Among the goals of the national mortgage settlement is to establish a system of distressed loan servicing—including foreclosure—that is efficient, fair and humane. The former system, when confronted by the aftermath of the mortgage crisis, was none of the above.
This resulted in, among other things, the litigation that led to the settlement and a loss of public confidence in the financial system and, to some extent, in the government’s ability to address the problems. As a result, implementation of the settlement has taken place in an atmosphere of understandable skepticism. Needless to say, I hope that the work that my colleagues and I are doing will allay at least some of the skepticism and strengthen public trust and confidence.
Let me describe the work we are doing in the two areas of the settlement for which I am responsible: consumer relief and servicing standards.
The first and most public opportunity under the settlement for the servicers to address prior harm is through the consumer relief they have undertaken to provide: nearly $20 billion in credited relief, such as principal forgiveness, refinancing, short sale assistance, acceptance of deeds in lieu of foreclosure, deficiency waivers and blight relief activities. Unlike other settlements, individual consumers, except in limited circumstances, do not have a right to receive this relief, nor are they able to simply sign up to receive it. The servicers have a fair amount of discretion as to how they allocate the various types of relief they provide, subject to minimum and maximum requirements with regard to certain categories. The servicers get credit for these activities—based on valuation formulas contained in the settlement—when they have certified to me that they have earned it and I have determined that they are right.
The banks have made some important progress on consumer relief in the last year. In February, I released my latest progress report on the data the banks reported to me. The report outlined the more than $45 billion in gross relief the banks have delivered to more than 550,000 homeowners across the country. That equates to about $82,000 per borrower. While review and certification of these amounts remains to be done, there is no doubt that the relief distributed thus far has been significant and, in many cases, life changing for the families who received it.
While the amount of consumer relief to date is promising, important concerns have been raised about it. Specifically, some have worried about the banks’ use of short sales. Short sale related relief has in fact accounted for a large number of transactions and a significant portion of the gross dollar relief reported by the banks. However, it is important to remember the requirement in the settlement that 60 percent of the total credited relief come from first or second lien principal forgiveness. While short sales are an important tool in the overall effort to relieve borrowers across the country from the burdens of excessive mortgage debt, they will not comprise a majority of the settlement’s credited relief. Banks simply cannot short sale their way to satisfaction of their obligations under the settlement.
Second liens also have garnered attention. The concern here is that a bank could get credit under the settlement for modifying a second lien, but leave a borrower with a first lien he or she is still unable to afford and, though the bank gets credit under the settlement, the borrower is still sent to foreclosure. This is a more difficult case than short sales, as second lien relief is intended to be a significant form of relief under the settlement. Here again, some difficulty has been created because the second lien disclosure in our progress reports is gross dollar relief, while much of such relief will be credited for much less than dollar for dollar, often as low as $0.10 on the dollar. As I mentioned, the settlement requires that 60% of the total credited relief come from lien forgiveness—of that 60%, at least half must come from first lien modifications. It also is important to remember that second lien modifications and extinguishments are helpful to many borrowers in distress; an overall reduction in debt certainly improves a borrower’s financial situation and may help a borrower to restructure his or her debts.
Finally, a number of community advocacy and civil rights groups have asserted that further steps should be taken to ensure that at least a fair share of consumer relief go to low and moderate income borrowers, particularly those in communities of color. I would first like to say that I share the concern expressed by these groups. The devastation that subprime lending inflicted on these communities and the growing disparity in wealth in our country are serious issues that deserve a serious response.
However, while the settlement obliges me to evaluate servicer policies and procedures in this regard, it does not prescribe outcomes. Likewise, while I do have access to certain loan level information, I do not have access to demographic or ZIP code data. The settlement is meant to address a variety of serious shortcomings in distressed mortgage servicing; it did not focus on fair lending claims. In fact, those claims are expressly preserved in the release that the government provided to the settling servicers; they have not been settled. That said, I am having continuing discussions with the servicers to establish that consumer relief benefits have been made broadly available.
Just prior to the release of my most recent progress report, I certified that the first of the five servicers, the ResCap parties (the former GMAC and affiliates) have met and exceeded their minimum obligations for consumer relief of $200 million. Because the relief is scored under formulas outlined in the settlement—where some types of relief receive less than dollar for dollar credit—the ResCap parties’ total gross consumer relief amounts to $556 million. My review found that they delivered approximately $257 million in credited relief to borrowers. Because the ResCap parties have mandatory solicitation requirements with regard to consumer relief which are not completed, there is more to come from them. The report is publicly available at my website (www.mortgageoversight.com) for those of you who would like to know more.
The other four servicers also are progressing on their consumer relief obligations. I have received requests from them to certify at least a portion of their performance. My colleagues and I have begun our review of bank performance to date and will issue a public report on it later this year. I can assure you that the confirmation work my colleagues and I are undertaking with regard to the other banks will equal or exceed our work on ResCap.
The settlement also establishes 304 servicing standards, or rules of conduct for distressed loan servicing. These are intended to remedy the alleged abuses in servicing that are the settlement’s basis in fact. As of Oct. 2, 2012, these servicing standards must have been fully implemented by the servicers. There are servicing standards related to document integrity, the loan modification process, dual tracking, single points of contact, other customer service requirements and other more general requirements.
Under the settlement, I am directed to measure servicer compliance with the servicing standards through 29 metrics—tests designed to determine whether one or more of the servicing standards are being followed. The servicers conduct these tests through “internal review groups” of employees and contractors independent of the mortgage line of business who then report the results to me. Assisted by professional firms in my employ, I assess the work of the internal review groups and report my conclusions. If the internal groups or I find potential violations—noncompliance with the standards—the servicer has to implement a corrective action plan and, in the case of widespread error, to remediate. If it can’t or won’t correct the potential violations, I can seek enforcement through the United States District Court for the District of Columbia.
My retained professional firms and I have negotiated work plans under which the reviews I have just mentioned are being conducted. We have completed our first review of servicer compliance under the settlement—for the calendar quarter ended on Sept. 30, 2012—and have nearly completed our second quarterly review. When that review is complete, I will report to the court and to the public on how they have done, probably sometime next month. This process will continue for the next two years.
While I have some anecdotal evidence that the settlement is working with regard to some servicing standards, we are nowhere near “mission accomplished.” As noted above, testing has just begun and, because the servicing standards were phased in over a six-month period ending in October of last year, we are only now beginning to test compliance with all 29 metrics. Further, while the metrics were well designed and cover a number of important areas of concern, there are a number of standards that don’t map to metrics at all.
Joseph A. Smith Jr. is monitor of the Office of Mortgage Settlement Oversight and former North Carolina Commissioner of Banks.
