U.S. Looks Deeper Into Foreclosures

It’s about time somebody starts looking into more of these seemingly shady practices.

From the Wall Street Journal
November 26, 2010
By EVAN PEREZ And DAMIAN PALETTA

WASHINGTON — The Justice Department and other federal agencies have intensified their review of the banking industry’s foreclosure documentation problems, using their powers over bankruptcy proceedings to scrutinize the treatment of troubled mortgages.

A key part of the effort is the Justice Department Trustee Program, the federal watchdog overseeing bankruptcies, which has launched a broad review of Chapter 13 bankruptcy filings by homeowners trying to halt foreclosure proceedings.

A U.S. official said Wednesday that 17 federal Trustee offices around the nation have recently stepped up efforts to scrub Chapter 13 filing documents, looking for documentation errors or improper practices such as inflated fees. Under Chapter 13 bankruptcy, a borrower seeks to halt foreclosure and comes up with a plan to catch up with their mortgage debt within five years.

Leading the federal response is Associate Attorney General Thomas Perrelli, the Justice Department’s No. 3 official, who has been tapped to coordinate the efforts of multiple federal agencies, including the Treasury Department and the Securities and Exchange Commission, and also share information with state attorneys general.

The increased federal scrutiny puts more pressure on the banking industry, which is already dealing with probes by 50 state attorneys general into allegations of the improper use of “robo-signers” to foreclose on homes. The industry is also bracing for the results of a separate probe by the Federal Housing Administration, which is scrutinizing the way banks process mortgage payments.

The reviews could lead to the government requiring banks to overhaul the way they modify mortgages and handle foreclosures, according to government officials involved in the discussions. Under agreements with the states, banks could also have to establish settlement funds to compensate homeowners who have been hurt by foreclosure errors, these people said.

No decisions have been made and the reviews are still in their early stages, the officials familiar with the matter said.

The new effort comes after criticism from homeowner-rights groups and others who have said the federal government wasn’t doing enough to address the document problems.

There have been varying assessments of the foreclosure-documentation problems. Many in the banking industry acknowledge paperwork mistakes, but say they mostly concerned homeowners who were in default on their loans and would have lost their homes anyway. Critics say the errors show how the banking industry hasn’t given homeowners a chance to rework the terms of their loan.

Federal officials hold weekly conference calls to discuss new developments and are beginning to challenge arguments from the banking industry that an intrusive investigation could damage the housing market’s recovery.

Treasury Department Assistant Secretary Michael Barr said Tuesday the federal review of foreclosures found “widespread” and “inexcusable” breakdowns in the process. “These problems must be fixed,” he told the Financial Stability Oversight Council, a consortium of regulators.

Scrutiny by federal Trustees is focusing on two common problems found in Chapter 13 filings, according to the U.S. official. In Chapter 13 filings, mortgage servicers are required to file a “proof of claim” to show how much they are owed by borrowers.

Trustees officials are scrutinizing documents for signs that lenders aren’t inflating their claim or aren’t improperly trying to resume foreclosure proceedings against borrowers. Homeowners are required to continue to make mortgage payments as the bankruptcy court considers the filing.

Similar problems were at the root of a Trustees settlement with the former Countrywide Financial Corp., announced in June. The agreement was part of a $108 million settlement between Countrywide and the Federal Trade Commission. The FTC and the Trustees alleged that Countrywide collected excessive fees from borrowers who were using Chapter 13 to try to keep their homes.

Where does your work go?

Program uses job-loss coverage to lure home buyers

By Jacob Adelman
Associated Press
November 13, 2010

The California Association of Realtors program allows home sellers to fund insurance plans that pay buyers up to $1,500 a month toward their mortgages for six months if they’re laid off from their jobs.

The so-called Home Payment Protection Program is a nod toward the role job concerns are playing in the housing market, especially in high-unemployment states such as California, where 12.4 percent of the population remains without work.

“Most people out today wanting to buy houses have a fear: What happens if I lose my job?” said CAR president Beth L. Peerce. “This takes some of that stress away.”

Mortgage payment protection programs are nothing new, but what distinguishes the California scheme is that the protection is being pitched as a selling point for reluctant buyers, which sellers advertise as part of their home listings.

Under the program, which covers buyers who lose their jobs within 12 months of escrow closing, a seller can choose to pay $200 for six mortgage payments of up to $1,000 each, or $275 for six mortgage payments of up to $1,500 each.

CAR began offering the service last month but doesn’t plan to begin advertising it widely until January, Peerce said.

National Association of Realtors spokesman Walter Molony said he knows of no other states that are offering similar incentives for job-fearing home-seekers.

The focus on consumers wary of making big purchases in a shaky economy recalls Hyundai Motor Hyundai Motor America’s offer to buy back cars from people who lose their jobs.

Analysts have credited that program with helping boost Hyundai sales since its introduction in January 2009, despite the ongoing economic doldrums.

University of Southern California business professor Lars Perner, who specializes in consumer behavior, thinks the realtors’ program could embolden those who have been putting off buying a home because of job insecurities.

“Taking away some of that fear of getting into big trouble is something that could easily tip the balance,” he said.

But Howard Wial, who directs the Brookings Institution’s Metropolitan Economy Initiative, said the plan would help only a limited number of borrowers with middling mortgage payments and relatively short amounts of time spent without work.

Indeed, nearly half of the state’s unemployed had been out of work for an average of more than six months, according to state statistics based on the year ending in September.

