Foreclosure Free-For-All

It's almost four years since the economy cratered, yet 11 million homes—accounting for 23 percent of all outstanding mortgages— remain underwater. The Obama administration's efforts to shore up the housing market by offering incentives for refinancing, rather than the government directly purchasing loans, has been an utter failure; countless homeowners have been left desperately negotiating with their lenders to modify the terms of their loan and more often than not, being tossed onto the street by mortgage servicers. Servicers are the companies that process mortgage payments; they're also the point of contact should something go amiss, resolving a defaulted mortgage by either restructuring the loan or beginning foreclosure proceedings. During normal times, servicers could better handle the requests of an occasional delinquent borrower. When the avalanche fell in 2009 and a massive pool of customers could no longer make the monthly payments, the incentives shifted, often pushing servicers against modifications. Instead it can be easiest for them to begin foreclosure proceedings.

Earlier this month, the Consumer Financial Protection Bureau (CFPB)—a new arm of the federal regulatory apparatus created under Dodd-Frank—issued a string of proposed rules that would simplify borrowers' interactions with servicers. The newly drafted stipulations—open to comment until October, after which they will be finalized—would institute clearer billing statements (including advanced notifications of interest rate increases), force servicers to promptly apply payments on the day they are received (instead of applying payments late and racking up fees), and force servicers to re-evaluate delinquent borrowers’ loans. Servicers must at least consider modification possibilities before rushing straight to foreclosure.

Consumer advocates see a handful of bright spots in these proposed rules. "What's important about these rules is that they will establish for the first time a set of uniform standards on how lenders should service loans, that will apply not just to banks but also nonbank financial services companies, some of whom are among the biggest players in mortgage servicing," says Barry Zigas, director of housing policy at Consumer Federation of America. "It's very, very important to get this baseline established and much of what they have proposed have been very consumer friendly provisions."

But it's not all favorable. While many consumer advocates might not object to the rules that have been proposed, many seem them as only a half-step.

Given the close relationship between the CFPB and consumer-advocacy groups, it must have been a bit surprising when the latter took to the press to criticize this latest set of rules. The Hill reported that many consumer groups were less than satisfied by the proposal. “We need more cushion,” said Michael Calhoun of the Center for Responsible Lending of the CFPB's proposed rules. Calhoun and others quoted by The Hill are normally aggressive defenders of the consumer bureau. After all, Calhoun himself is on the steering committee of Americans For Financial Reform, the group that guided Congress in writing the language for the CFPB's inclusion in Dodd-Frank. What caused the break in this instance?

Foremost among the complaints: The CFPB's rule, as currently written, will not ban dual-tracking, which allows banks to seek a solution to keep the owner in their home while simultaneously beginning foreclosure proceedings. "The way the draft rule is written it would prevent a foreclosure sale but not any other foreclosure action," Zigas says. "This is an area of tremendous friction and dispute between consumer advocates who have been working with consumers who have been tremendously disadvantaged by servicers' incompetence and sloppy work and the lack of clear standards about the timing of modifications when a borrower is delinquent versus foreclosures."

Margot Saunders, an attorney at the National Consumer Law Center, called the regulation a "missed opportunity" and said the CFPB didn't use the full extent of its powers to keep the servicers in check. She says the new rules offer an implicit blessing for mortgage servicers to pursue foreclosure alongside modification, which had been banned in a settlement the five largest servicers reached with state attorney general's earlier this year. "There are a few things that are really not very good, that are a setback and are a change from current law that we view as being worse than current law," she says. Saunders also objected to the vagueness of the rule on what strategies the servicers should pursue to keep owners in their home. "There's no standards at all," she says. "Nothing."

At first glance, one can easily understand why servicers would support dual-tracking. Foreclosure proceedings can be a long and arduous process in some states, so delaying that initiation can result in a long backlog for lenders. They argue that they can keep working toward a modification, but should that fail, they would like to be prepared for a foreclosure sale as soon as possible; otherwise, that home will continue to be a drain on their balance sheet. The CFPB seems to have accepted that premise, but the consumer advocates aren't buying it. "The view within the consumer community is that if it costs the industry a bunch of money to protect those consumers that's too damn bad," Zigas says.

In an ideal world, the two processes could track simultaneously. The evidence from the past two years shows otherwise. Consumers typically work with a more limited set of information than the servicer. It's a discombobulating experience to receive a legal notice that your bank intends to foreclose while you believed they were renegotiating the deal. For many, it's a sign that they should just give up and prepare to lose their home. "There's evidence from advocates who work with consumers that consumers basically say, 'the jig is up,' and stop pursuing the modification," Zigas says, "and end up losing their home when they didn't have to."

Consumer advocates have been vocal about their objections, but it's hard to know if much will come of it. Saunders expressed the same sentiments during meetings with the CFPB while the regulations were under consideration, to no avail. She doesn't necessarily think the CFPB disagrees with consumer advocates’ assessment on dual-tracking, but is under the impression that the CFPB is hesitant about how far their mandate extends. Consumer advocates are taking advantage of the comment period, but in terms of sheer numbers, they're sure to be outmatched by an onslaught of comments from the industry arguing that the rules are too stringent and should be pared back.

Comments

The Cornell e-Rulemaking Initiative (CeRI) has partnered with the Consumer Financial Protection Bureau (CFPB) to facilitate public participation on the CFPB’s newly-proposed residential mortgage rules. CeRI’s participation website provides a forum for understanding exactly what CFPB is proposing and makes it easier for a broad audience of individual consumers and members of the industry to provide input into CFPB’s proposed mortgage rules.

If you have any suggestions or comments related to these rules, join the discussion at http://regulationroom.org.

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