Federal banking regulators have not officially imposed their new rules for the top mortgage servicers, but criticism is already being heard. A wide coalition of consumer and housing groups is denouncing the legal agreements, which are likely to be published within a few days.
The new rules require the servicers to improve their processing systems, to stop foreclosing while negotiating to modify the loan and to give borrowers a single direct means of contact.
Servicers will be required to bring in a consultant to investigate complaints by homeowners who lost money because of foreclosure processing errors in 2009 and 2010. In some cases the homeowners could be compensated.
The problem, said Alys Cohen of the National Consumer Law Center, is the agreements “do not in any way require the servicers to stop avoidable foreclosures, and that is what we need.”
At the heart of the complaints by Ms. Cohen and others is whether the servicers, which are arms of the biggest banks, may be compelled to give households fighting foreclosure a better shot at renegotiating their loans and staying in their properties.
The servicers argue that whatever mistakes they made in handling foreclosures — errors that will be amply on view in a regulatory report accompanying the agreements — they never foreclosed on anyone not in severe default. They are strongly resisting proposals to cut the debt of homeowners in default to help them stay put.
The issue has wide repercussions for an ailing housing market. About four million people are either in foreclosure or near it. Some housing analysts argue that adding those houses to the abundant inventory already on the market will further reduce values for all owners and prolong the downturn.
To some critics, the pending fixes are all but useless. Adam Levitin, an associate professor of law at Georgetown University who has closely monitored efforts to more tightly regulate foreclosure practices, calls it “a sham settlement” that is worse than none at all.
“It gives the banks political cover, undermines attempts at a real and just resolution, and could be the basis for the regulators to claim that state actions are pre-empted,” Mr. Levitin said. Allowing federal regulators to pre-empt or elbow aside potentially stronger state actions during the housing boom has been widely seen as contributing to the collapse.
Representatives of the regulators, including the Office of the Comptroller of the Currency and the Federal Reserve, declined to comment.
The legal agreements, which take the form of consent orders, will be signed by the 14 largest servicers, including Bank of America, Wells Fargo and JPMorgan Chase. They are being published on the heels of new evidence that foreclosures are still being conducted improperly.
The Washington attorney general, Rob McKenna, sent a letter last week to a group of trustees. The trustees work with the servicers in states like Washington where the courts do not oversee foreclosures.
Washington law requires trustees to have a local office so borrowers in default can submit documentation or last-minute payments. In a continuing foreclosure investigation, Mr. McKenna found that many trustees were effectively invisible. In his letter, Mr. McKenna called their absence “widespread, illegal and contrary to an effective and just foreclosure process.”
Among the groups protesting the consent orders are the Center for Responsible Lending, the Consumer Federation of America and dozens of local and regional housing groups. In a letter to the regulators, the groups are asking for the withdrawal of the agreements in favor of “specific and protective measures regarding loss mitigation, account management and documentation.”
Efforts to get the servicers to change their practices have a long and not particularly successful track record. During the boom the servicers needed to do little more than deposit the checks of borrowers. That changed when defaults began to swell and borrowers called to try to work out new loan arrangements.
Servicers were ill-equipped to deal with something so complicated. Nor did they have much incentive, because in most cases the loans had long ago been sold to investors. Borrowers complained that servicers were sloppy, that they lost paperwork and then lost it again, that they reshuffled borrowers among endless personnel to no effect and that they foreclosed on the property even while supposedly negotiating to save it.
These assertions were brought into sharp focus last fall after revelations by servicers that in their haste and sloppiness they had broken local laws and regulations. They imposed moratoriums while saying they were clearing up the problem, but by then a range of federal and state investigations were under way.
A coalition of all 50 state attorneys general joined by the Obama administration set out to change the process of foreclosure so more borrowers could remain in their homes. The goal of the regulators was more limited.
The efforts by the attorneys general to impose a broader settlement with a multibillion-dollar penalty and some provision to restructure mortgages by cutting debt are continuing, however slowly.
Attorney General Tom Miller of Iowa, who is leading the effort, said a settlement with regulators “neither pre-empts nor impacts our efforts.” The attorneys general are striving to pursue their negotiations out of the public eye so every incremental step is not open to commentary and criticism.
