Ben Bernanke and the Federal Reserve Bank Explain that Lenders And Servicers Share Responsibility as Key Contributors to the Foreclosure Crises.
By: Adam Deutsch, Esq.
Last week the Federal Reserve Bank (“FED”) published its latest report looking into the foreclosure crises across America. In part, the paper seeks to offer recommended policy changes that could be implemented to reduce the far reaching effect of the crisis. The owners of mortgage loans and their loan servicing companies are cited as problems, and the FED offers several recommendations for how these entities can help resolve the foreclosure crises in the near future.
According to the FED, the heart of the problem is related to the loss in home values across the country. The report states, “in the aggregate, more than $7 trillion in home equity, more than half of the aggregate home equity that existed in early 2006 has been lost.” The drop in home prices has created a toxic environment in which more than 20% of homeowners with a mortgage owe more on their mortgage than the home’s open market value. These properties are referred to as “underwater” in the mortgage industry.
One concern of the FED is that middle-income households have been particularly hard hit during the mortgage crises because “home equity is a larger share of their wealth in the aggregate than it is for low-income households (who are less likely to be homeowners) or upper-income households (who own other forms of wealth). Many homeowners across all economic thresholds have been met with roadblocks when seeking to obtain mortgage modifications. As the FED report explains, modifications may provide homeowners with an opportunity to lower the cost of monthly payments by extending the term of the loan, reducing the interest rate, or reducing the principal. For lenders, these modifications can make sure that defaulted and struggling loans remain performing.
This latest paper by the FED points out that banks have been regularly rejecting modification requests even for well qualified homeowners who agree to pay more than market value to keep their underwater homes. According to the FED, this unsound business practice may be caused by loan servicers rather than the actual lender-owner. The report explains that servicers are “gatekeepers to loan modifications and other foreclosure alternatives.”
Of particular concern to the FED is the structure of servicer compensation. According to the report “the fee structure of the servicing industry helped create perverse incentives for servicers to, for example, reduce the costs associated with working out repayments and moving quickly to foreclosure, even when a loan modification might have been in the best interest of the homeowner and investor.” In states where the foreclosure process is streamlined, the problem is worsened by contractual requirements that force servicers to advance payments of principal and interest to lenders from the date of a homeowners default through foreclosure. Accordingly, because the modification process can take several months, servicers stand to increase their revenue by foregoing modification talks, proceeding to foreclosure, and ridding the home from their servicing obligations.
An inferred conclusion of the FED report is that both servicers and lenders have moved to panic mode. Their decision making ability has become paralyzed and management is less focused on maintaining and creating new performing loans than they should be. There are two key solutions offered by the FED. Under the first solution, servicers and lenders would continue declining to make modifications and would instead shift their business model to become landlords converting the millions of foreclosed properties into rental units. The second more plausible solution calls on policy makers to unite with businesses to implement a new set of modification incentives. This final proposal is an admission by the FED that the Obama administration’s Home Affordable Modification Program (“HAMP”) has failed to fulfill its potential. HAMP’s failures are due to restrictions of eligibility for the program and a lack of incentives for creative solutions.
The start of 2012 marks more than four years since the start of the ongoing recession and foreclosure crises. It is a problem that after so much time the lenders and servicers remain incapable of independently developing a set of solutions to solve a crisis they helped create. Changing servicer compensation to reflect the 2012 mortgage market rather than the 2006 market will be a great help in promoting modifications and alternatives to foreclosure. Collectively, the recent proposals and ongoing attention to the crises provided by the FED offers hope that the foreclosure crisis is at least a step closer to resolution.
The Federal Reserve report is available at: http://www.federalreserve.gov/publications/other-reports/files/housing-white-paper-20120104.pdf
Tagged with: bank • Ben Bernanke • crisis • Fedral Reserve Bank • foreclosure crisis • lenders • loan servicing • mortgage • servicers
Filed under: Foreclosure • New Jersey Foreclosure Lawyer
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