There are new rumblings in Washington and perhaps a growing consensus regarding how to end the foreclosure mess. The solution? Change the rules.
This is big stuff for those with an interest in buying foreclosures. The latest quarterly figures from RealtyTrac show that foreclosed properties represent one in four sales nationwide and that distressed properties are typically selling with a 32 percent discount.
But what happens to foreclosure values and local real estate prices if the supply of distressed properties is reduced? With fewer distressed properties local home prices in many areas would likely stabilize if not actually rise, a situation which would benefit property owners and local communities.
The fewer foreclosures scenario has begun to haunt Washington. The worry is not that real estate values might rise but that there will be fewer foreclosures and more lender losses because of current rules and regulations. Those losses could be so large that they might imperil major lenders thus the entire financial system. The result is an effort to protect mortgage owners and stifle foreclosure challenges.
Don’t believe it? Let’s look at some recent developments.
Honor All Affidavits
In civics classes there’s always time spent explaining how a bill becomes law on Capitol Hill. The usual explanation is that a bill is dropped in the hopper, it’s considered by committees in both the House and the Senate, there’s then a lengthy floor debate by informed lawmakers, the measure is voted up or down and finally — if passed by both congressional bodies — it’s sent on to the President.
Unless, of course, we’re talking about the Interstate Recognition of Notarizations Act of 2009. This little gem passed through both the House and the Senate without hearings, without debate and by unanimous consent without recorded votes. It would have been signed by the President had there not been a sudden outbreak of media attention.
And what did this bill say? It would require “any Federal or State court to recognize any notarization made by a notary public licensed by a State other than the State where the court is located when such notarization occurs in or affects interstate commerce.”
Real estate is within the stream of interstate commerce because mortgage money moves across state lines. One way to read this legislation is to say that state courts would be forced to accept lender foreclosure claims — even if property owners were losing their homes on the basis of robo-signed and factually-incorrect affidavits. As the White House explained in rejecting the bill with a pocket veto, “we need to think through the intended and unintended consequences of this bill on consumer protections, especially in light of the recent developments with mortgage processors.”
“What we need is balance,” says Jim Saccacio, Chairman and CEO at RealtyTrac.com. “The goal should be to have a system which assures that lenders have the right to foreclose when mortgages are unpaid but which also guarantees that borrower protections remain in place.”
Less Truth In Lending
Mortgage borrowers have several protections under the Truth in Lending Act of 1964 (TILA), including a three-year right of rescission in situations where a lender did not properly disclosed all loan terms. Under this rule, a lender is required to cancel the mortgage before it can seek full repayment of the debt, meaning that the lender cannot foreclose on the basis of an improperly originated loan.
In September the Federal Reserve posted 249 pages of densely-written suggestions to update TILA, including a proposal to revise the rescission rule.
A coalition of consumer groups, civil rights organizations and state legal services complained, saying the proposed Fed regulations “would make the extended right of rescission useless by requiring that the homeowner must pay the entire amount demanded by the creditor before the creditor is required to cancel the security interest in the home.”
It is unlikely that the new Federal Reserve proposals can be stopped without a court fight. While the Federal Reserve asked for public comments there’s no requirement that it abide by any suggestions it receives.
Dump The State Foreclosure System
According to Daniel K. Tarullo, a Federal Reserve governor, we really need to re-think the inefficient state foreclosure system we now have in place.
“It has been increasingly apparent,” says Tarullo, “that the inadequacy of servicer resources to deal with mortgage modifications — an area that was a point of supervisory emphasis — was actually a reflection of a larger inability to deal with the challenges entailed in servicing mortgages in many jurisdictions and dealing with a complicated investor base.
“For example, foreclosure procedures are specifically the province of real property law governed by the states, and can vary not only by state, but also within states and sometimes even within counties. With or without regulatory changes, it is quite probable that servicer fees to securitization trusts will increase to reflect the costs associated with the complexities of the contemporary mortgage model.”
Translation: Mortgage servicers could foreclose more quickly and at lower cost if only we replaced 50 sets of state foreclosure rules with a single federal structure.
This may sound appealing. After all, we have one national currency, one width for railroad tracks and a gallon is a gallon anywhere you go, so why not exchange 50 state standards for one national foreclosure process?
A single set of rules could speed foreclosures, standardize paperwork, reduce the inventory of distressed properties and thus stabilize local housing prices. Unfortunately, the term “new rules” might also mean fewer protections for borrowers and still more concentration among the nation’s largest banks.
Why? Borrowers have virtually no influence in Washington — just name one borrower association with significant PAC money to spread around on Capitol Hill. Alternatively, the power and importance of lenders is immense.
According to Julie Williams, chief counsel with the Office of the Comptroller of the Currency, “the servicing portfolios of the eight largest national bank mortgage servicers account for approximately 63 percent of all mortgages outstanding in the United States — nearly 33.3 million loans totaling almost $5.8 trillion in principal balances.”
In fairness, some proposals in Washington can be seen as pro borrower. The so-called Produce The Note Act would require lenders to demonstrate loan ownership before foreclosing. However, unlike the affidavit defense bill which raced through Congress, the Produce the Note Act has been stalled on Capitol Hill since February 2009 without a hearing or a vote in either house.
Peter G. Miller is syndicated in more than 100 newspapers and operates the consumer real estate site, OurBroker.com.