In foreclosure settlement, U.S. may force banks to meet loan-modification quotas
Thursday, March 3, 2011
As part of a settlement with banks that engaged in shoddy foreclosure practices, the Obama administration is weighing whether to impose quotas that would force the firms to modify a specific number of mortgages for distressed borrowers, sources familiar with the discussion said.
The move would be an escalation in the administration's efforts to get banks to take more steps to reduce foreclosures.
Federal and state officials have been moving toward a settlement that would penalize the mortgage servicers for abusive foreclosure practices and use the fines to help provide relief for underwater borrowers, whose homes are worth less than what is owed on the mortgage. This help could take the form of reducing the outstanding principal that the borrowers owe on their loans.
Government officials are wrestling with how to structure quotas, sources said. Under one option, the government would set a number of loans that the mortgage servicers as a group would have to modify. A second option would entail quotas for individual firms.
Another approach, rather than designating a number of loans to be reworked, would instead require the mortgage servicers to spend a certain amount of money modifying troubled loans.
If the settlement ultimately imposes new obligations on mortgage servicers, it would be a shift in philosophy for the Obama administration, which adopted a voluntary approach when it launched its key foreclosure-prevention effort in March 2009.
That effort, called the Home Affordable Modification Program, has come under attack from various quarters because it has fallen far short of its goals. Instead of helping 3 million to 4 million borrowers, as initially projected, it has permanently modified the loans of about 600,000 borrowers so far. Consumer advocates have long railed against the voluntary nature of the program, which allows banks to decide whether to participate. House Republican lawmakers are trying to dismantle the initiative, saying it is not worth the money set aside for it.
But forcing the banks to reduce the principal on distressed loans could pose its own problems. Some people familiar with the discussions are concerned that if banks are required to meet a loan quota, they would put the top priority on modifying mortgages for borrowers who need relatively little help. By doing so, the banks could limit the losses they face in reducing the principal on loans.
"It creates some potential strange choices for the servicers," one source said.
In the coming weeks, state and federal officials are scheduled to sit down with bank executives to hammer out the details of the proposed deal. So far, its framework and dollar amounts have been shifting, several sources said, though the settlement is likely to cost the financial industry billions. Banks also have warned in recent filings that they stand to incur fines.
Multiple state attorneys general and nearly a dozen federal agencies are involved in the discussions. They could eventually announce a comprehensive settlement with a range of companies or separate deals with individual firms.
The extensive foreclosure problems - from flawed or fraudulent paperwork to questions about improper or incomplete loan transfers - surfaced in September, when large firms such as Bank of America and Ally Financial abruptly halted foreclosures.