By Cliff Montgomery – May 14th, 2011
A top financial markets expert recently revealed the U.S. government’s stunning lack of legal oversight on foreclosures, and how it continues to plague our economy.
On Thursday, A. Nicole Clowers–Government Accountability Office (GAO) Acting Director of Financial Markets and Community Investment–provided a testimony before a Senate Committee panel on Banking, Housing, and Urban Affairs. That statement deserves a good look.
Below, The American Spark provides major quotes from Clowers’ testimony:
“Thank you for the opportunity to discuss our work on mortgage servicing issues. With record numbers of borrowers in default and delinquent on their loans, mortgage servicers—entities that manage home mortgage loans—are initiating large numbers of foreclosures throughout the country.
“As of December 2010, an estimated 4.6 percent of the about 50 million first-lien mortgages outstanding were in foreclosure—an increase of more than 370 percent since the first quarter of 2006, when 1 percent were in foreclosure.
“Beginning in September 2010, several servicers announced that they were halting or reviewing their foreclosure proceedings throughout the country after allegations that the documents accompanying judicial foreclosures may have been inappropriately signed or notarized. The servicers subsequently resumed some foreclosure actions after reviewing their processes and procedures. However, following these allegations, some homeowners challenged the validity of foreclosure proceedings against them.
“Questions about whether documents for loans that were sold and packaged into mortgage-backed securities were properly handled prompted additional challenges.
“In summary, until the problems with foreclosure documentation came to light, federal regulatory oversight of mortgage servicers had been limited, because regulators regarded servicers’ activities as low risk for banking safety and soundness. However, regulators’ recent examinations revealed that servicers generally failed to prepare required documentation properly and lacked effective supervision and controls over foreclosure processes.
“Moreover, the resulting delays in completing foreclosures and increased exposure to litigation highlight how the failure to oversee whether institutions follow sound practices can heighten the risks these entities present to the financial system and create problems for the communities in which foreclosures occur.
“As a result, we recommended in our report that the financial regulators take various actions, including:
- Developing and coordinating plans for ongoing oversight of servicers,
- Including foreclosure practices as part of any national servicing standards that are created, and
- Assessing the risks of improper documentation for mortgage loan transfers.
“The regulators generally agreed with or did not comment on our recommendations, and some are taking actions to address them.
“The origination, securitization, and servicing of mortgage loans involve multiple entities. In recent years, originating lenders generally have sold or assigned their interest in loans to other financial institutions to securitize the mortgages. Through securitization, the purchasers of these mortgages then package them into pools and issue securities for which the mortgages serve as collateral. These mortgage-backed securities (MBS) pay interest and principal to their investors, such as other financial institutions, pension funds, or mutual funds.
“After an originator sells its loans, another entity is usually appointed as the servicer. Servicing duties can involve sending borrowers monthly account statements, answering customer service inquiries, collecting mortgage payments, maintaining escrow accounts for taxes and insurance, and forwarding payments to the mortgage owners.
“If a borrower becomes delinquent on loan payments, servicers also initiate and conduct a foreclosure in order to obtain the proceeds from the sale of the property on behalf of the owner of the loan. Any legal action such as foreclosure that a servicer takes generally may be brought in the name and on behalf of the securitization trust, which is the legal owner of record of the mortgage loans.
“Several federal agencies share responsibility for regulating activities of the banking industry that relate to the originating and servicing of mortgage loans. Upon assumption of its full authorities on July 21, 2011, CFPB [Consumer Financial Protection Bureau] also will have authority to regulate mortgage servicers with respect to federal consumer financial law. Other agencies also oversee certain aspects of U.S. mortgage markets, but do not have supervisory authority over mortgage servicers.
“Because state laws primarily govern foreclosure, federal laws related to mortgage lending focus on protecting consumers at mortgage origination and during the life of a loan, but not necessarily during foreclosure.
“Federal consumer protection laws, such as the Truth in Lending Act (TILA) and the Real Estate Settlement Procedures Act of 1974 (RESPA), address some aspects of servicers’ interactions with borrowers. For example, these laws require servicers to provide certain notifications and disclosures to borrowers or respond to certain written requests for information within specified times, but they do not include specific requirements for servicers to follow when executing a foreclosure.
“According to Federal Reserve officials, in addition to federal bankruptcy laws, federal laws that address foreclosure processing specifically are the Protecting Tenants at Foreclosure Act of 2009, which protects certain tenants from immediate eviction by new owners who acquire residential property through foreclosure, and the Servicemembers Civil Relief Act, which restricts foreclosure of properties owned by active duty members of the military.
“Banking regulators oversee most entities that conduct mortgage servicing, but their oversight of foreclosure activities generally has been limited. As part of their mission to ensure the safety and soundness of these institutions, the regulators have the authority to review any aspect of their activities, including mortgage servicing and compliance with applicable state laws.
“However, the extent to which regulators have reviewed the foreclosure activities of banks or banking subsidiaries that perform mortgage servicing has been limited, because these practices generally were not considered as posing a high risk to safety and soundness.
“Oversight also has been fragmented, and not all servicers have been overseen by federal banking regulators. At the federal level, multiple agencies—including OCC [Office of the Comptroller of the Currency], the Federal Reserve, OTS [Office of Thrift Supervision], and FDIC [Federal Deposit Insurance Corporation]—have regulatory responsibility for most of the institutions that conduct mortgage servicing, but until recently some non-bank institutions have not had a primary federal or state regulator.
“Many federally regulated bank holding companies that have insured depository subsidiaries, such as national or state-chartered banks, may have non-bank subsidiaries such as mortgage finance companies.
“Under the Bank Holding Company Act of 1956, as amended, the Federal Reserve has jurisdiction over such bank holding companies and their non-bank subsidiaries that are not regulated by another functional regulator. [But] until recently the Federal Reserve generally had not included the non-bank subsidiaries in its examination activity, because their activities were not considered to pose material risks to the bank holding companies.
“In some cases, non-bank entities that service mortgage loans are not affiliated with financial institutions at all, and therefore were not subject to oversight by one of the federal banking regulators.
“In our 2009 report on how the U.S. financial regulatory system had not kept pace with the major developments in recent decades, we noted that the varying levels or lack of oversight for non-bank institutions that originated mortgages created problems for consumers or posed risks to regulated institutions.”
