December 24 2010 (Chris Moore)
In a letter addressed to the Obama Administrations top financial leaders, fifty-two of the mortgage industry’s top executives are calling for the development of national standards in the originating, selling and servicing of mortgage loans.
The letter, which included the names as such industry heavyweights as Marten Mayer of the Brookings Institution, Allan Mendelowitz, former Chairman of the Federal Housing Finance Board, and Harold Simon of the National Housing Institute, cited a number of reasons for the development of servicing standards, including the robo-signing crisis, delays in the loan modification process and illegal foreclosure proceedings.
“Problems of this magnitude are a threat not only to the economic recovery, but to the safety and soundness of all insured depository institutions,” said the letter. “Servicing standards need not be overly complex, but they must address the misaligned incentives and ‘tranche warfare’ issues that have bedeviled mortgage servicing throughout this crisis.”
The letter was sent directly to the leaders of the Federal Reserve Board (Ben S. Bernanke), the Federal Deposit Insurance Corporation (Sheila Bair); the U.S. Department of the Treasury (Timothy Geithner); Edward DeMarco, Acting Director of the Federal Housing Finance Agency (FHFA); Mary L. Schapiro, chairman of the Securities & Exchange Commission (SEC); and John Walsh, acting Comptroller of the Currency.
To protect borrowers and investors alike, the letters originator’s recommended the following standards that lenders and servicers should be required to do:
– Credit monthly loan payments promptly and correct any misapplication of such funds in a timely manner.
– Engage in loan modifications, including reductions in the payment amount and principal balance, consistent with state law, to address reasonably foreseeable default when a homeowner can make a reasonable payment and it is economically feasible to do so. When existing or future loans are more than 90+ days delinquent, federal regulations should mandate that the credit be assigned to a special servicer.
– Prohibit the commingling of homeowners’ monthly mortgage payments with servicers assets except for the time necessary to clear the payments received, but generally not more than two (2) business days.
– Be accountable for lost paperwork on loan modifications and/or for failing to suspend the foreclosure process when a homeowner is actively engaged in the loan modification process.
– Create incentivized compensation structures tied to effectiveness in managing the long-run performance risk of the assets in a securitization.
– Mitigate losses on residential mortgages by taking appropriate action to maximize the net present value of the mortgages for the benefit of all investors in a securitization rather than the benefit of any particular class of investors.
– Make servicer advances to a securitization vehicle a required reporting item. Prohibit the servicer from advancing delinquent payments of principal and interest by mortgagors for more than three (3) payment periods unless financing or reimbursement facilities to fund or reimburse the primary servicers are available.
– Disclose any ownership interest of the servicer or any affiliate of the servicer in other whole loans secured by the same real property that secures a loan included in a given pool of mortgages used in a securitization.
– Eliminate the regulatory incentives that motivate banks to keep troubled portfolio loans in “limbo,” without permanent modification or remediation, merely because the bank is successful in obtaining a marginal payment that avoids classifying a loan as non-accrual.
– Establish a pre-defined process to address any subordinate lien owned by the servicer or any affiliate of the servicer, if the first mortgage is seriously delinquent (i.e., 90 days or more past due) to eliminate any potential conflicts of interest.
– Attest annually in writing under penalty of a fine or legal action.
Tags: mortgage industry leaders, federal reserve, treasury, loan modification, foreclosure, mortgage loans, mortgage lenders, mortgage servicers, mortgage originators