In recent weeks, the foreclosure processing practices of some of the nation’s largest mortgage servicers have come under scrutiny. If the allegations of widespread fraud are true, this episode serves as yet another reminder that we can’t simply rely on the prudence of servicers to adequately address the foreclosure crisis.
Some mortgage servicers have announced temporary moratoria on foreclosures in 23 states, while Bank of America announced a moratorium for the entire country. The moratoria were prompted by evidence of “robo-signers,” employees at some servicers who signed off on thousands of foreclosure documents a month without properly ensuring their validity, potentially in violation of state laws. The servicers announced the moratoria in order to review their foreclosure processes. Several Attorneys General, including Lisa Madigan of Illinois, are looking into the allegations, while, the Office of the Comptroller of the Currency, a federal bank regulator, has ordered servicers to review their processes as well.
This is not the first sign of trouble with servicers’ attention to detail. Servicers have been inexplicably slow to respond to their foreclosure crisis, creating a host of problems in the implementation of the federal government’s primary foreclosure prevention program, the Home Affordable Modification Program (HAMP). Economist Tom Lawler points out that, in normal economic times, large servicers are able to conduct a profitable business because of the large economies of scale in processing mortgage payments. However, dealing with widespread defaults requires much more staff to work out individual borrowers’ problems, and servicers were slow to ramp up staffing levels accordingly. The result is a large number of complaints about servicer unresponsiveness, misinformation from employees without adequate training, and a tendency to lose documents required for acceptance into HAMP multiple times.
The “robo-signing” affair is another argument in favor of regulations that ensure that servicers are practicing diligence and honoring the rights of consumers. Most importantly, servicers must do better at preventing foreclosures in the first place. We have yet to see much willingness to reduce the principal owed by underwater homeowners, which would mitigate the risk of default in a large fraction of borrowers. Treasury needs to hold servicers accountable who continually give borrowers the run-around or who are sloppy in their implementation of HAMP—while Treasury has tools at its disposal to sanction noncompliant servicers, they have yet to do so.
A coalition of consumer and civil rights groups has called for a national moratorium on foreclosures in order to investigate all servicers’ processes. While temporary moratoria may be appropriate for servicers with evidence of widespread robo-signing, putting a blanket moratorium on all foreclosures would inject even more uncertainty into an already feeble housing market. A moratorium would delay even longer the entry of foreclosed homes into the housing market and the eventual stabilization of the market, while potential home buyers may be deterred from purchasing foreclosed houses because of the added layer of delay and risk. Servicers who have prepared erroneous foreclosure documents must bear the full cost of fixing their mess and be adequately sanctioned when in violation of the law, but stopping all foreclosures would serve to prolong the pain.
See more on the “robo-signing” controversy and how it will affect communities of color from our Senior Vice President Geoff Smith in Chicago Magazine.