Legal Issues

Mortgage servicing executives can be forgiven if they've developed a taste for jokes about lawyers these days. After all, a souring economy, rising defaults, and increased scrutiny of servicing practices have left mortgage servicers in the cross hairs of lawsuits and investigations all too often.

But while all that attention may be causing you stress, it also means you are more dependent than ever on your legal counsel, both in-house and external. Servicers face threats from consumer advocates and plaintiffs' lawyers who are trying to protect their clients by delaying or blocking foreclosures, sometimes relying on arcane legal arguments and all too eager to shine a light on minor infractions or legal loopholes that might put a cog in the foreclosure proceedings. To top it off, bankruptcy reform is on deck in Congress, and servicers appear likely to face the threat of "cram downs" on existing, underwater mortgage loans. Some experts believe the lure of cram downs will lead more consumers to declare bankruptcy, in part hoping to get the principal balance of their secured mortgage reduced. Servicers need to focus heavily on compliance and document management - including electronic documents and images - to make sure they are compliant with the rules and regulations governing any action they take on a distressed loan.

To top it off, not all of the investors who own securitized mortgage loans are happy about plans to streamline loan modifications for troubled borrowers. Some claim that the streamlined modification programs, especially those designed to appease state attorneys general who are mad about risky loan products and questionable underwriting, amount to "penalty shifting." MBS investors, in at least some cases, believe they are being asked to pay for mistakes or violations made by loan originators.

It all adds up to a lot of legal pressure for servicers. And whenever potential courtroom showdowns are concerned, an once of prevention is worth a pound of cure.

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