Investors Worry About ‘Foreclosure-Gate’ Costs

The nationwide frenzy over foreclosure moratoriums and servicer accountability is worrying investors about the cost of unintended consequences.

The Association of Mortgage Investors said it supports a mortgage industry practices reform that will ensure responsible parties are held legally accountable.

AMI released a statement in support of the state attorneys general investigation on allegations about the illegality of servicers and mortgage industry foreclosure practices but also stated it is against “hasty action to assign liability or settle allegations surrounding foreclosure paperwork and processing.”

The association’s executive director Chris Katopis warned that an “ill-formulated legal settlement may harm the investors of mortgage-backed securities, namely retirees, municipalities, government entities, state pension funds, retirement systems, universities and charitable endowments.”

The best solution would be one where legal settlements require large banks and servicers to accept responsibility for their actions, he said, repurchase defective mortgages when these defects are identified, and “enforce the contractual obligations requiring trustees and servicers to return faulty mortgages.”

AMI is calling upon residential mortgage-backed securities trustees “to perform their responsibilities and protect millions of Americans’ savings and pension accounts,” which may have been affected by irregularities in the processing of legal affidavits by the nation’s largest mortgage servicers.
Similarly, the Securities and Exchange Commission is reviewing investor concerns.

The SEC recently reported there is widespread investor confusion about how to understand current fiduciary standards as required by the Dodd-Frank Act. Responding to those concerns the SEC is calling for public input, comments and data about the effectiveness of existing standards of care for brokers-dealers and investment advisers, and whether there are gaps, shortcomings and other problem issues in the current legal or regulatory standards.

The SEC said it is concerned that as a rule it receives extensive feedback from financial industry groups, but relatively little information from the U.S. investing public.

U.S. investors are expected to comment about the efficiency of current regulation of financial professionals providing investment advice—such as investment advisers and financial planning organizations. As of now it is not clear the extent to which investors are confused as to who is held to a fiduciary duty.

Also, as the country’s largest banks already have decided to stop proceedings in all 23 states where foreclosures must be approved by a judge and are conducting both in-house and independent reviews searching for evidence of inappropriate foreclosures, it is not yet clear what the outcome will be.
Meanwhile, allegations that large mortgage servicers pursuing foreclosure actions may have filed inadequate and legally defective affidavits have had an immediate effect on interest rates.

The Bankrate.com weekly national survey based on data from the top 10 banks and thrifts shows that mortgage rates have remained low for both fixed- and adjustable-rate loans.

Bankrate warns that “the current foreclosure moratorium mess raises both the cost and the amount of time involved in foreclosure,” which in return could translate into higher mortgage rates for borrowers in the near future. So the current average rate of 4.47% may start to creep up. And even though it may take some time to reach to 6%—the last time mortgage rates were above 6% was November 2008—it may happen faster than previously expected.

Dave Cribbin, president of Tailwind Capital who also is associated with Americans for Limited Government, says the “answer to the current economic malaise” is simple.

The “only two things” needed to boom the economy are low tax rates and stable money, he says, quoting tax and monetary policy expert Nathan Lewis. Get them wrong and “you are where we are today, scraping along the bottom, not quite falling behind, but certainly not moving ahead.” A third component could be “rolling back unnecessary regulations.”

A low tax rate represents the seed of economic growth, while “stable money is the spring rain that makes the combination bear fruit.” Otherwise, he explains, attracting capital becomes increasingly difficult and “the plummeting dollar tells investors the game is rigged.” And without capital not much can be achieved.

The Association of Mortgage Investors also has expressed its view on what would be the best and quite simple way to ensure bank servicer accountability. It includes reviewing any alleged misconduct and requiring that servicers comply with their contractual obligations and when necessary buy back deficient mortgages from the trustees.