FDIC Chairman Sheila Bair warned mortgage bankers Wednesday that failure to take immediate and decisive action to deal with the foreclosure crisis and breakdowns in servicing procedures will trigger a double-dip in U.S. housing markets and keep the industry deeply mired in a cycle of credit distress.
Her fix includes assigning distressed borrowers a single point-of-contact throughout the entire loss mitigation process, instituting new fee structures so that servicers aren't forced to cut corners, and establishing a claims commission funded by servicers to compensate borrowers who've been impacted by substandard practices.
""FDIC-insured institutions have recognized more than half a trillion dollars in losses thus far, and they're not finished yet,"" Bair said.
""The fact is, every time servicers have delayed needed changes to minimize their short-term costs, they have seen a deepening of the crisis that has cost them - and the rest of us - even more. It is time for government and industry to reach an agreement that will finally bring closure to the crisis and pave the way for a lasting recovery in our housing and mortgage markets,"" she told mortgage professionals at the forum.
Bair urged lenders and servicers to recognize that loss mitigation is Ã¢â‚¬Å“not just a socially desirable practiceÃ¢â‚¬Â to preserve homeownership, but is Ã¢â‚¬Å“wholly consistent with safe and sound banking and has macroeconomic consequences.Ã¢â‚¬Â
For the industry to successfully respond to todayÃ¢â‚¬â„¢s foreclosure crisis, Bair said first, regulators must remedy failures endemic to the largest mortgage servicers with enforceable requirements that will improve opportunities for homeowners to avoid foreclosure.
She said one such requirement is that servicers must provide a single representative to assist a troubled borrower throughout the loss mitigation and foreclosure process.
Ã¢â‚¬Å“In order to prevent costly miscommunication, this person - and it does need to be a real person - must be well trained and adequately compensated,Ã¢â‚¬Â Bair said, and she stressed that this person must be authorized to put a hold on any foreclosure proceeding while loss mitigation efforts remain ongoing.
In addition, Bair said industry benchmarks - based on a maximum number of delinquent loans per representative Ã¢â‚¬" must be established and servicers must commit to adequate staffing and training for effective loss mitigation.
She noted though, Ã¢â‚¬Å“There is no question that the fee structure currently in place for most servicers provides insufficient resources for effective loss mitigation and has led servicers to cut corners in their legal and administrative processes.Ã¢â‚¬Â
Bair said paying servicers a low fixed-fee structure based on volume may be sufficient to ensure that payments are processed and accounts are settled during good times, but it does not provide sufficient incentives to effectively manage large volumes of problem loans during a period of market distress.
She said this compensation structure drove automation, cost cutting, and consolidation in the servicing industry in the years leading up to the crisis. Case in point, Bair said the market share of the top five mortgage servicers has nearly doubled since 2000, from 32 percent to almost 60 percent. However, when mortgage defaults began to mount in 2007 and 2008, she said servicing shops were left without the contractual flexibility, financial incentives, or resources they needed to responsibly manage distressed loans.
In addition, Bair said to expedite the loan modification process and help clear the market, the industry should look for opportunities to simplify loan modification offers in exchange for waivers of claims, and must also deal head-on with the second-lien problem and the potential conflicts of interest they pose.
Bair called for independent reviews of loss mitigation denials and an appeals process for borrowers; eliminating incentive payments to law firms for speedy foreclosures; and regulations that prohibit foreclosure sales when a loan is in loss mitigation, unless delay would disadvantage the investor or violate existing contracts.
Lastly, Bair said the industry must provide remedies for borrowers harmed by past practices. She suggested establishing a foreclosure claims commission, modeled on the BP oil spill or 9/11 claims commissions, which would be funded by servicers and address complaints from homeowners who have been foreclosed on as a result of servicer errors.
Bair said these resolutions should become part of a settlement agreement between servicers and the regulators and state attorneys general who are investigating foreclosure and servicing practices.