1Center for American Progress | What the Fair Credit Reporting Act Should Teach Us About Mortgage Servicing
What the Fair Credit Reporting Act Should Teach Us About Mortgage Servicing
Progressive Recommendations to Protect Home Mortgage Consumers
Peter Swire January 2011
Introduction
Our naion’s recen housing crisis revealed deep aws in he way monhly mor-gage paymens by homeowners are handled by morgage servicers—he compa-nies ha collec monhly morgage paymens rom homeowners and orward hepaymens o invesors in hose morgages. Tese aws go ar beyond he recenand headline-grabbing robo-signing scandals, in which many morgage servicingcompanies were ound complici in shoddy handling o he legal requiremensor oreclosure. Oher major players in he housing marke are deeply dissaised wih he curren sysem, including privae invesors in morgages ha have been bundled ino morgage-backed securiies, morgage insurance companies, andhe wo big morgage nance gians ha are now in governmen conservaorship,Fannie Mae and Freddie Mac.So, oo, are he consumers o home morgages—he more han 50 million home-owners who wrie monhly morgage checks o morgage servicing companies.Tis issue brie presens a new analysis o how consumers are sysemaically disad- vanaged by he curren sysem o morgage servicing, in which morgage servic-ing righs are governed legally o proec he ineress o invesors and morgageservicers beore he righs o consumers are ever considered. As he morgage servicing indusry evolved in he pas decade, a major markeailure developed—hey owe heir responsibiliy only o invesors, and owe noduy a all o consider he needs and ineress o consumers. Amid he housingcrisis ha began in 2006 and measasized over he nex our years, i becameincreasingly clear his ype o marke ailure precisely racks he problems ha led
2Center for American Progress | What the Fair Credit Reporting Act Should Teach Us About Mortgage Servicing
o creaion o he Fair Credi eporing Ac in 1970—harms o consumers whenhe large nancial companies responsible or consumers’ credi raings served heineress o heir major corporae cliens raher han consumers. Ta marke ailureour decades ago was correced by FCR, which requires he hree big credi raingagencies—Equiax, Experian, and ransUnion—o give individuals he righ osee heir credi hisory and o correc misakes. Over ime, Congress srenghenedhese consumer proecions under FCR, noably in overhauls in 1996 and 2004.Ta same marke ailure correced by FCR in consumer nance is now readily apparen in he morgage servicing markeplace. Aer all, some o he biggesconsumer issues in a amily’s lie—wheher hey can say in heir home, on whaerms, and paying how much in ees—is a realm o nance over which consumers boas litle o no leverage. Wha’s more, morgage servicing righs are no speci-cally addressed in he nancial regulaory reorm law passed by Congress las year.Te upsho: An eecive se o consumer proecion rules should be a prioriy o nancial regulaors, he new 112h Congress, and he Obama adminisraion inhe response no jus o he robo-signing scandals bu also he creaion o our nexgeneraion o housing nance as Congress and he adminisraion grapple wihhow o replace he morgage nance roles played by Fannie Mae and Freddie Mac.Tis issue brie oers some progressive recommendaions or how his could bedone o he bene o consumers and our morgage nance sysem.
From robo-signing to investor concerns
A series o congressional hearings lae las year regarding he “robo-signing” scan-dal raised he quesion o wha o do abou morgage servicing righs. Te robo-signing scandal involved employees o major servicing companies who admitedha hey rouinely, alsely signed documens under oah in cour cases. OnceCongress and he press began o look under he hood o servicing pracices, oherserious problems emerged, including he quesion in many cases abou wheherservicers ollowed he requiremens or endorsing he “noes” (proo o owner-ship o a loan) as required beore a oreclosure can legally occur.Te robo-signing hearings brough new atenion o longsanding complains aboumorgage servicers. Te Obama adminisraion’s Home Aordable MorgageProgram, or HAMP, a morgage-modicaion program or embatled bu credi-
3Center for American Progress | What the Fair Credit Reporting Act Should Teach Us About Mortgage Servicing
worhy homeowners, has been plagued by slow acion by servicers. For insance,Bank o America Corp. did no complee a single permanen morgage modica-ion by he end o 2009, and he atorneys general in wo saes brough a new law-sui agains Bank o America in December or numerous alleged unair or decepivepracices.
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Tere have been numerous complains abou los documens, slow service, and servicer misakes abou puting houses ino a oreclosure sale while adieren par o he same servicer was agreeing o a morgage modicaion.On he nancial side, morgage servicers are being hi by enormous claims ordamages rom a range o acors. Fannie Mae and Freddie Mac are seeking billionso dollars o “pubacks,” or paymen back o hem or morgage originaion andservicing during he housing bubble ha violaed he legal requiremens o hewo hen-governmen-sponsored enerprises, boh o which are now eecively governmen owned. Tose puback demands are based on he documened raudand abuse commited by many morgage originaors and servicers during he bubble as hey sough o creae more and more morgage-backed securiies orsale o eager insiuional invesors worldwide. Major lawsuis by privae mor-gage insurance companies similarly claim ha hey paid billions o dollars ininsurance claims o invesors in hese morgages or loans ha were no properly originaed and serviced.Some o he sharpes complains have come rom invesors in so-called “privae-label securiies,” he morgage bonds creaed on Wall Sree during he bubble wihou any paymen guaranees rom Fannie Mae or Freddie Mac. Tese privae-label securiies were issued and sold separaely rom he so-called “conorm-ing” morgage-backed securiies ha Fannie Mae and Freddie Mac guaraneed.Invesors in privae-label securiies essenially claim ha servicers have no beenaihul agens or invesors; servicers are supposed o ac on behal o he inves-ors under he conracs ha hired hem. Among oher concerns, invesors worry ha servicers have been making judgmencalls o he advanage o he servicers hemselves raher han he invesors heconracs say hey are supposed o work or. Oher afliaes o he major servicers,or insance, hold he bulk o he home equiy lines o credi and oher juniormorgage claims. Tis means hey are incenivized o maximize value o hesesecond-lien morgages over he rs-lien morgages. Te concern is ha servicersoen make modicaions and oher decisions in ways ha bene he supposedly “second-in-line” lenders (he servicers) in ron o he “rs-in-line” invesors.
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What the Fair Credit Reporting Act Should Teach Us About Mortgage Servicing
The Fair Credit Reporting Act provides a model for showing that the rights and needs of consumers should not continue to be ignored in our system for mortgage servicing, writes Peter Swire.
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