Foreclosure-Gate Settlement?

What appears to be part of a Foreclosure-gate settlement has been leaked.  There's a lot in this 27-page document, but here are some initial thoughts.

First, let's recall that this is not a complete document.  We don't know how it will interface with monetary penalties, modification quotas, etc.  It also isn't clear which government actors are on board with this and therefore how much ability the banks have to push back against these terms.  Are these just a preliminary offer or are these negotiated terms?

That said, whatever these terms are, they look astonishingly strong to me.  There are some places where they could be tightened, but they amount to a complete and desparately needed overhaul of the mortgage servicing industry.  The terms here lay out a lot of explicit duties and prohibitions for servicers.  Some of them already exist for some parts of the servicing industry or might be implied in contractual terms, but this document would make them all explicit.  

Perhaps most appropriately, it makes servicers bear the costs of their own failed business model, rather than externalizing that on homeowners.  Servicers entered into servicing contracts in which they took on default management duties, but were woefully unprepared for the level of defaults that came, in part because they cut fees and costs to increase profits and failed to reserve for bad times.  It's possible that servicers will shift the costs of this settlement back to MBS investors, but this is at least a start for making them internalize the costs.    

The biggest question mark about the settlement and what everything, and I repeat everything, depends on is enforcement.  This agreement is not self-executing, and it doesn't appear to give homeowners the right to invoke noncompliance as a foreclosure defense. If the CFPB and AGs are vigorous in demanding strict compliance, then this settlement is huge. If they are lax in enforcement, then it's largely a paper victory. This makes the issue of who will be CFPB director so enormously important, as it will really be the CFPB, not the AGs that take the lead with enforcement.  I would feel a little more comfortable if there were some sort of conusmer and investor ombudsmen or IGs supervising the whole process (sort of like special masters to ensure execution).  

The agreement covers a number of major areas.  These are the ones I believe are the most important:  

• Robosigning

Requires servicers to be really clear about who is attesting to what and on what basis and mandates various attestations not just in judicial foreclosures, but also nonjudicial foreclosures.  

• Crediting of payments and accounting

Requirements as to how payments are to be credited and for monthly servicing statements.   

• Chain of title documentation

Servicers have to submit a lot of documentation on this now.  That helps tee up litigation over chain-of-title if there are in fact problems.  

• Oversight of third-party vendors

Servicers are required to exercise much better oversight over third-party vendors (e.g., LPS).  

• Loss mitigation requirements

Servicers are required to do mods if NPV positive and to consider principal reductions in the mod waterfall.  There's also a prohibition on dual-track loss mitigation, a mandate for single point of contact and single electronic record, and a requirement of independent review of loss mitigation decisions.  

• Limits of fees and force-placed insurance and in-sourced markups

Lots of limits on fees, the ability to force-place insurance, and on markups on in-sourced services.  

So here are my concerns:  

1. It's vague on principal mods.  It's not really clear what will be required.  That might be because we don't know the interface between these terms and the $$$ and/or mod quotas.  
2. It's vague about 2d liens.  It's not clear what happens if a 2d lienholder refuses to do a proportional mod or extinguish its lien.  
3. Nothing prohibiting servicers from servicing first and owning second liens.  
4. It reserves the MERS issue for later.  
5. It will take a long time before servicers are able to be in full compliance with these terms.  That's a sign of just how troubled the industry is.  These terms are hardly outrageous.  They're pretty much best practices, and I wouldn't be surprised if RMBS deals start to incorporate many of these terms going forward.  But what happens until there is compliance?  Does this mean a de facto foreclosure moratorium until compliance?    
6. Enforcement, enforcement, enforcement.  CFPB doesn't have the examination and enforcement staff yet to ensure strict compliance, even if it wanted to.  Going forward, CFPB will have the staff.  I hope that it will have the inclination to ensure strict compliance, but that will depend heavily on the director and his/her priorities.  

I know that some will find these terms to go too far and some will think they don't go far enough. For those who think this goes too far, well, I just disagree. Everything in this document is there because it is addressing a specific, known problem in servicing, and the fact that this is having to be done via a settlement shows just how failed the servicing industry is. 

For those who think this doesn't go far enough, I think it's important to remember the context. It's hard to imagine this administration, and particularly this Treasury Department, backing much stronger terms. The administration's goal is not to destroy the banks. It's to make sure that they are functioning and behaving reasonably well. That means there's a limit to how firmly the administration will ever discipline the banks. Given where things were six months ago, it's pretty amazing to see terms like this.  It speaks pretty strongly to the seriousness of the banks' wrongdoing and to the new bank-regulatory balance of power, where CFPB is able to lend a strong voice alongside FDIC and the state AGs and move issues when the facts are on their side.  

It's also important to see these terms as part of a big picture on consumer finance reform. Consumer finance reform isn't a one-stage game.  It's hard to think of a time that the banks really lost before the Credit CARD Act, or at least when they lost while playing defense.  (It took them a while to push through BAPCPA,).  Now, in the space of a couple of a years, they lost on the CARD Act, they lost on Reg E overdraft provisions (as weak as it is), they lost on parts of Dodd-Frank (particularly the creation of the CFPB and the Durbin Interchange Amendment), and now this.  I think the net effect is that the bank lobby doesn't look nearly as invincible as it dead when it lobbed off then Majority Leader Tom Daschle's political head for opposing the BAPCPA and stuck on a pike in front of Congress as a reminder of the fate that befalls politicians who don't kowtow.  A strong settlement might help build some regulatory spine going forward.  

So, to recap, we don't know exactly what these terms are, but if they are included in a final settlement, it will be an extremely strong settlement.  

Comments

[Alessandro Machi]

When compared to the bailout money that was given to the banks, the amount of these penalties is basically a joke.

How about real reform. How about giving back 80% of a foreclosed on homeowner's DOWN PAYMENT. How about giving back ALL OF THE HOME EQUITY that some homeowners had built up in their home when it was foreclosed upon?

Are HOMEOWNER REFUNDS in the agreement? If not, than the "settlement" is not about main street, but it may be about Barack Obama setting up his 2012 re-election bid by letting the banksters keep all that they stole from foreclosure victims.

[Richard Davet]

The "GSE Business Model" is termed "fatallly flawed" by all credible scholars on the subject. Is this not putting a band aid on a corpse?

[chris lahaie]

It is encouraging to hear rumors of Washington standing up to the banks but it does seem very ceramonial if there isn't some teeth in the settlement that would mandate the large banks do more mods and more writing down of principal.

Especially the bail out banks and the ones that bought distressed assets at fire sale prices. Bank of America did not pay 100 cents on the dollar for country wide I am sure, not to mention the backing from H Paulson. They should not be able to collect 100 cents on the dollar on the mortgages that they got dirt cheap with full government backing. They are raping homeowners after they have already raped the entire country bringing down the housing market.

[Tony]

Foreclosure-gate is the new scandal?
No way!