By Richard Neiman
Years after the subprime crisis first shook the housing market, we have once again found ourselves facing disarray and confusion on residential mortgage loans. This time allegations of faulty mortgage servicing are the culprit, with continuing documentation irregularities and dubious paperwork procedures raising serious questions about the viability of foreclosures.
First we need to acknowledge that this is more than just a paperwork issue. Real harm is being done to the integrity of the judicial system, even in states with comparatively lower levels of foreclosure like New York. Further, these allegations call into question the integrity of all aspects of servicer decision-making, such as whether to modify a mortgage or to foreclose, or whether to only modify through a proprietary modification that may be less sustainable than modification under the federal Home Affordable Modification Program (HAMP). That uncertainty is creating a crisis of confidence in the foreclosure process, the modification process, and in the housing market more broadly.
While in-depth investigations by government regulators are underway to address these harms and to punish potentially illegal activities, more still needs to be done. We must quickly address growing market concerns that could delay an already anemic housing recovery.
We urgently need nationwide mortgage servicing rules to address these concerns. The number of permanent modifications that have been made under HAMP has been disappointing, but HAMP did help to standardize loss mitigation by servicers. The goal now is to build on this provisionary and voluntary process, to create rules with staying power and real consequences for noncompliance.
New York set a strong model for such regulations last year by establishing the most comprehensive set of mortgage servicer rules in the nation. They directly address the servicers’ responsibilities with respect to loss mitigation, in addition to covering many of the day-to-day aspects of mortgage loan servicing such as how payments should be credited, what fees are permissible, and the servicer’s obligation for providing payoff statements and payments histories.
For too long, we have heard complaints from homeowners about servicers’ overall unresponsiveness and sometimes unprofessional behavior. It is these practices that have led to much of the confusion and frustration that we face today, with preventable foreclosures going forward and adding to mounting investor and homeowner losses. New York’s business conduct rules attempt to address these widespread grievances by creating a clear system of accountability for the servicing of mortgage loans from their beginning to their end. Key provisions include:
A general duty of fair dealing: Servicers must act in good faith with borrowers on loan transactions and provide them with clear, accurate communications on their accounts;
Servicers must pursue appropriate loss mitigation efforts with homeowners, such as loan modifications or short sales to avoid preventable foreclosures, and to make these decisions within a specified timeframe;
Servicers must have adequate staffing, written procedures for handling consumer inquiries and complaints, and methods for making sure that homeowners are not required to submit multiple copies of required documents;
Approvals must provide “clear and understandable written information explaining the material terms, costs and risk of the option offered;”
Denials must state with “specificity” the reasons for denial, contact information for a person who can reconsider the denial and any other foreclosure prevention alternatives.
These regulations apply to all servicers handling New York-based mortgages. They set the basis for what modern residential mortgage servicing should look like – providing servicers with the guidelines they need for developing appropriate loss mitigation procedures and properly investing in staffing. New York borrowers now have rights when it comes to saving their homes for foreclosure, and servicers will be held accountable for violating those rights.
In short, our financial and economic recovery depends on this type of smart regulation. By working together to restore public confidence in the housing market – ensuring both consumers and investors that the mistakes of the pasts cannot be repeated – we can look forward to a revitalized and vibrant New York economy.
Richard Neiman, superintendent of the New York State Banking Department, writes on regulatory issues for Banking New York.