Along with the Federal Reserve and the Office of Thrift Supervision, we announced cease-and-desist orders against 14 large servicers and two service providers that are intended to correct the deficiencies we found both in mortgage servicing and foreclosure processing.
These orders were based on the onsite reviews we conducted last year of servicers' foreclosure processing operations, as well as interviews with staff, validations of servicer self assessments, and a review of case files of mortgages at various stages of foreclosure. We found significant deficiencies that represent not only unsafe and unsound practices, but a breakdown in way customers are treated. This is a very serious problem that servicers are going to have to do substantial work and absorb substantial expense to fix.
There has been a great deal of noise and confusion surrounding our enforcement effort, and I'd like to explain what our orders are about, and how they and other regulatory actions are likely to reshape the mortgage servicing business.
First of all, the problems we found were extensive. Our reviews found significant weaknesses in foreclosure governance and document preparation: improper affidavits were submitted and documents were notarized improperly. Servicers devoted insufficient financial, staffing and managerial resources to foreclosure processing. Third party providers of foreclosure-related services, including outside law firms, were not adequately supervised, and, in a limited number of cases, servicers failed to ensure proper endorsement of promissory notes or mortgage documents.
As bad as the mortgage servicing breakdown was, it was not the cause of mortgage delinquencies that led to the surge in foreclosures. Rather, it was the unprecedented surge in foreclosures that exposed and exacerbated weaknesses that already existed in the process. Likewise, as we take steps to solve the processing problem and ensure that troubled borrowers receive the full protections available under federal and state laws, our actions are unlikely to fundamentally change the trajectory of the foreclosure problem.
What the reforms will do is to help restore integrity to the process. That's very important because widely reported foreclosure processing defects have not only harmed individual troubled borrowers but they have undermined confidence in the system. Given the state of the mortgage markets, taking these steps to restore confidence is a matter of urgency.
We began this work last fall when evidence of significant documentation problems came to light, by directing the servicing banks to conduct a self-assessment of their processes. We followed up very quickly with a large-scale interagency examination of the servicers intended to assess the extent of problems and to craft remedies. As part of these horizontal exams, we evaluated foreclosure operating procedures and controls, interviewed bank staff involved in the preparation of foreclosure documents, and reviewed approximately 2,800 borrower foreclosure cases in various stages of foreclosure.
We focused on all phases of the foreclosure process: policies and procedures; organizational structure and staffing; vendor management, including use of outside counsel and third-party service providers; quality control and audits; accuracy and appropriateness of foreclosure filings; and loan document control, endorsement, and assignment. Examiners also checked the fees assessed in connection with foreclosures against the organization's internal records.
If there is any reassurance here, and there is sadly very little, it is that borrowers subject to foreclosure in our sample were indeed seriously delinquent. That's not surprising since according to data collected through our quarterly Mortgage Metrics report, more than 94% of borrowers foreclosed in 2010 were six months or more past due. The cases evaluated in the sample also showed that servicers generally had the documents they needed to foreclose. Still, a small number of sales should not have been gone forward because the Servicemembers Civil Relief Act barred a lender from foreclosing on active duty service members, a bankruptcy had been filed, or they had been approved for a trial period modification.
The reviews didn't focus specifically on banks' loan modification process, but when reviewing individual foreclosure files, examiners did check for evidence that servicers were in contact with borrowers and had considered alternate loss mitigation efforts, including modifications. In general, we found that servicers had considered whether borrowers facing foreclosures might qualify for some alternative program, such as a modification.
But while the servicers got a couple of things right, what stood out was the pervasiveness of flaws and failings right across the process. Robo-signing may be the image that has lodged most firmly in our minds from news reports, but other deficiencies, beyond the mishandling of affidavits, were equally serious.
That such routine business operations could be so badly mismanaged as to raise safety and soundness concerns was, quite frankly, astounding.
I should add that while the sample of foreclosures we examined was adequate to expose these flaws in the process and provide a basis for developing enforcement actions, it did not capture the full extent of harm to borrowers. It was judgmentally drawn to ensure it included certain types of foreclosures-actions in judicial and nonjudicial states, for example-but it was only a sample. Our enforcement actions include a Foreclosure Review article that requires servicing banks to submit action plans that will look back at a larger base of foreclosures. For servicers with significant problems, it may be the case that each foreclosure over the past two years will have to be evaluated individually.
So with our exam findings in mind, let me offer some thoughts on how foreclosure processing should work and how we expect it work going forward. Homeowners have the right to expect transparency, accessibility, and fairness from the companies that service their mortgages, and never more than when a borrower is experiencing financial difficulty.
Transparency is the most basic of these rights: homeowners deserve to know who is servicing their mortgage and what is happening with it throughout the process.
Accessibility is equally important: distressed borrowers are entitled to a single point of contact familiar with their mortgage and empowered to make decisions to assist them.
We've heard stories about borrowers who submitted paperwork for modifications on multiple occasions only to be told each time that the documents couldn't be found. We don't know how often that happened, but it should never happen and there should be a responsible person and sensible process to make sure it doesn't happen.
Fairness is a third key element of effective servicing, and it is addressed in a number of ways in our enforcement orders: homeowners facing foreclosure deserve to know the criteria under which they would qualify for assistance, and they should not be faced with the confusion of dual tracking: negotiate a modification and still see the foreclosure process move forward. They should be able to have confidence that their mortgage is being handled in a manner that is fair and complies with all applicable laws. Anything less is unacceptable.
Our enforcement actions address the full range of deficiencies we found. They are intended to fix what is broken, identify and compensate borrowers who suffered financial harm, and ensure a fair and orderly mortgage servicing process going forward.
They require a comprehensive revision of the loan modification and foreclosure processes. They address the most frequently heard servicing complaints: eliminating dual tracking, once a modification has been approved, and establishing a single point of contact to ensure borrowers can contact a live person throughout the process.
The orders also require robust oversight and controls of third-party vendors, including outside legal counsel and vendors who provide default and foreclosure processing services.
John Walsh is the acting comptroller of the currency.
