In a strongly worded speech at the Summit On Residential Mortgage Servicing For the 21st Century, FDIC Chief Sheila Bair condemned the mortgage servicing industry for their role in extending the mortgage crisis.
Ms. Bair stated that the housing industry has been stabilized by emergency measures but that the effects of the housing bust and financial crisis remain very much in evidence. FDIC insured institutions have collectively lost more than half a trillion dollars with more losses on the way. Mortgage markets remain in a “cycle of credit distress, securitization markets remain frozen, and now chaos in mortgage servicing and foreclosure is introducing a dangerous new uncertainty into this fragile market”.
Ms. Bair charged the mortgage servicing industry with expanding the mortgage crisis by not taking prompt action from the earliest days to modify mortgages.
Prompt action to modify unaffordable subprime loans in 2007 could have helped to limit the crisis in its early stages. Instead, we saw one and a half million foreclosures that year, contributing to a decline in average home prices that eventually totaled about one-third. Mortgage servicers have remained behind the curve as the problem has evolved to include underwater mortgages and, now, foreclosure practices that sow confusion and fear on the part of homeowners and fail to fully conform to state and local legal requirements.
According to Ms. Bair, the basic business model and compensation structure of the mortgage servicing industry are flawed and in urgent need of reform. The industry was never properly structured to handle large volumes of problem loans. Cost cutting and industry consolidation left the industry without the expertise needed to engage in effective loss-mitigation programs.
Mortgage servicers, according to Ms. Bair, still refuse to commit the resources necessary to properly pursue loss mitigation in an efficient manner. “The bottom line is that we need more modifications and fewer foreclosures. When foreclosure is unavoidable, we need it to be done with all fairness to the borrower and in accordance with the law”.
Ms. Bair sees “more modifications and fewer foreclosures” as the solution to stabilizing the housing market. In order to accomplish this, Ms. Bair recommends a single point of contact with troubled borrowers, a greater commitment of resources by servicers, simplification of the loan modification process and broad industry agreement on resolving the competing interests of first and second lien holders.
Ms. Bair warned that we are at a critical phase in the mortgage crisis. “If we fail to act decisively now to deal with the foreclosure crisis, we risk triggering a double-dip in U.S. housing markets that could roll back the progress that has been made to date. The problem is serious, and the need for action is urgent. We cannot afford to wait for Congress to take action on this issue”.
Issues not addressed by Ms. Bair during her address include the following:
1. The biggest banks in the country service trillions of dollars in mortgages, such as America’s Servicing Company (ASC), a division of Wells Fargo Home Mortgage. If loan modification efforts are dramatically expanded, would the cost be covered under existing government programs or would the banks be facing billions in losses?
2. Loan modifications done under existing government programs such as HAMP have generally had a dismal success rate with the majority of borrowers re-defaulting (see Government’s Effort To Stop Soaring Mortgage Defaults a Failure). Many borrowers simply do not have the financial resources to manage a mortgage payment regardless of how much it is lowered, or simply chose to walk away from the burden of home ownership. Is it equitable to lower mortgage balances only for those in default? Many struggling homeowners continue to make their monthly payments at great financial sacrifice but are not eligible for loan modifications.
3. The role of regulators in the mortgage crisis bears scrutiny. Regulators, including thousands of auditors from the FDIC, had no issue with the reckless lending policies of banks until it was too late. Regulators were oblivious to the risks of subprime, no doc and low doc mortgage lending. The entire regulatory apparatus consistently turned a blind eye to repeated warnings of lending excesses and abuses until the financial crisis was upon them. (See – As Subprime Lending Crisis Unfolded, Watchdog Fed Didn’t Bother Barking.)
The financial crisis has exposed how multiple regulators, responsible for ensuring safe and sound lending practices, all failed in their primary mission. To date, there has been no fundamental restructuring of the financial regulatory agencies. Those who believe that future crises can be averted by the financial regulatory system are not thinking clearly. (See Regulators Were Blind to Risk In Biggest US Banking Failure).