washingtonpost.com
Foreclosure alarms rang months ago

By Zachary A. Goldfarb
Washington Post Staff Writer
Sunday, October 10, 2010; A1

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.

"The Federal Government should use sticks that it has available to put pressure on servicers to fully comply" with the legal commitments they had made to federal officials about helping borrowers avoid foreclosure, the coalition said.

Several reports by government watchdogs, meanwhile, raised concerns that mortgage servicers were not up to the challenge presented by the staggering number of troubled borrowers, including many looking to modify their loans.

The reports, from the Government Accountability Office and the Congressional Oversight Panel for the government bailout of the financial industry, warned that servicers employed staffers who gave borrowers inaccurate information, didn't hire enough staffers, failed to track complaints and lost important paperwork.

"Servicers are generally understaffed for handling a large volume of consumer loan workouts. Staffing is not simply a matter of manpower, but also of sufficiently trained personnel and adequate technological support," said a March 2009 oversight panel report.

Housing advocates and government reports gave several reasons why servicers try to foreclose so quickly.

In general, servicers make more money when they foreclose on a loan than when they find a better arrangement for the borrower. That's because the payments to the servicer decline when a loan is modified. But if instead the borrower is in default, the servicer adds fees on the account and can collect when the house is sold, even at foreclosure.

In addition, servicers are under pressure to continue to transfer the money paid by the borrower to the investor in the loan. When a borrower isn't paying the loan, the servicer has to cover the difference.

Moreover, servicers can expect to charge more if they receive higher ratings from credit rating agencies. And the faster a servicer forecloses when loans are in default, the higher the rating they stand to receive.

So new businesses have emerged to accelerate the foreclosure process. Companies have launched electronic platforms that allow servicers to rapidly foreclose, quickly hiring lawyers to file necessary court documents in a process that is often divorced from the circumstances facing an individual borrower.

Problems outlined

In an interview this week, a senior administration official confirmed that the White House and Treasury Department had received warnings that the mortgage industry employed inexperienced staffers to oversee foreclosures, had problems handling documents and communicating with borrowers, and often failed to comply with regulations.

But the government had struggled to address shortcomings in the industry, the official said, because the administration was also seeking the servicers' help with modifying the home loans of millions of borrowers to help them avoid foreclosure.

In addition, a Treasury official said the federal government's power to tackle problems in the servicer industry is limited because foreclosure law is largely the domain of states.

Both officials, who were not authorized to speak on the record but were providing the administration's views on the matter, said problems in the foreclosure process were largely the result of mortgage servicers being overwhelmed.

The only immediate response to warnings was a letter to servicers urging them to behave better. But in June, the administration enacted a policy requiring that servicers try to modify a loan before beginning the foreclosure process.

"Though we cannot and should not prevent every foreclosure, the administration continues to work hard to stop preventable foreclosures and promote policies to stabilize the housing market and keep more Americans in their homes where possible," said Amy Brundage, a White House spokeswoman.

Brundage added, "We will continue to focus on implementing our existing housing programs and on working closely with appropriate agencies to ensure programs are working as effectively as possible and that all participants are complying fully with any and all applicable rules and laws."

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