I know a lot of readers miss Dave Dayen, who had a solid following at Firedoglake and among other things, covered the mortgage beat ably and energetically. He’s apparently been busy reporting, and just published a story in Washington Monthly on how the mortgage standards launched by the Consumer Financial Protection Bureau fall well short of what is necessary.
Now the parts of mortgage reform that the CFPB did get sorta right, which are its qualified mortgage rules (which Adam Levitin argues are back door usury laws; they make high-spread interest rate mortgages very unattractive to originators and investors) may well be moot. Any action taken that relied on the powers that the CFPB obtained only by having a director in place could be voided, since a recent appeals court decision (which looks likely to be affirmed if taken to the Supreme Court) found recess appointments to be invalid. So this action, plus its measures to prohibit steering payments to front line lending officers, may be thrown out. Now the worst case scenario is that the CFPB could re-enact them, but that may not be as easy as it sounds. Obama would still need to get a director approved. While Republicans seem to deem the suddenly-maybe-not-a-director Richard Cordray acceptable, they are still keen to use every opportunity on offer to weaken the CFPB. They plan to revive efforts to undermine the agency by having it lead by a commission rather than a director and/or have it funded by appropriations, which was the mechanism used to hobble the SEC.
Dayen describes how the CFPB blew it on servicing reform. There seems to be a peculiar amount of denial in the Beltway as to how terrible servicing is. If you were to believe the CFPB, all you need to do is make those pesky servicers follow servicing standards and make them offer sensible mods before foreclosing. The one truly positive thing the CFPB did do was to require servicers to offer modifications. Dayen gives a high-level description:
When a borrower misses two straight payments, servicers must intervene with specific information on loan modification options. They must provide “continuity of contact” – not a single specialist tasked with following a borrower, but a set of personnel that has access to all information, so the borrower won’t need to send multiple documents (these personnel must acknowledge receipt of an application and request any specific information they need from the borrower to complete it). Servicers must go to the investors in the loan, who have typically been shut out of the process, and clarify up-front what loss mitigation procedures they can offer, while keeping investors abreast of the decisions they ultimately make. They must offer one application that includes all potential modification plans, and consider them simultaneously, checking eligibility on the “waterfall” of options provided by the investor until they find one suitable. Critically, servicers must wait 120 days before starting the foreclosure process, ending an insidious tactic known as “dual track,” where servicers would review an application for a loan modification while simultaneously starting the foreclosure process. If the borrower slips into foreclosure, they get more limited protections from dual track, and in certain circumstances, they could pause the process by submitting a modification application. Finally, rejections of modifications must be accompanied by specific reasons, with an appeal process available to the borrower.
While this looks great on paper, servicers have proven to not just be masters of gaming systems but also quite content to break rules flagrantly. As Dayen stressed: “Servicers appear to fear the loss of the profit centers in their business model more than any penalties or sanctions.”
The elephant is that servicers are paid reasonably well to service performing mortgages. They are also paid even more to foreclose, in the way of various legitimate fees that they get. Yet servicers have, consistently, cheated in a myriad of creative ways to boost their revenues during the foreclosure process: force placed insurance, junk fees, attorney fees in excess of permitted state and Fannie/Freddie/FHA/VA guidelines. The whistleblowers at Bank of America that were tasked to reviewing fees said that they found overcharges in virtually every borrower file they reviewed.
So why do they cheat? It is as much desperation-driven as opportunity-driven. With the fee structures now in place, servicers lose money if delinquencies rise above a certain level. On an individual borrower level, servicing a delinquent mortgage, even with all the permitted foreclosure fees, is a money-loser. And the margins on servicing current mortgages aren’t so hot either, so it doesn’t take all that much in the way of delinquencies to render a servicing operation plenty unprofitable. And once you start cheating, it becomes a drug. Management gets accustomed to the new margin levels and are loath to impair them unless forced to do so.
And forget about modifications. A modification is like underwriting a new loan: it takes work and individualized assessment. Servicers, by contrast, are factories. To do mods properly, you’d need specialized and better paid staff. Culturally and operationally, it’s difficult to put the two under the same roof. And that’s before you get to the fact that the margins don’t begin to cover acquiring these skills. Look at how the government has had to bribe servicers to do mods, by providing incentive payments, and it’s only when they got very juicy that they finally got any level of participation.
The fact that it has taken such a high level of incentives to get servicers to do a meaningful level of loan modification is a strong proof that the payment structures desperately need to be reformed. Investors understand that; it’s one of the big reasons the private label (non-government guaranteed) mortgage market remains dead. Having been burned, no investor wants to be victimized a second time by having his payments dependent on the vagaries of servicers. Better to leave that risk to Uncle Sam. But as Dayen points out, perversely, the big guarantors, Fannie and Freddie, which have the power to set market standards, also are dragging their feet on addressing servicer fees structures Dayen again:
The Federal Housing Finance Agency (the conservator for mortgage giants Fannie Mae and Freddie Mac, also called GSEs, short for “government sponsored enterprises”) and HUD have begun work on a joint project to address servicer compensation…
However, the FHFA/HUD servicer compensation process is showing few signs of life. They announced the initiative two years ago, and released a discussion paper in September 2011, inviting public comment on a couple broadly rendered alternatives, including a “fee for service” model where servicers would get paid a flat rate for performing loans, presumably encouraging them to keep the loans current. As is typical for these regulations, practically all of the public input on the discussion draft came from the mortgage industry. They objected to changing the system before they had new requirements in place, like the 2012 National Mortgage Settlement and the CFPB servicing standards. In addition, they made the usual complaints about undermining the market and increasing costs for borrowers.
Perhaps as a result, basically nothing has been done on servicer compensation since the fall of 2011.
So the short version of why nothing is going to get better anytime soon is that no one showed up in the regulatory process to represent homeowner or even investor interests. This is an abject failure on behalf of the housing and other consumer advocate groups. And it also seems to underscore the point Sheila Bair made when she met with Occupy Wall Street, that there are typically staff members within the regulators who will object to the snake oil the banking industry is selling, but they can’t get very far if they don’t have letters or other input from ordinary citizens and groups on the other side of the issue. I’m reminded of a joke:
A man prays to God to win the lotto. The next drawing comes and he is not one of the winners.
More desperate, he prays three times as many times as he did before, and three times as long each time. The next round comes and goes, and again the man is not among the winners.
The man goes to pray again, begging God for help. The heavens open. God pronounces, “First, you have to buy a ticket.”
Politics is like that. You can’t change outcomes unless you participate. The banks do, in a serious way. It’s time you do too. While all those little things, like writing your Congressman, writing your local newspaper, submitting letters to regulators in public comment periods, does not lead to the gratification of tangible results, narrow groups rely on the inertia of the general population to get their way. Finance has become too important and powerful to treat it as a special interest any more. We all need to roll up our sleeves if we are to curb the industry’s power.