The large U.S mortgage servicers are mulling over submitting their plans regarding the modified foreclosure practices by July 13 to the Federal Reserve, while their talks on broader settlement terms with state attorney generals (AGs) and the Department of Justice (DoJ) continue. The important participants in the discussion are Bank of America Corporation (BAC), JPMorgan Chase & Co. (JPM), Citigroup Inc. (C), Ally Financial Inc. and Wells Fargo & Company (WFC).
Issues to be Resolved
Apart from fines, the banks would be required to provide solutions to various problems plaguing the foreclosures. The various issues that need to be addressed include a single point of contact for the borrowers, making sure that all documents are properly checked and singed by the concerned employee, and ending the ‘dual-tracking’ practice of starting a foreclosure while a loan modification is on.
Why Issues Cropped Up?
In October 2010, large mortgage providers, including JPMorgan, BofA and Ally Financial, had suspended all foreclosures across the nation, following the detection of faulty foreclosure paperwork. Flaws in documents resulted primarily from the use of ‘robo-signers’, who sign hundreds of documents everyday without verifying the decisive information.
Despite being aware of the imminent danger, the negligence of homeowners and lawyers aggravated the problem. In many cases, signatures were not reviewed by any notary. Even when notarizations took place, it was unlikely that the officials executed the signings keeping legal requirements in mind.
Faulty paperwork also raised questions about the validity of the ownership documents. In several cases, an individual who moved into a house after a payment was found not be the legal owner of the house. This ended up in mortgage lenders improperly expelling original owners from their homes as part of their foreclosure process.
Proposed Plan
Following the detection, the U.S. bank regulators, along with the state attorney generals (AGs), geared up to take actions against mortgage servicers such as JPMorgan, BofA, Ally Financial Inc., Wells Fargo & and Citigroup.
In April, the OCC had entered into an agreement with 14 major lenders to ensure reimbursement to the victims of foreclosure scams. The banks were given time to hire auditors and detect how many foreclosures could have been avoided in the last two years, had the documents not been messed up.
Further, in May, the U.S. mega banks decided to pay as much as $5 billion to settle the claims made by the federal and state officials for mortgage foreclosure malpractices. However, the proposed payment is substantially lower than what the regulators are demanding as penalties ($20–$25 billion).
The proposed plan that is to be submitted would include setting up of a fund by these banks to resolve mortgage complaints. Additionally, a separate federal account will be opened that would require the banks to provide monetary relief to the mortgage borrowers.
Also, going forward, the final settlement deal would act as a guideline for other mortgage providers and set a standard for processing loans and foreclosures.
Our Viewpoint
Whatever the settlement deal might be, it would definitely take quite long to overcome the foreclosure crisis. However, we are also optimistic that various corrective measures, if implemented correctly, would surely prevent yet another foreclosure crisis. But most importantly, it would leave a lasting impact on lenders, forcing them to be extra cautious during housing transactions.
