Federal regulators and lawmakers pressed mortgage guarantors Fannie Mae and Freddie Mac to suspend foreclosure proceedings while distressed borrowers seek new mortgages.
Acting Comptroller of the Currency John Walsh testified at a Senate Banking Committee hearing today that his agency is directing national servicers to suspend foreclosures for borrowers who are actively seeking to qualify for loan modifications.
Dual-track processing is “unnecessarily confusing for distressed homeowners,” Walsh told the committee, which held its second hearing since allegations of shoddy or fraudulent foreclosure practices arose in September.
Government-controlled Fannie and Freddie, taking congressional questions on the dispute for the first time, insisted that borrowers and lenders both benefit from the dual track process of pursuing foreclosure and loan modification at the same time.
Freddie Mac Executive Vice President Donald Bisenius said that the dual-track process minimizes losses, protects communities from blight and ultimately helps borrowers.
“It is not in the borrower’s interest for the process to drag on indefinitely,” Bisenius said. “The longer the borrower’s delinquency goes uncured, the farther behind he or she gets, and the harder it becomes to bring the loan current.”
A foreclosure can cost $30 to $40 a day, or as much as $15,000 a year, Bisenius said.
Congress is examining the foreclosure process after Ally Financial Inc.’s GMAC Mortgage unit, JPMorgan Chase & Co. and Bank of America Corp. temporarily halted home seizures in September amid claims that legal documents were mishandled.
State attorneys general and federal regulators are investigating mortgage companies for their reliance on “robo-signers,” employees who signed off on thousands of foreclosure affidavits without reviewing the underlying facts.
At the hearing, lawmakers questioned bank regulators about what actions they have taken to ensure that home seizures are fair and legal. They also criticized dual-track processing as confusing and sometimes unfair.
“Countless constituents have told us stories of being stonewalled by banks for very long periods of time, of not being told the reasons for their rejection of their modification request, of significant delays caused by banks losing their paperwork, and trial modifications canceled with no rationale,” said Senator Robert Menendez, a New Jersey Democrat. “That just can’t continue to happen.”
Federal Reserve Board Governor Daniel K. Tarullo called the system “literally a race between foreclosure and modification” and called for national standards on loan servicers.
The Fed’s preliminary review of the problem suggests “significant weaknesses” in loan servicing and foreclosures, Tarullo said.
“The problems are sufficiently widespread that they suggest structural problems in the mortgage servicing industry,” he said. “It has now become evident that significant parts of the servicing industry also failed to handle foreclosures properly.”
The Fed also has told the largest banks to estimate their liability for failed mortgages as part of a capital review, Tarullo said. Investor demands that banks buy back improperly issued mortgages “could be quite significant,” he told the committee.
Attorneys general, consumer advocates and congressional lawmakers have said that problems in the housing system are complicated by the fact that delinquent homeowners seeking to renegotiate their loans through government- or bank-sponsored programs such as the Home Affordable Modification Program are often surprised and confused to discover that their foreclosures haven’t been suspended.
Freddie Mac, Fannie Mae and other purchasers of home loans, including the Association of Mortgage Investors, said the dual-track system balances the interests of everyone involved.
“While we believe that borrowers who already are under significant stress arising from their financial situations should not be subjected to needless confusion, we also believe that unnecessary delays in an already lengthy foreclosure process would be counterproductive,” Bisenius said.
His comments were echoed by Terry Edwards, executive vice president at Fannie Mae. The two mortgage companies are controlled by the U.S. government and have been surviving on taxpayer aid since 2008.
Further in Arrears
“The longer the process takes, and the further in arrears the borrower becomes, the less likely it is that the borrower will succeed with a modification and the greater potential there is for loss to Fannie Mae and the U.S. taxpayer,” Edwards said.
The average foreclosure takes 449 days, Bisenius said, which provides sufficient time to explore alternatives. The company and its servicers suspend foreclosures when a loan workout, short sale or other option becomes viable, he said.
Freddie Mac of McLean, Virginia, and its Washington-based rival Fannie Mae purchased or guaranteed 70 percent of new mortgages in the third quarter.
The U.S. Treasury Department took control of the two companies in 2008 after losses on subprime loans pushed them to the brink of collapse. Since then they have drawn more than $150 billion in aid to remain solvent.