Servicers Face More Calls for Oversight
Congress has just passed legislation to increase refinancing and workout options for troubled borrowers, but some leaders on Capitol Hill think greater relief is needed. And they are pushing additional legislation that will put more pressure on servicers and investors to write down the principal balance of home loans.
Rep. Barney Frank, D., Mass., chairman of the House Financial Services Committee, is urging servicers to hold back on foreclosures in applicable cases so that borrowers can take advantage of an FHA program to help troubled, subprime borrowers with adjustable-rate mortgages refinance into more affordable fixed-rate loans.
The FHA refinancing program included in the landmark housing bill does not go into effect until October 1. That program allows the FHA to refinance borrowers who are in danger of losing their homes, but in exchange for the FHA guarantee, borrowers must share any profit from the later resale of their home with the government. Lenders and investors must take significant losses by agreeing to reduce the principal on the refinanced loans.
"I would hope that no one would be foreclosed upon between now and October first who would have qualified for this new program. And that is within your power to do. You can show some forbearance," Rep. Frank said at the start of a congressional hearing on loan servicing practices, adding that the hearing on loan servicing practices was among the most important he'd participated in during his 28 years in Congress.
Noting that the split between loan servicers and investors complicates decision-making on loan modifications, Rep. Frank said the servicing business may need a substantial overhaul if foreclosure prevention and relief efforts don't pan out.
"If it turns out that our having done the best we could in consultation with the servicers to provide a set of incentives to reduce foreclosure, if it turns out that the structure of the servicing industry - the split between the decision makers and the ultimate beneficiaries is a significant interference with our taking advantage of this, then I am determined to change that structure," Rep. Frank said.
He wasn't the only member of the committee to hint at possible additional action to regulate mortgage servicing more broadly, including more generous loan modification and workout procedures.
Some of the legislative proposals would mandate that servicers offer to cut a borrower's mortgage debt outstanding under certain circumstances.
At a recent House Financial Services Committee hearing, several Democratic lawmakers, including Maxine Waters, D., Calif.; and Melvin Watt, D., N.C.; expressed skepticism about the ability of current voluntary homeowner relief programs to stem the growing tide of foreclosures.
Rep. Waters criticized servicers for not having adequate staff to handle the increasing number of loan defaults.
"When the crisis hit, it rapidly became clear that the mortgage servicing 'muscle' of the industry had largely atrophied. Nobody was sufficiently staffed up or trained to do the kind of workouts and modifications needed."