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Rifts Continue to Surface Around Robo-Signing Settlement

Federal regulators split from state attorneys general last week to ""cut their own deals"":http://dsnews.comarticles/lets-make-deal-feds-move-on-robo-signing-settlement-without-state-ags-2011-04-06 with mortgage servicers as part of a settlement for the robo-signing mess that surfaced last fall.
[IMAGE] The regulators' terms include tighter quality controls to ensure foreclosure procedures are properly followed and independent reviews of 2009 and 2010 cases, as well as changes to the way servicers deal with delinquent homeowners, including providing a single point-of-contact through loss mitigation talks and halting foreclosure actions while negotiations for a loan modification are in process.

One major servicer has reportedly already signed on to the federal regulators' consent decree, and at least 13 more are expected to follow suit in the coming days.

Critics of the feds' side deal are making their voices heard. Dozens of consumer advocacy and community organizations are calling for federal regulators to withdraw their agreements, arguing that the consent decrees provide ""minimal guidance"" to banks on document handling and account management, and do not hold servicers accountable for illegal practices or stop avoidable foreclosures.

In a ""letter to the regulators"":http://www.responsiblelending.org/mortgage-lending/policy-legislation/regulators/regulators-should-withdraw-consent-orders.html, the organizations urge them to work with the state attorneys general and the U.S. Justice Department ""to create a meaningful agreement that holds banks accountable for illegal and abusive practices.""

State attorneys general have said they will move forward with their own, more stringent settlement without the federal regulators. But even in the attorney general camp there has been dissension.

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Just this week, New York State Attorney General Eric Schneiderman said he was concerned that a settlement could preclude individual states from continuing their own foreclosure and mortgage servicing investigations.

According to _Bloomberg_, Schneiderman feels that even a settlement should not be considered an end to the matter. ""Any settlement agreement should preserve the ability of attorneys general to follow the facts where they lead,"" Schneiderman's office told the news agency.

A faction of chief legal counsels from several states ""publicly expressed reservations"":http://dsnews.comarticles/delays-in-negotiation-and-more-ag-disagreement-causing-problems-for-servicer-settlement-2011-03-24 about certain provisions in the 27-page term sheet issued jointly by the states and federal regulators when it was released last month.

Namely, they said some of the proposal's terms could have the unintended effect of prolonging the foreclosure process. And they took considerable issue with the proposal's suggestion of principal write-downs for underwater borrowers, which the dissenting AG's said would be a disservice to homeowners who, despite the downturn, have worked hard to keep their mortgages current.

A ""study released Tuesday"":http://www.scribd.com/doc/52856735/The-Economics-of-the-Proposed-Mortgage-Servicer-Settlement by three economists says the original settlement proposal backed by the attorneys general ""would generate significant unintended negative consequences"" and is ""unlikely to provide broad or lasting benefits.""

The economists estimate that even a small increase in strategic defaults caused by a principal write-down mandate could increase the foreclosure inventory by $297 billion. They say mortgage rates would rise by as much as 45 basis points a year, another 280 days would be added to foreclosure timelines, and additional costs to the mortgage industry would tally up to $10 billion a year if the attorneys general's terms are put into play.

The paper was written by Charles Calomiris, a professor of financial institutions at Columbia Business School; Eric Higgins, a finance professor at Kansas State University; and Joseph Mason, Louisiana State University's banking chair and a senior fellow at the Wharton School.

Their research, though, was funded in part by the financial services industry, including entities affected by the proposed settlement, according to a footnote in the report. Although the authors write that the views are their own, some are dismissing their findings altogether based on the fact that it was paid for by servicers.

About Author: Carrie Bay

Carrie Bay is a freelance writer for DS News and its sister publication MReport. She served as online editor for DSNews.com from 2008 through 2011. Prior to joining DS News and the Five Star organization, she managed public relations, marketing, and media relations initiatives for several B2B companies in the financial services, technology, and telecommunications industries. She also wrote for retail and nonprofit organizations upon graduating from Texas A&M University with degrees in journalism and English.
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