Meanwhile, although the state’s average mortgage payment was $1,055 in September, according to tracking firm MDA DataQuick, the insurance payouts wouldn’t cover mortgages in higher priced counties where sales have been most sluggish.

Average monthly mortgage payments in San Francisco and Orange County were $2,469 and $1,772 in September, DataQuick said.

“It could have some impact on home sales, but I wouldn’t overstate it,” Wial said of the CAR plan. “I think it’s a small step.”

Are Asset Management Companies Next on the List of Government Investigations for Mortgage Fraud?

Finally the government has announced what we in the industry have suspected for a long time – highly questionable and likely illegal conduct in foreclosures.

The Treasury Department, HUD, the Justice Department and other federal agencies and state attorney generals are aggressively investigating these problems. Asset management companies are an integral part of the foreclosure process. It’s likely that asset management companies will soon be part of these investigations.

As one example of irregular behavior, we know of an asset management firm that has communicated to all agents that they are restricted to the use of one single service provider, sending correspondence warning agents that if they do not to use their preferred service provider, agents would have to pay for the services out of their own pockets.

While attorney generals in all 50 states are conducting a joint investigation into how lenders managed the foreclosure process, RE Insider is asking the same AG’s and government agencies to look into Asset Management companies and their single sourcing procedures.

Federal Reserve Chairman Bernard Bernanke said, “We take violations of proper procedures seriously.”

And frankly, so do we at RE Insider. Do you know something that can shed more light on these practices? Let us know.

Is Transaction Point’s Pay-per-Click a Broker Nightmare?

In our opinion, some brokers may be about to experience their worst nightmare because they may be violating HUD’s RESPA laws. We have just learned that Fidelity actively marketed Transaction Point to brokers encouraging the use of its pay per click system in settlement services as a way for the broker to generate revenue. One Keller Williams broker is publicly calling this a “pay per click system.”

Have these brokers been assured by Fidelity or others that accepting fees for orders through Transaction Point is RESPA compliant?

Has Fidelity indemnified brokers in writing, in the event that this “pay per click system,” as the Keller Williams broker calls it, is or is not RESPA compliant?

Could there be a possible class action lawsuit filed? Are there home sellers or buyers that were not informed that the broker received a fee in exchange for an order placed through Transaction Point on a transaction involving their home? Will Fidelity indemnify brokers against such a lawsuit?

Did the Fidelity/Transaction Point program have a self-serving interest?

We are in receipt of correspondence from Keller Williams about this practice, and will be writing about it in our next article.

We’d like to hear from you. Please share any insight and continue to keep us alerted to industry practices.

More on the Mortgage Mess

Another opinion supporting real enforcement of banks’ foreclosure practices.

From the New York Times
November 1, 2010

Ben Bernanke, chairman of the Federal Reserve, said recently that federal regulators are “looking intensively” at banks’ foreclosure practices. An investigation is long overdue, though it shouldn’t take a lot of digging.

Consumer advocates, the press, investors and homeowners have already compiled a compelling list of transgressions: conflicts of interest that have banks pushing foreclosures, without a good-faith effort to modify troubled loans. Dubious fees that inflate mortgage balances. The hundreds of thousands of flawed foreclosure affidavits that violated homeowners’ legal protections. The misplaced documents. And it goes on.

For years these problems have been the focus of research reports, Congressional testimony and court cases. Regulators, however, looked the other way, which is how we got into the mortgage mess.

What makes the latest scandals so outrageous is that even after the financial meltdown and taxpayer bailout— and all those vows about accountability — the regulators are still behind the curve. The fundamental problem is that the banks’ drive to profit from the foreclosure process is all too often at odds with the interests of mortgage investors, homeowners and the economy’s health.

That is a big reason that the Obama administration’s antiforeclosure effort, with its voluntary participation by banks, has fallen so short.

Here is the background. The big banks — Bank of America, JPMorgan Chase, Citibank, Wells Fargo — service most of the nation’s home mortgages for investors who own the loans. They are paid a fee by the investors and also make money from fees on delinquent loans.

Servicers are obligated to manage the loans in the best interest of the investors. That means modifying a troubled loan, if reduced payments would bring in more money over time than a foreclosure. Or foreclosing if a borrower cannot make the payments on a modified loan.

If only it worked that way in practice.

Take, for example, underwater borrowers — the millions of Americans who owe more on their loans than their homes are worth. For them, the best modification is often to reduce the loan’s principal balance, lowering the monthly payment and restoring some equity. That could be best for investors too, because even reduced payments are often better than a foreclosure sale. A bank’s servicing fee is based on the principal balances of the loan — a strong incentive not to reduce a troubled borrower’s balance.

Another conflict occurs when the bank that services a primary mortgage is also the owner of a second lien on the same property. Resolving a troubled first mortgage generally requires a write-down of the second lien, a step that banks have been loath to take.

Banks also profit from late fees and other default-related charges assessed on borrowers. And there is an additional incentive to pile on charges, since the bigger the loan balance, the higher the fee to manage the loan. A group of prominent investors — including Freddie Mac, the Federal Reserve Bank of New York and Pimco, the world’s largest bond fund — recently accused Bank of America of fee-padding. The bank denies wrongdoing.

High default charges harm homeowners because they make it increasingly difficult to catch up on late payments and avoid foreclosure. They also disadvantage investors, because the servicer collects the charges from the foreclosure sale before the investors see any money. Everyone loses, except the bank.

Mr. Bernanke said that the regulators’ findings would be released in November. What is also needed is real enforcement — and new rules and possibly new laws — to make banks change their ways.