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What the Fair Credit Reporting Act Should Teach Us About Mortgage Servicing

What the Fair Credit Reporting Act Should Teach Us About Mortgage Servicing

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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.
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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Published by: Center for American Progress on Jan 18, 2011
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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 naion’s recen housing crisis revealed deep aws in he way monhly mor-gage paymens by homeowners are handled by morgage servicers—he compa-nies ha collec monhly morgage paymens rom homeowners and orward hepaymens o invesors in hose morgages. Tese aws go ar beyond he recenand headline-grabbing robo-signing scandals, in which many morgage servicingcompanies were ound complici in shoddy handling o he legal requiremensor oreclosure. Oher major players in he housing marke are deeply dissaised wih he curren sysem, including privae invesors in morgages ha have been bundled ino morgage-backed securiies, morgage insurance companies, andhe wo big morgage nance gians ha are now in governmen conservaorship,Fannie Mae and Freddie Mac.So, oo, are he consumers o home morgages—he more han 50 million home-owners who wrie monhly morgage checks o morgage servicing companies.Tis issue brie presens a new analysis o how consumers are sysemaically disad- vanaged by he curren sysem o morgage servicing, in which morgage servic-ing righs are governed legally o proec he ineress o invesors and morgageservicers beore he righs o consumers are ever considered. As he morgage servicing indusry evolved in he pas decade, a major markeailure developed—hey owe heir responsibiliy only o invesors, and owe noduy a all o consider he needs and ineress o consumers. Amid he housingcrisis ha began in 2006 and measasized 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 creaion o he Fair Credi eporing Ac in 1970—harms o consumers whenhe large nancial companies responsible or consumers’ credi raings served heineress o heir major corporae cliens raher han consumers. Ta marke ailureour decades ago was correced by FCR, which requires he hree big credi raingagencies—Equiax, Experian, and ransUnion—o give individuals he righ osee heir credi hisory and o correc misakes. Over ime, Congress srenghenedhese consumer proecions under FCR, noably in overhauls in 1996 and 2004.Ta same marke ailure correced by FCR in consumer nance is now readily apparen in he morgage servicing markeplace. Aer all, some o he biggesconsumer issues in a amily’s lie—wheher hey can say in heir home, on whaerms, and paying how much in ees—is a realm o nance over which consumers boas litle o no leverage. Wha’s more, morgage servicing righs are no speci-cally addressed in he nancial regulaory reorm law passed by Congress las year.Te upsho: An eecive se o consumer proecion rules should be a prioriy o nancial regulaors, he new 112h Congress, and he Obama adminisraion inhe response no jus o he robo-signing scandals bu also he creaion o our nexgeneraion o housing nance as Congress and he adminisraion grapple wihhow o replace he morgage nance roles played by Fannie Mae and Freddie Mac.Tis issue brie oers some progressive recommendaions or how his could bedone o he bene o consumers and our morgage nance sysem.
From robo-signing to investor concerns
 A series o congressional hearings lae las year regarding he “robo-signing” scan-dal raised he quesion o wha o do abou morgage servicing righs. Te robo-signing scandal involved employees o major servicing companies who admitedha hey rouinely, alsely signed documens under oah in cour cases. OnceCongress and he press began o look under he hood o servicing pracices, oherserious problems emerged, including he quesion in many cases abou wheherservicers ollowed he requiremens or endorsing he “noes” (proo o owner-ship o a loan) as required beore a oreclosure can legally occur.Te robo-signing hearings brough new atenion o longsanding complains aboumorgage servicers. Te Obama adminisraion’s Home Aordable MorgageProgram, or HAMP, a morgage-modicaion program or embatled bu credi-
 
3Center for American Progress | What the Fair Credit Reporting Act Should Teach Us About Mortgage Servicing
 worhy homeowners, has been plagued by slow acion by servicers. For insance,Bank o America Corp. did no complee a single permanen morgage modica-ion by he end o 2009, and he atorneys general in wo saes brough a new law-sui agains Bank o America in December or numerous alleged unair or decepivepracices.
1
Tere have been numerous complains abou los documens, slow service, and servicer misakes abou puting houses ino a oreclosure sale while adieren par o he same servicer was agreeing o a morgage modicaion.On he nancial side, morgage servicers are being hi by enormous claims ordamages rom a range o acors. Fannie Mae and Freddie Mac are seeking billionso dollars o “pubacks,” or paymen back o hem or morgage originaion andservicing during he housing bubble ha violaed he legal requiremens o hewo hen-governmen-sponsored enerprises, boh o which are now eecively governmen owned. Tose puback demands are based on he documened raudand abuse commited by many morgage originaors and servicers during he bubble as hey sough o creae more and more morgage-backed securiies orsale o eager insiuional invesors worldwide. Major lawsuis by privae mor-gage insurance companies similarly claim ha hey paid billions o dollars ininsurance claims o invesors in hese morgages or loans ha were no properly originaed and serviced.Some o he sharpes complains have come rom invesors in so-called “privae-label securiies,” he morgage bonds creaed on Wall Sree during he bubble wihou any paymen guaranees rom Fannie Mae or Freddie Mac. Tese privae-label securiies were issued and sold separaely rom he so-called “conorm-ing” morgage-backed securiies ha Fannie Mae and Freddie Mac guaraneed.Invesors in privae-label securiies essenially claim ha servicers have no beenaihul agens or invesors; servicers are supposed o ac on behal o he inves-ors under he conracs ha hired hem. Among oher concerns, invesors worry ha servicers have been making judgmencalls o he advanage o he servicers hemselves raher han he invesors heconracs say hey are supposed o work or. Oher afliaes o he major servicers,or insance, hold he bulk o he home equiy lines o credi and oher juniormorgage claims. Tis means hey are incenivized o maximize value o hesesecond-lien morgages over he rs-lien morgages. Te concern is ha servicersoen make modicaions and oher decisions in ways ha bene he supposedly second-in-line” lenders (he servicers) in ron o he “rs-in-line” invesors.

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