The ongoing crisis-related confrontation between state regulators mitigating customer rights and trade organizations vouching for the mortgage industry continues to generate new regulatory updates that increase the foreclosure backlog.
In the past two years many states have proposed and passed new laws that regulate how foreclosures are conducted adding new legal barriers to mortgage servicers who all along have been struggling to understand and comply with the Dodd-Frank Act and other area-specific regulations.
However, Michelle Mierzwa, a corporate lawyer with Cal-Western Reconveyance Corp., told this publication that judging from her years of experience with mortgage servicing clients state legislation “is one of the biggest hurdles in getting foreclosures done.” These new laws add layer after layer of compliance challenges to Dodd-Frank.
And pending foreclosure lawsuits filed accross the country are an example of how “any time there’s new legislation there’s going to be a related increase in litigation,” she says.
The effect on servicers can be summarized in a few words: delays, additional staff, penalty costs.
Nevada imposes an automatic $5,000 damage liability award paid to the borrower for any violation of the foreclosures statute. Hawaii charges fees for any violation of the new provisions and the Services and Practices Act.
Utah also has enacted a statutory damage liability award.“Homeowners may allege damages simply based on the breach of the foreclosure statute,” she said. Lenders and servicers need to be prepared for potential increases in damage liability claims that challenge the eviction action of foreclosure. In cases when lenders are attempting to evict borrowers after the property is repossessed by the bank, often borrowers oppose the eviction and file claims that allege invalid foreclosure process.
Utah is just one example. Judging from the frequency REO departments are contacting her department to provide documentation that would prove the validity of the foreclosure process, Mierzwa said, there has been “a dramatic increase" of over 50% in these types of claims in all states Cal-Western operates.
Meanwhile regulatory updates continue.
About five of these states--which include Alaska, Arizona, California, Hawaii, Idaho, Oregon, Texas, Utah, Washington State and Nevada--are in the process of updating and adopting extensive changes to their foreclosure-related laws. The mortgage servicing and foreclosure process requirements in most states are fairly similar, with the exception of Hawaii and Texas, which have slightly different requirements.
In an effort to better manage the high delinquency and foreclosure rates in the state, Nevada, which by far is the state that was hardest hit by the foreclosure crisis, “has substantially altered the law.” It requires servicers to have a presence in the state, she said.
Nevada’s Assembly Bill 284 effective Oct. 1, makes substantial changes to the foreclosure process. Starting in October all mortgage note documents need to be recorded before the foreclosure process starts. It requires that all assignments of the beneficial interest of the loan must be recorded prior to a foreclosure. In the past the recording of all loan assignments, or mortgage note transfers to the county books was a suggested option, not a requirement.
It is a challenge to say the least since for years the Mortgage Electronic Registration System pooled the information about a large number of mortgages, so many transfers of assignments of beneficial interest have not been recorded. MERS has held the beneficial interest in the loan as nominee for various lenders as the note has been transferred. The requirement to record all those assignments “is problematic,” she says. One of the most challenging barriers being that of getting an assignment when the original lenders got out of the business.
Furthermore, “under the penalty of perjury” lenders/servicers operating in Nevada have to attach a notarized affidavit for the assignments of all the deeds of trust and the recording information, as well as the names of the trustees, the name of the note holder, the name of the servicer, the present and all the past beneficiaries back to the origination of the loan. Plus, it requires detailed information about future fees that could be incurred if the borrower does not reinstate the foreclosure.
These new requirements subject lenders and servicers “to the same documentation issue they have been facing during the past year” since they face more document fines that ultimately increase the operational burdens of their document execution departments.
Hawaii is another such example where servicers are required “to properly complete foreclosure” and access the file before filing foreclosure notices. Legislation changed the statute under which servicers need to operate when processing foreclosures. And the result is more delays.
Prior to the change lenders and servicers operating in Hawaii had were offered a foreclosure statutory process with two options: part one, non-judicial foreclosures and part two, judicial foreclosures. The legislator has placed a moratorium on all part one, non-judicial foreclosures until July 2012. “It essentially brought the foreclosures in Hawaii to a halt.”
According to Mierzwa, until now since part two, the judicial foreclosure process "was very unclear," lenders and servicers used the non-judicial foreclosure option instead. Once the option was taken out of the table making judicial foreclosures the only option available lenders pending foreclosure proceedings that as a rule take much longer time to go through than non-judicial foreclosures “are clogging up the courts creating a substantial backlog.”
Hawaii is also requiring servicers to acquire specific licensing and have a physical presence in the state. Idaho has mandated a loan modification process that precedes a foreclosure proceeding. In July the state of Washington enacted new legislation that requires a foreclosure mediation program.
Besides states, lobbying from customer advocacy groups and political motivation adds to the frenzy for more changes.
In July Rep. Marcy Kaptur, D-Ohio, submitted a resolution to the House Financial Services Committee that would give the White House the ability to establish a temporary national foreclosure moratorium.
If passed, Kaptur’s H.R. 234 would enable the president to “declare a national residential mortgage foreclosure emergency.” The resolution would also allow the states to direct their police departments “to enact a moratorium on residential mortgage foreclosures.”
Kaptur’s resolution was presented without co-sponsors and is not considered likely to pass the Republican-controlled committee, but it shows how far some politicians are willing to go when it comes to managing the very sensitive issue of foreclosure moratoria.
The H.R. 234 bill is another example of how public pressure is pushing banks to continuously revaluate their loss mitigation tools and procedures. It also indicates that the regulatory landscape will continue to change drastically in the short term.