Lawmakers See Systemic Threat from Foreclosure Problems

American Banker

by Stacy Kaper

WASHINGTON — At a hearing in which protestors attempted to shout down a witness from JPMorgan Chase & Co. as he testified on ongoing foreclosure problems, lawmakers were clearly worried that there were still more damaging revelations to come.

Senate Banking Committee Chairman Chris Dodd and other Democrats said that accusations of improper documentation practices by major servicers were proof the current foreclosure process was broken. But they also suggested the problems may be worse than have come to light.

"The focus on the robo-signing problem is too limited," Dodd said at the outset of the hearing. "Many believe that the robo-signing errors are simply the tip of a much larger iceberg, that they are emblematic of much deeper problems in the mortgage servicing business, problems that have resulted in homeowners losing their homes in unjustifiable foreclosures. In fact, servicing practices may be putting homeowners at risk."

Sen. Jon Tester, D-Mont., addressing Barbara Desoer, the president of Bank of America Home Loans, said he had examples of borrowers who were given bad advice by servicers or were unjustly facing foreclosure. Other senators backed him up, with Sen. Jeff Merkley pressing industry representatives on specific cases.

"No doubt in my mind this is not isolated," Tester said. Borrowers "never did anything wrong. I remain concerned about the scope of this problem. … It strikes me some of the biggest servicers have been glib about potential magnitude of the problem and the effect on their balance sheets. It's important we get this squared away."

Tester said the Financial Stability Oversight Council should look at the issue to ensure it is not a systemic threat. Dodd clearly agreed, rattling off a list of documentation problems, including failure to properly record transfer and ownership of notes and mortgages; failure to maintain proper custody of title; and failure to meet the requirements of the foreclosure process, such as the use of robo-signers.

"In my view, we created the Financial Stability Oversight Council to examine exactly this kind of issue," Dodd said. "FSOC needs to really drill down and find out the scope of the problem and determine the steps that may need to be taken to prevent systemic problems, if they conclude that there are systemic implications."

The hearing was the subject of a protest by the Neighborhood Assistance Corporation of America. While Dave Lowman, the chief executive of JPMorgan Chase Home Lending, testified that the bank was addressing flaws in the foreclosure process and making efforts to keep homeowners in their homes, one man shouted, "He's lying." Several others clapped and cheered the man on, causing Dodd to briefly lose control of the hearing and call a recess.

The protests underscored the raw feelings surrounding the issue. Although servicers briefly paused foreclosures last month, consumer groups continue to charge they are improperly foreclosing on many borrowers.

During the hearing, Thomas Miller, the Iowa attorney general, fanned those fears, arguing that state AGs had tried to work with servicers but have been disappointed by a series of half-measures.

"The current mortgage servicing system was not designed for any of the tasks it is being asked to perform, and is not equipped to perform such tasks at anywhere near the scope and scale of the foreclosure crisis," Miller said. "Asking servicers to solve the foreclosure crisis is akin to putting a square peg in a round hole."
Miller said that while he could not divulge details about a pending investigations, the AGs have found problems that go beyond robo-signing.

"Robo-signing is only a symptom of the much larger problems with the mortgage servicing system," he said, adding that investigators were reviewing the chain of title and the accuracy of the information used by servicers in the foreclosure process.

Many lawmakers agreed the system is broken.

"It's clear that the predatory practices of the mortgage servicing industry are remarkably similar to the predatory practices that led to the subprime crisis," Sen. Sherrod Brown said in a prepared opening statement. "The biggest mortgage servicers have poorly maintained, lost or forged documentation. They proffered indifference to the interests of homeowners and investors in exchange for their outsized profits."
Sen. Tim Johnson, who is expected to chair the Banking Committee next year, said that as long as there are doubts the foreclosure process is fair, reforming the housing finance system and restoring confidence in the mortgage market will be next to impossible.

"If we are going to restore stability to the housing market and our economy, we must also restore confidence in our documentation process," he said in his prepared opening statement.

Johnson was particularly concerned by reports of foreclosures occurring while the servicer is still negotiating a modification of the loan.

"Foreclosure should be the last resort, and it seems illogical to begin the foreclosure process while continuing to negotiate a modification," he said.

Miller agreed that a major flaw was that most servicers still initiate foreclosure and modifications at the same time and try to work out the best result along the way.

"Perhaps the biggest problem is that loss mitigation and foreclosure exist on parallel tracks. This leads to problems where the left hand does not know what the right hand is doing," he said.

Merkley and Dodd pressed Desoer and Lowman on why servicers proceeded on parallel tracks with modifications and foreclosures, asking them if they had considered changing that procedure.

Lowman said Chase did not want to abandon that practice, but Desoer said "that is what we are proposing to consider."

Republicans, too, voiced concerns about the process, but also blamed regulators for not detecting and correcting problems on their own.

Sen. Richard Shelby, the panel's top GOP member, said he wanted to understand how "thousands of robo-signers working on behalf of banks that service loans signed foreclosure-related court documents swearing that they had 'personal knowledge' of the fact of each foreclosure case," when it "now appears that few, if any, of these people had such knowledge."

The Alabama Republican also said that it would be crucial to examine the role of the regulators.

"Where were they in this process?" he asked. "What were they supposed to be doing and were they doing it? If not, why not?"

Desoer and Lowman acknowledged flaws in the system but said servicers were working to correct them. "JPMorgan Chase is committed to ensuring that all borrowers are treated fairly," said Lowman. "We regret the errors that we have discovered in our processes, and we have worked to correct these processes so that we get them right."