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Regulators Want Big Mortgage Changes

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BankOwned_Nick_Bastian_FlickrIf you have a mortgage you worry you may not be able to repay, bank regulators in all 50 states are pushing a solution for you. In a 27-page letter sent to some of the nation’s largest banks, state and federal regulators demanded sweeping changes to how the mortgage loan servicing industry operates.

The proposal could make it easier for some homeowners to renegotiate the amount they owe. It also would force the industry to become more transparent, and give regulators more power to detect abuses.

After five months of investigation by bank regulators in all 50 states, plus three federal agencies, the proposal is widely seen as the opening salvo in what will likely be a long negotiation between regulators and banks over how the industry will change, and what penalties it may face as a result of shoddy loan practices that helped cause the economic crisis of 2007 and 2008.

Regulators are not releasing the proposal itself.

“The [New York] Times and the [Wall Street] Journal and pretty much everyone else has called and asked for it,” Geoff Greenspan, spokesman for Iowa Attorney General Tom Miller, told Credit.com. “I’m under a pretty clear directive that I cannot release it.”

Nevertheless, members of the banking industry have shared copies of the proposal with journalists. According to reports by American Banker, The New York Times and the Wall Street Journal, some of the letter’s more important proposals include:

– Loan servicers would be pressured to modify more loans. As we have covered in the past, the industry has been criticized by consumer advocates, and sued by investors, for refusing to modify loans to keep homeowners in their houses. (Banks’ refusal to modify loans has been detrimental to investors, many of whom would rather receive some income on their investments than none at all.)

[Article: HAMP Fails to Save Homeowners from Foreclosure]

– Servicers would have to share with federal regulators their formulas for determining “net present value.” This is the elusive “secret sauce” that servicers use to determine whether it makes financial sense for them to modify loans. Servicers have claimed this is proprietary information, while consumer advocates have alleged it’s just a hocus-pocus excuse for not modifying loans.

– Improved technology and record-keeping practices. The “robo-signer” scandal and other court cases have shown that, in many cases, servicers lack the paperwork required to prove they actually own the loans they claim to own, and therefore lack the standing to modify or foreclose. The letter proposes technology upgrades and process improvements to fix that.

– Improved disclosure and appeal procedures, so that homeowners facing foreclosure are provided all the relevant paperwork, and given an opportunity for an administrative appeal, before the case goes to court.

– Changing the Obama administration’s Home Affordable Modification Program to make it easier to convert changes from trial modifications to permanent ones. As we reported, servicers and the program itself have been criticized for offering 740,240 trial modifications by the end of January, but making only 539,493 of them permanent, well short of the program’s goal to make over 3 million mortgages more affordable.

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Image: Nick Bastian

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