The Mortgage Mess: Bair Comes out Swinging

We’ve been talking a lot recently about the massive size and on-going nature of the foreclosure problem in the US. Reid Cramer recorded a podcast on solutions to stem the tide, and recorded conversations with Julia Gordon, who called for the involvement of the bankruptcy courts to help, and Alon Cohen, who outlined a simple model with great promise–opt-out mediation. Now Sheila Bair, Chair of the FDIC has thrown her hat into the ring and laid blame on the doorstep of the the mortgage servicing industry.

“Throughout the mortgage crisis, from the earliest days of the subprime credit problem to the current robo-signing controversy, the most persistent adversary has been inertia in the servicing and foreclosure practices applied to problem loans. Prompt action to modify unaffordable subprime loans in 2007 could have helped to limit the crisis in its early stages. Instead, we saw one and a half million foreclosures that year…Mortgage servicers have remained behind the curve as the problem has evolved to include underwater mortgages and, now, foreclosure practices that sow confusion and fear on the part of homeowners and fail to fully conform to state and local legal requirements…

Fair dealing with borrowers and adherence to the law are not optional. They must be viewed as mandatory if our servicing and foreclosure process is to function in the interest of all parties concerned.

The bottom line is that we need more modifications and fewer foreclosures. When foreclosure is unavoidable, we need it to be done with all fairness to the borrower and in accordance with the law.”

Wow. For those interested in a calming of rhetoric that’s what a DC smackdown looked like before we just started screaming at each other. So what does the Chairman recommend? Here are principles she’s putting forward for reform:

1)       That borrowers have a single point of contact with their servicer.

2)       That servicers have adequate staffing and training for effective loss mitigation.

3)       Take opportunities to clear the decks with simplified loan-modification offers in exchange for waivers of claims.

4)       Servicers must deal head-on with the second-lien problem.

5)       There must be independent review of loss-mitigation denials.

6)      Borrowers harmed by past practices must have remedies available to them, “a foreclosure claims commission, modeled on the BP or 9/11 claims commissions, could be set up and funded by servicers to address complaints of homeowners who have wrongly suffered foreclosure through servicer errors.”  

Now, by and large that’s ambitious, but it hardly seems out of line. However, Chairman Bair felt the need to send a shot across the bow for the industry:

The fact is, every time servicers have delayed needed changes to minimize their short-term costs, they have seen a deepening of the crisis that has cost them – and the rest of us – even more.

Double snap. I’d recommend reading the Chairman’s entire speech, and keeping a close eye on where this proposal goes.