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Multiple Fronts in Mortgage Industry War

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If you have a mortgage, or if you ever plan on buying a home, big changes are afoot that could change how much you pay, and in the repercussions for falling behind on your payments.

At the state level, a coalition of attorneys general and other state banking regulators has issued the mortgage servicing industry a list of demands that would streamline the process of handling foreclosures, eliminating opportunities for abuse and fraud. But two states already are pulling out of the deal, saying it imposes overly strict regulations on the banking industry.

[Related article: The CFPB and Congress’ Need for an Adult Conversation]

At the federal level, the Obama administration is considering an effort to pressure the industry into accepting parts of the states’ proposed demands in exchange for more limited legal investigations into the industry’s allegedly illegal practices.

The changes could come soon.

“It’s very important that we try to bring this to bed as quickly as we can,” Treasury Secretary Timothy Geithner said to the Senate Banking Committee recently.

The industry’s problems started with the “robo-signer” scandal. Employees of various large mortgage servicers admitted to signing foreclosure documents without actually reading them to make sure the foreclosures were legitimate, as required by law.

That rather limited scandal grew quickly, however, as judges in civil court cases discovered that robo-signers were actually just covering up deeper problems with mortgage paperwork. In many cases, when a bank gives a mortgage, it bundles that loan with many others and sells the package to investors. That process can involve seven different title transfers, and sometimes more. Each transfer of each loan requires an “assignment” document to track the change of ownership.

In many cases, that assignment system broke down, according to a report by the Florida attorney general. The result: Servicers foreclosing on mortgages they couldn’t even prove they owned.

[Related: Consumer Advocates Sue for Big Banks’ Robo-Signing Records]

Along the way, other problems were discovered. Servicers often make more money when houses fall into foreclosure, even if it hurts homeowners and investors, as reported here.

So the 50-state investigation by attorneys general and state bank regulators quickly grew to address these problems, too. On March 3, the coalition sent a 27-page letter to the largest servicing companies with a list of demands including better documentation, and requirements that servicers cannot keep a homeowner in foreclosure while simultaneously negotiating with her about changing her loan.

“We’re going to move as fast as we can” to implement the proposed new rules, said Tom Miller, the Iowa Attorney General who is leading the coalition, said in a press conference.

Multiple Fronts in Mortgage Industry War (cont.) »

Image: Jeff Turner, via Flickr.com

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