homeowners' total debt obligations, rather than just their first mortgage, when restructuring their home loans (this would have the effect of lowering borrowers' total debt payments);

-Homeowners should have only one person to deal with at their servicer when trying to modify their loan, a significant change from the present situation in which homeowners are subject to endless phone calls and letters from a variety of bank employees;

-And investors will have access to more information, loan files, and will have a more powerful voice to call for individual loan modifications, rather than being forced to trust that servicers are acting in their best interests. This could be one of the more powerful changes as investors have long called for more loan modifications of troubled borrowers' debt, only to be rebuffed by mortgage servicers. If investors can see individual loan files -- and borrowers can see who the investors are -- this could lead to a significant increase in mortgage modifications.

Banks, though, are already bristling at the proposals, according to people familiar with the matter. Asked about whether the industry would agree to adopt the changes, Miller wondered: "Will enlightened self-interest prevail?"

Mortgage Delinquencies in Decline but a Tough Road Ahead Remains

Fewer Americans are falling behind on their mortgage payments; in fact, the fewest in two years. Mortgages just one payment past due fell to their lowest level since just before the recession began. Is it delays in paperwork from insufficient paperwork and the foreclosure servicing scandal? No. It's actual fundamentals in the economy and the mortgage market. This may seem like a surprise to many how work in the industry.

It is interesting to note that as we got toward the end of 2010 we began to see another drop in weekly claims for unemployment insurance. I think that's a key driver of the short term delinquencies but many of those figure scan be shewed due to the way unemployment figures are reported. They are based on claims and if an individual doesn't make a claim, it may mean that he or she found employment or it can also mean that they simply ran out of unemployment benefits.

But even more significant is the improved underwriting that began after the mortgage market crashed. We're now past the delinquency peak on loans that were underwritten during the worst phase of the housing boom in 2006 and 2007.

The national delinquency rate fell 10 percent in the fourth quarter of last year to 8.22 percent, according to the Mortgage Bankers Association's latest survey. That's still high by historical standards, but it's a huge improvement. It's also good to see that the FHA delinquency rate improved slightly, from 12.62 percent to 12.26 percent, which is still high based on past years but a step in the right direction.

Beware of Mortgage Modification Scams

Mortgage Modifications have gained popularity in recent years, but many Mortgage Modifications Company are in legal turmoil due to unfair business practices. Often they will promise to lower Mortgage payments but cannot deliver on those promises and leave Homeowners in a worse situation than before. Currently there are several Attorney Generals in various states who are pursuing Legal actions against these companies.

Advance fees and demands that a homeowner stop making payments are key hallmarks of a scam. A Federal Trade Commission rule that took effect last week makes it illegal for companies to tell consumers to stop paying their mortgage, unless they also tell them that they could lose their home and damage their credit rating by doing so. A federal ban on collecting advance fees under the same rule will take effect at the end of this month.

It is already illegal in Florida for a loan modification company to charge a fee up front, and the state attorney general's office confirmed to HuffPost that it is currently investigating NHR, partially based in Florida, for "unfair and deceptive practices with regard to collecting fees and utilizing a client contract."

FTC spokesman Frank Dorman said the volume of loan modification scams has significantly increased with the uptick in foreclosures in the past few years.

"While the scams have existed in some form for awhile, as delinquencies and foreclosure filings have risen the opportunity for loan modification and foreclosure rescue scams has increased," he said. "We advise people to avoid any company or individual that requires a fee in advance, guarantees to stop a foreclosure or modify a loan, or advises the homeowner to stop paying the mortgage company. Many of the complaints received by the FTC include not being able to contact the company after paying for mortgage refinance services, not being able to get their money back and not receiving proper help from the company after paying for services."

It is always recommended to that you get legal advise from an Attorney prior to entering into any Loan Modification agreement. Many Bankruptcy and financial services Law firm offer modification options as well. It is often better to hire an attorney's office to do your Modification because they have the backing of a real Lawyer. Many Loan Modification Companies are only loosely affiliated with an Attorney and many have no legal expertise or backing whatsoever.

The Carbone Law Firm has a Loan Modification Expert on staff and they have a better than average results when it comes to Modifying loans. Most Importantly we have been in business for over 17 years and are based locally in Wall, New Jersey, so you know who you are dealing with and where your money is going. For a free Consultation call us at 732-681-6800 or visit us on the web at www.cerbonelaw.com for more information.

The Complexities of Mortgage Ownership: Can You to Complete the Puzzle?

We all know the mortgage securitization process is complicated.

But just how complicated? This chart from Zero Hedge shows the convoluted journey a mortgage takes as it morphs into a security. Dan Edstrom, of DTC Systems, who performs securitization audits, and who is giving a seminar in California next month, spent a year putting together a diagram that traces the path of his own house's mortgage. "Just When You Thought You Knew Something About Mortgage Securitizations," says Zero Hedge, you are presented with this almost hilariously complicated chart.

A controversy of allegedly shoddy paperwork has raised doubts about the legitimacy of foreclosures nationwide, eliciting complaints from homeowners and investors alike. The Congressional Oversight Panel, a bailout watchdog, released a statement Tuesday that says the scandal over alleged "robo-signers," foreclosure processors who approve documents without reading them, "may have concealed much deeper problems" in the mortgage industry,

Regulators will have their hands full.

Bank of America Finally Comes to its Senses

Bank of America will stop foreclosures in all 50 U.S. states. Last week the bank, the country's biggest by assets, announced it was halting foreclosure in the 23 states where foreclosures are processed in court, saying it needed to review foreclosure documents for potential errors. Now, the bank has extended that moratorium to all 50 states as it has decided to stop sales of foreclosed properties, blocking a major step in the foreclosure process.

