Wednesday, November 17, 2010

Pressure Builds Over Loan Modifying

State attorneys general are intensifying pressure on lenders to fix the system they use to modify mortgages as part of a potential settlement in their multistate investigation of the foreclosure problems.

View Full Image

FORCLOSE_1

Bloomberg News

Iowa Attorney General Tom Miller and Barbara Desoer of Bank of America Corp. at Tuesday hearing.

FORCLOSE_1

FORCLOSE_1

The attorneys general are scrutinizing whether home-loan servicers violated state laws against deceptive practices by using "robo signers" to submit affidavits and foreclosure documents without confirming the paperwork's accuracy. But the states' investigation, which could lead to civil charges, already has expanded to include other issues, such as the fees charged by servicers.

State attorneys general have taken the lead in investigating banks over paperwork problems. Many feared banks and investors might have to shoulder huge costs if the problems led them to reduce the principal of tens of thousands of mortgages. While principal reduction isn't being ruled out, some attorneys general appear willing to settle for a more transparent loan-modification system.

With the midterm elections over, the pace of discussions about a possible resolution has picked up. Several people familiar with the probe said the attorneys general aim to wrap up their investigation by as soon as December, though the effort could take longer. Bank of America Corp. has already met with Iowa Attorney General Tom Miller, who is spearheading the 50-state probe, about foreclosure issues.

The major mortgage servicers as a group are expected to meet in late November with Mr. Miller and the dozen or so other attorneys general leading the probe, people familiar with the matter said.

A Bank of America spokesman said, "We have had constructive meetings with Attorney General Miller, and a number of positive steps have been discussed, but there has not been an agreement."

The states want banks to modify mortgages in instances where doing so would result in a cash flow from the borrower that is greater than the likely proceeds of a foreclosure sale, Mr. Miller said.

Although the states are moving relatively fast in their coordinated probe, Mr. Miller's own prediction was that reaching a resolution with all of the major lenders could take months.

The stepped up discussions come amid hearings by lawmakers in Washington, D.C., probing the causes of the foreclosure problems, and how to solve them.

In a Tuesday hearing of the Senate Committee on Banking, Housing and Urban Affairs, executives for two major U.S. mortgage servicers, J.P. Morgan Chase & Co. and Bank of America, expressed contrition for errors their companies have made in processing foreclosures and pledged they are working hard to fix those problems.

View Full Image

FORECLOSE_2

Associated Press

Chase Home Lending CEO David Lowman's testimony is disrupted by protestors

FORECLOSE_2

FORECLOSE_2

Senators of both parties expressed frustration with lenders, regulators and others involved in the foreclosure process and called for more hearings and investigations. Sen. Richard Shelby (R., Ala.), the top Republican on the panel, called for the committee to expand its oversight to regulators, who may have missed widespread problems at institutions they oversee, as well as mortgage finance giants Fannie Mae and Freddie Mac.

Sen. Michael Bennet (D., Colo.) noting the hearing was nearing its end, said he was "still completely unclear" why it is so hard for servicers to conduct modifications. Several witnesses, including Iowa's Mr. Miller, told lawmakers that part of the issue lies with servicers who see it as more profitable to foreclose on homeowners than undertake modifications.

Mr. Miller sounded the most confident that he had a potential solution to the mess. But Mr. Miller provided no details about the specifics of the discussions so far between the states and lenders.

His testimony signaled that the attorneys general likely won't relent until they manage to get a standardized loan-modification program from servicers.

"The multi-state investigation is about more than robo-signing," Mr. Miller said. "The biggest issue is fixing the loan-modification system."

Mr. Miller said he wants to "change the paradigm within the current system so it functions." Among other things, he said he wants to fix the dual-track system of foreclosures and modifications, and to perhaps have a monitor, or possible penalties for lenders that don't comply.

"We all hear stories of borrowers who thought they were approved for a loan modification receiving a notice of foreclosure sale," he said, noting that the system is currently overwhelmed.

Bank of America is embracing reform of the dual-track system of foreclosures and modifications.

But when asked if he would be willing to ditch the two-track system, David Lowman, chief executive for J.P. Morgan's home-mortgage division, said, "I think we'd have to be careful with that."

One person familiar with the matter said there is a growing awareness on the part of the states that any settlement that involves writing down loan balances would have to include conversations with Fannie Mae and Freddie Mac, which own or guarantee half of the nation's $10.6 trillion in mortgages.

Fannie and Freddie and other investors who own mortgage-backed securities rarely approve loan modifications that forgive principal, instead preferring to reduce interest rates or offer some form of forbearance. The firms, which were taken over by the government two years ago, are under orders to conserve assets.

Any efforts to force principal reductions on the firms would likely require the approval of their regulator, the Federal Housing Finance Agency, and the U.S. Treasury, which has injected $151 billion into the firms to keep them afloat.

The multistate group hasn't yet reached out to Fannie and Freddie but intends to do so, Mr. Miller said.

—Dan Fitzpatrick
and Nick Timiraos
contributed to this article.

Write to Vanessa O'Connell at vanessa.o'connell@wsj.com

Online.wsj.com

No comments:

Post a Comment