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Foreclosure_woodleywonderworks_CCFlickrOpposition is growing to proposed new rules for loan servicers, creating more uncertainty about how most American mortgages will be handled, and who will be responsible for preventing illegal foreclosures. After an investigation by state banking regulators and all 50 attorneys general into alleged wrongdoings by the mortgage servicing industry, the coalition sent a 27-page letter to the largest servicing companies in February demanding a list of reforms.

But now four attorneys general appear to have backed out of the proposed deal. In a letter sent March 22 to Iowa AG Tim Miller, who led the investigation, the officials accused the coalition of overstepping its authority.

“The term sheet appears to reach well beyond the scope of our enforcement role, and, in some instances, far exceeds the scope of the misconduct which was the subject of our original investigations,” said the letter, which was signed by Attorneys General Alan Wilson of South Carolina, Kenneth Cuccinelli of Virginia, Pam Bondi of Florida and Greg Abbott of Texas.

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The four Republican AGs worry that if enacted, the proposal would give state regulators too much power to monitor servicers’ day-to-day business operations. They believe the term sheet’s proposal to require servicers to reduce the principal and change the terms of some loans could backfire.

In most mortgages, the loan is written by a lender, which quickly sells it in a bundle of other loans to investors. Servicers are responsible for managing all the paperwork, including paying the investors and monthly insurance bills.

But servicers have come under fire ever since last year’s robo-signer scandal demonstrated that servicers’ poor paperwork practices often means they cannot prove they legally own the loans they service. That becomes a problem when they go to foreclose.

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Other studies, including this one by the Center for Responsible Lending, have found that servicers actually profit from foreclosures, at the expense of homebuyers and investors, by pushing people into foreclosure prematurely and holding them there indefinitely, racking up maintenance fees the entire time, as we reported here.

But the critics of the proposed deal say the remedy may be worse than the cure, threatening to endanger the housing market’s already shaky recovery.

Together, these changes could cripple the housing market’s already shaky recovery.

“These and other terms could have the unintended effect of unnecessarily prolonging the foreclosure process and therefore delaying the recovery of the housing market,” the AGs said in their letter.

Image: woodleywonderworks, via Flickr.com

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