The decision comes as a foreclosure crisis threatens the nation's housing market and larger economy. Reports of foreclosure processors approving documents without properly reviewing them and bank agents changing locks on the doors of houses that aren't even in foreclosure -- while the residents are inside -- pile ambiguity and scandal on the foreclosure system. Delays in the process further cripple the weak housing market.

Already, foreclosure ambiguities have begun to stall sales of foreclosed properties. The New Yorl Times describes the case of a woman who was about to move into a house when Fannie Mae declared the property's foreclosure might not have been valid, and she was told to wait. While owners of foreclosed homes may be glad to see these proceedings halted, buyers of those homes -- and the larger housing market -- are suffering.

In the years leading up to the housing crash, investors hungered for risky mortgages that banks would bundle and re-package into securities. This arcane market drove banks to initiate more and riskier mortgages at break-neck speeds. Experts say the massive amounts of shoddy paperwork that accompanied this process are now being exposed, wreaking havoc on the banks and on the economy.

Senate Majority Leader Harry Reid (D-Nev.) supports Bank of America's decision to halt foreclosures across the nation, according to a release. "I thank Bank of America for doing the right thing," he said in a statement, calling on other lenders to follow the bank's lead and expand their foreclosure moratoriums.

BofA joins Citi in support of Judicial Mortgage Modification

Bank of America, the nation's largest lender and its biggest bank by assets, now supports changing the law to give federal judges the power to modify mortgages in bankruptcy.

The bank joins Citigroup, the nation's third-largest bank by assets, in supporting a change to existing law to give homeowners more leverage. Unlike other forms of debt, bankruptcy judges presently lack the power to change mortgage terms. The banking and home mortgage industry want to keep it that way -- by not allowing judges the authority to change the terms, troubled homeowners are at the mercy of their lenders. They take what they get.

But Tuesday, before a nearly-empty Congressional hearing room, Barbara J. Desoer, president of Bank of America Home Loans, said her bank now supports leveling that playing field.

"As we've gone through the lessons that we've learned with modifications and other programs, there probably is some segment of borrowers for whom that would be an appropriate alternative," Desoer said before the House Financial Services Committee.

"So you would support that in some circumstances?" asked Rep. Brad Miller (D-N.C.) in a follow-up to his original question.

"In some circumstances, yeah," Desoer responded.

In December, the House failed to pass an amendment to its financial reform bill that would have given judges this authority, despite the fact that it passed the chamber the previous March. The Senate defeated it the next month after banks and mortgage lenders of all sizes mobilized to kill the measure.

Bank of America, though, is the nation's largest lender and servicer of home mortgages. Desoer oversees a home mortgage unit that accounts for "about 20 percent of the U.S. mortgage origination market, with a $2 trillion servicing portfolio serving nearly 14 million customer loans," according to the bank's website.

Its support now gives homeowner advocates in Congress added ammunition to pressure lenders to either do more to give distressed homeowners sustainable mortgage modifications, or to threaten the rest of the mortgage industry with the possibility of reintroducing a bill that would allow federal judges the authority to unilaterally do it on their own.

Citigroup supported the change last year as Congress debated the proposal. Its position has not changed, bank spokeswoman Molly Meiners told the Huffington Post. Together, Bank of America and Citigroup hold a combined $4 trillion in assets, according to regulatory filings with the Federal Reserve.

After Desoer appeared to qualify her support, committee Chairman Barney Frank (D-Mass.), who supports giving judges the authority to treat home mortgages like other forms of consumer debt, interjected in hopes of getting additional clarification.

"Obviously the law would have to be modified to allow that circumstance," he said. "We should make clear that we can't change the bankruptcy law obviously case by case, so it would have to be an [inaudible] change."

Miller then asked a follow-up question.

"You would support a legislative change in the bankruptcy law to allow the modification of home mortgages in bankruptcy?" he asked Desoer.

"Yes," she replied. "And I believe that there is a segment of borrowers for whom that is the appropriate alternative, subject to them having gone through qualification for HAMP, or something like that, and failed." HAMP refers to the administration's main foreclosure-prevention initiative, the Home Affordable Modification Program.

"There is a segment of borrowers for whom that might be an appropriate alternative, yes," Desoer added.

In an interview after the hearing, Frank told HuffPost that Bank of America's new position was "encouraging."

"We may be able to reopen that," Frank said. "And of course, Citi stayed with it. We now have two of the four [biggest banks in the country]" supporting judicial mortgage modifications.

Frank added that he would tell the House Judiciary Committee about Bank of America's now-public position. Judiciary has jurisdiction over bankruptcy law, he said.

"Maybe we can revisit this," Frank said.

Odds are slim. Banks still wield tremendous influence in the Capitol.

"I'm not confident. I'm hopeful," said Frank. "Look, you've got the credit unions, the community banks -- people tend to overestimate the importance of the big banks. Frankly, it's the smaller entities that have more political clout, and I don't see that this has moved us elsewhere. It's helpful, but it's not conclusive."

The panel was quickly reminded that Bank of America and Citi were alone in their support for homeowners.

Mike Heid, co-president of Wells Fargo Home Mortgage, butted in after Desoer finished responding to Miller, and added his two cents:

"I think you'd have to ask yourself whether a change in bankruptcy law is really the best way -- and the fastest way -- to achieve assistance for homeowners. I think there's other alternatives," Heid said in a response to a question that wasn't asked of him.

Miller quickly retorted, "We're trying to do other alternatives now, and have been for three years, and without much to show for it."

Last year lenders foreclosed on more than 2.8 million homes, according to real estate research firm RealtyTrac. The firm estimates three million homes will get foreclosure notices this year; more than one million of them will be repossessed by lenders