Foreclosure alarms rang months ago
Sunday, October 10, 2010
Consumer advocates and lawyers warned federal officials in recent years that the U.S. foreclosure system was designed to seize people's homes as fast as possible, often without regard to the rights of homeowners.
In recent days, amid reports that major lenders have used improper procedures and fraudulent paperwork to seize properties, some Obama administration officials have acknowledged they had been aware of flaws in how the mortgage industry pursues foreclosures.
But the officials said they could take only limited action to address the danger. In part, this was because they wanted lenders' help carrying out federal programs to modify mortgages that had fallen into default or were poised to do so.
New concerns about improper practices - such as those involving faked documents or "robo-signers" who signed tens of thousands of documents without reviewing them - have prompted the mortgage servicing arms of the country's largest banks to freeze millions of foreclosures. As momentum builds for a national moratorium, the administration has begun assessing the potential impact, examining the threat it could pose for the ailing housing market and the wider financial system.
There is no evidence so far that the specific abuses made public in the past few weeks were known to government officials. Nor is it clear whether they were aware that the process of the selling and reselling of mortgages among financial firms - which became extremely common and highly profitable during the housing boom - was raising legal questions about who actually owned the loans and had the right to foreclose if they want bad.
But government officials were told repeatedly that the mortgage servicing industry was deeply troubled, according to administration officials, consumer advocates, housing lawyers and congressional aides.
"Have we talked to them about servicer incompetence? Repeatedly. Have we talked to them how the servicer system is broken? Yes," said Ira Rheingold, executive director of the National Association of Consumer Advocates. "Have we talked to them about the costly stream of errors made by servicers? Yes."
In meetings and letters to the government, consumer advocates and lawyers accused the servicer industry of violating its agreements with the government to help slow foreclosures, saying it instead was structured to accelerate the foreclosure process.
"The message was that servicing needs to be regulated, and that the existing regulators of the servicers need to be on the job and needed to look at what has happened in the servicing industry," said Julia Gordon, a lawyer with the Center for Responsible Lending. "If it had been mandatory for servicers to engage in some kind of evaluation of the loan prior to foreclosure, you'd have seen a much different outcome for many borrowers."
Loan modification plans
Many of the warnings came in the context of the administration's signature housing policy program, the Home Affordable Modification Program. The initiative seeks to rework the loans of struggling borrowers to make them more affordable.
As discussions about the program began in late 2008 and early 2009, consumer advocates and housing lawyers say they told senior officials that they had to escalate pressure on mortgage servicers to revamp their procedures if they hoped to stem the foreclosure crisis. In particular, the advocates and lawyers cautioned that servicers had incentives to foreclose and would only pay lip service to modifying mortgages.
In July of last year, a coalition of housing advocates and consumer lawyers wrote to the administration.