Fannie, Freddie Spar With Regulators on Foreclosures
By - Dec 1, 2010 7:59 AM PT
Acting Comptroller of the Currency John Walsh said that his agency is directing national bank servicers to suspend foreclosures for borrowers actively seeking to qualify for loan modifications. Photographer: Joshua Roberts/Bloomberg
Federal banking regulators said they are pushing lenders to suspend foreclosure proceedings while distressed borrowers seek new mortgages.
Acting Comptroller of the Currency John Walsh said in testimony prepared for a congressional hearing today that his agency is directing national bank servicers to suspend foreclosures for borrowers actively seeking to qualify for loan modifications.
Dual-track processing, where lenders pursue foreclosures at the same time as borrowers seek new loans, is “unnecessarily confusing for distressed homeowners,” Walsh said.
The Senate Banking Committee is holding its second hearing on foreclosures as lawmakers question bank regulators about what actions they have taken to ensure that home seizures are fair and legal.
Executives from government-owned mortgage companies Fannie Mae and Freddie Mac insisted that it was better for both borrowers and lenders if foreclosure proceedings are not suspended.Freddie Mac Executive Vice President Donald Bisenius said that the dual-track process minimizes losses, protects communities from blight and ultimately helps borrowers.
Process Shouldn’t ‘Drag On’
“It is not in the borrower’s interest for the process to drag on indefinitely,” Bisenius said in his prepared testimony. “The longer the borrower’s delinquency goes uncured, the farther behind he or she gets and the harder it becomes to bring the loan current.”
Federal Deposit Insurance Corp. chairman Sheila Bair took the opposite position, saying that the dual-track process could increase unnecessary foreclosures.
“It is vitally important that the modification process be brought to conclusion before a foreclosure sale is scheduled,” Bair said in prepared testimony. “Failure to coordinate the foreclosure process with the modification process risks confusing and frustrating homeowners and could result in unnecessary foreclosures.”
Ally Financial Inc.’s GMAC Mortgage unit, JPMorgan Chase & Co. and Bank of America Corp. temporarily halted foreclosures in September after claims that legal documents were mishandled.
State attorneys general and federal regulators are investigating mortgage companies after revelations that some relied on so-called “robo-signers,” or people who sign affidavits without actually reviewing the facts underlying foreclosures.
Weaknesses in Servicing
The Federal Reserve’s preliminary review suggests “significant weaknesses” in loan servicing and foreclosures, Fed Governor Daniel K. Tarullo said in prepared testimony.
“The problems are sufficiently widespread that they suggest structural problems in the mortgage servicing industry,” Tarullo said. “It has now become evident that significant parts of the servicing industry also failed to handle foreclosures properly.”
Attorneys general, consumer advocates and congressional lawmakers have said that delinquent homeowners seeking to renegotiate their mortgages through government- or bank- sponsored programs such as the Home Affordable Modification Program are often surprised and confused to discover that their foreclosures haven’t been suspended.
Freddie Mac, Fannie Mae and other purchasers of home loans, including the Association of Mortgage Investors, said the dual- track system balances the interests of everyone involved.
Delay is ‘Counterproductive’
“While we believe that borrowers who already are under significant stress arising from their financial situations should not be subjected to needless confusion, we also believe that unnecessary delays in an already lengthy foreclosure process would be counterproductive,” Bisenius said.
His comments were echoed by Terry Edwards, executive vice president at Fannie Mae. The two mortgage companies are controlled by the U.S. government and have been surviving on taxpayer aid since 2008.
“The longer the process takes, and the further in arrears the borrower becomes, the less likely it is that the borrower will succeed with a modification and the greater potential there is for loss to Fannie Mae and the U.S. taxpayer,” Edwards said in prepared testimony.
The average foreclosure takes 449 days, Bisenius said, providing sufficient time to explore alternatives. The company and its servicers suspend foreclosures when a loan workout, short sale or other option becomes viable, he said.
Freddie Mac of McLean, Virginia, and its Washington-based rival Fannie Mae purchased or guaranteed 70 percent of new mortgages in the third quarter.
The U.S. Treasury Department took control of the two companies in 2008 after losses on subprime loans pushed them to the brink of collapse. Since then they have drawn more than $150 billion in aid to remain solvent.
To contact the reporter on this story: Lorraine Woellert in Washington atlwoellert@bloomberg.net.
To contact the editor responsible for this story: Lawrence Roberts at lroberts13@bloomberg.net.
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