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Senate Considers Ways to Bring Trust Back to Mortgages

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The mortgage industry is torn apart by mistrust, and that mistrust has stalled the recovery of the housing market and the entire American economy, Senate Banking Committee Chairman Tim Johnson (D-SD) said before Congress this week.

“Borrowers aren’t certain that servicers are accurately evaluating them for modifications,” Johnson said. “Servicers aren’t confident that borrowers’ documents were submitted properly. And investors are concerned about how all these factors increase litigation risk for servicers.”

The result: A backlog of foreclosed homes that drags everyone’s home values down. “Homes that should move through the foreclosure process are held up because courts and servicers are concerned that paperwork has not been completed properly,” Johnson said.

The hearing this week was the committee’s eighth on housing finance reform. This one focused on three bills that would impose national standards on mortgage servicers—the companies that handle the day-to-day work of opening envelopes from homeowners, processing the checks, and making sure each mortgage’s taxes, insurance and investors are paid.

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One bill would require every servicer to give each consumer a single point of contact within the company. Currently, many consumers complain that when problems arise they are passed between may different people, so questions like whether the servicer received payment go unresolved.

Peter P. Swire, a banking law professor at Ohio State University and a former economic advisor to President Obama, told the committee that he ran into this problem when a servicing company owned by Washington Mutual tried to “force place” flood insurance on his Bethesda, Maryland, home, even though the house already had flood insurance.

Swire notified the now-bankrupt company “dozens of times” that he already had insurance. WaMu charged him anyway. And since Swire didn’t pay, he was assessed numerous late fees. Swire received assurances from several different WaMu employees that the problem was fixed, only to have it reappear the following month.

It took Swire—an expert in banking law—nearly two years to fix the problem, he told the banking committee.

“The amount of time it is taking for me to resolve this matter resembles a major piece of litigation,” Swire wrote in a letter to the company in 2007.

Another bill the committee is considering would end the practice of “dual-track processing,” in which servicers try to modify a mortgage to make it more affordable, while simultaneously suing to foreclose on the house. Combined, “the current process is both emotionally draining and ineffective in keeping people in their homes,” Sen. Robert Menendez (D-NJ) said in his opening remarks.

But a representative of the servicing industry warned that while pursuing a modification and a foreclosure simultaneously doesn’t make much sense to outsiders, doing so is actually required by state laws and by the servicers’ contracts with investors.

“It is important to keep in mind that the investors’ contracts continue to govern much of the latitude for servicers around foreclosures,” Faith Schwartz, executive director of the Hope Now Alliance, a servicing industry trade group, testified at the hearing.

The third bill under consideration would take steps to end the conflicts of interest between servicers and investors. One example: Currently, servicers sometimes earn more money by pushing a home into foreclosure rather than modifying the loan because under foreclosure laws they are guaranteed to reap their fees first, ahead of investors or anyone else. That can pressure them to foreclose, even though modifying the loan may reap more money for the investors.

“The obvious conflict of interest between the investors and servicers may well be a factor in the failure of servicers to modify mortgages voluntarily,” said Rep. Keith Ellison (D-MN), who introduced similar legislation in the House.

One bill currently being considered by the committee would reduce such conflicts. The Democrats who control the committee are pushing to merge all three bills into one and pass them together as a package. The measure will likely face little opposition in the Senate, but could run into difficulty in the Republican-controlled House.

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Image: André Natta, via Flickr.com

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