New York Superintendent of Banks Calls for More Servicer Supervision

Servicers and their adequacy in processing loan modifications are under attack. And a new bureaucratic resolution may soon be on the table.

An independent monitoring office would "counteract all cases of unresponsiveness" from mortgage servicers prior to and during mortgage modifications, wrote the New York State Superintendent of Banks, Richard H. Neiman in a statement sent to the media.

The idea to create "a dedicated Office of the Homeowner Advocate within the Treasury Department" initially proposed by Sens. Al Franken, D-Minn., and Olympia Snowe, R-Maine, is open to discussion.

Neiman stated his support in a recent press release.

The superintendent pledged his support amidst renewed concerns about the poor performance of loans under the Home Affordable Modification Program. According to Department of the Treasury data, another 91,118 trial HAMPs were canceled in June creating uncertainty about these borrowers' future.

He warned the industry "cannot rely solely on servicers and hotlines to address the growing needs and concerns of borrowers-whether it's homeowners that have just applied to the program or those whose trial periods have ended."

In fact despite efforts to assist them, hundreds of thousands of homeowners may be left worse off after they qualify for a trial HAMP but fail to qualify for a permanent modification.

Neiman sees "the ever-increasing number of homeowners being pushed out of HAMP" as a reason to raise "serious questions" about whether servicers are properly processing these loans or "continue to be plagued by the same documentation mistakes" seen in the past.

While his concern is legitimate, the priority is to assist distressed borrowers with some kind of loan modification. More servicers are currently expanding their assistance outside HAMP.

Various industry sources already are indicating a shift in the HAMP vs. non-HAMP ratio in favor of the latter.

While the performance of HAMP and the expectation to see most such modifications move onto the permanent modification phase, there was a reason why a trial period was deemed necessary. And a still-weak job market increases the risk of changes in borrowers' financial profiles. It also makes non-HAMP modifications and other workouts such as short sales better solutions for many distressed borrowers.

What concerns Neiman is that since now servicers are required to gather all documentation upfront, before any mortgage modification can be made, documentation mistakes "threaten to keep deserving homeowners that might otherwise qualify out of the program, and unable to receive the relief of reduced payments."

Further, "HAMP cannot be effective if borrowers are so hampered by servicer miscommunications about what should be a standardized qualification process."

In other words Neiman also supports more standardization in times when HAMP remains a work in progress that continues to change. Treasury data show "some progress in transparency," he said, with information breakdowns on the current status of canceled modifications by the largest eight servicers and new data on how servicers are handling consumer calls. It is "a great step forward in getting needed information to help homeowners," he argued, but this improvement is not enough.

Apparently, efforts by mortgage technology providers who incessantly update platforms and tools servicers use to process the high volume of workouts and help improve loan processing also need to further improve. Yet tools and processing improvements do not eliminate servicer mistakes.

Neiman says an independent office would be able to help "those who feel they have been incorrectly pushed out of trial modifications" after making timely payments "or feel they are now unfairly charged with sudden lump sum payments and exorbitant late fees."

"The time is long overdue to make mortgage modifications work," says the superintendent of a department that supervises over $2.4 trillion in aggregate assets from various depository institutions.

There also is a chance that such a supervisory office provides a litigation stick against servicers by adding risk of private litigation and regulatory proceedings. Beyond bringing more borrowers and servicers to courts, prolonged loan modification processing will also enlarge the existing shadow inventory.