With housing finance still in disrepair and little activity in the way of newly issued, private residential mortgage securities, a panel of economists, former regulators and other mortgage industry experts are calling for national loan servicing standards that they say would promote and accelerate a market recovery.
More than 50 co-signers took this position in a letter addressed just before Christmas to Treasury secretary Timothy Geithner, Federal Reserve Board chairman Ben Bernanke and the heads of the Federal Deposit Insurance Corp, Federal Housing Finance Agency, Office of the Comptroller of the Currency and Securities and Exchange Commission. The letter asserted that new securitization standards should be adopted now to address the misaligned incentives and tranche warfare issues that have bedeviled mortgage servicing throughout this crisis.
One of the signers is investment banker, risk management adviser and co-founder of Institutional Risk Analytics R. Christopher Whalen, who organized the effort and posted the letter on his Web site. Whalen was joined, among others, by Brookings Institution guest scholar, housing policy expert and journalist Martin Mayer; former Federal Housing Finance Board chairman Allan Mendelowitz; prominent and often outspoken economists James Galbraith of the University of Texas; Nouriel Roubini of New York University; former Federal Reserve and FDIC official Robert Eisenbeis, now chief monetary economist of Sarasota, Florida-based Cumberland Advisors; University of Maryland Law School professor Michael Greenberger, formerly of the Commodity Futures Trading Commission and Justice Department; and affordable housing advocate Harold Simon, executive director of the National Housing Institute.
The dearth of mortgage credit, compounded by reported fraud and disarray in foreclosures, loan modifications and related processes, is bad for investors, bad for homeowners and ultimately bad for a sustainable residential mortgage securitization market and the U.S. economy, the letter said. Also at stake, it went on, are the health and soundness of insured financial institutions that rely on a functioning secondary mortgage market for liquidity management.
The chaotic situation in the mortgage market today demands immediate action to ensure all parties are treated fairly and to restore the confidence needed to support a recovery in real estate markets and the entire U.S. economy, said the letter.
It suggested such borrower- and investor-protection standards as prompt crediting and, when necessary, corrections of monthly loan payments; tying compensation structures to effective, long-term management of securitized assets; and barring commingling of homeowners monthly payments with servicers assets for any longer than two business days.
Another point urged in the letter: Be accountable for lost paperwork on loan modifications and/or for failing to suspend the foreclosure process when a homeowner is actively engaged in the loan modification process.
Signs of Additional Support
The letter follows and cites as encouragement a statement on December 1 by Federal Reserve Board governor Daniel Tarullo to the House Banking, Housing and Urban Affairs Committee. Surveying documentation, foreclosure and other issues that might require structural solutions, and noting that more loan servicing could be migrating to non-bank organizations, Tarullo said, It seems reasonable at least to consider whether a national set of standards for mortgage servicers may be warranted.
Tarullo appeared to be on the same wave-length as the Whalen letter-writing group as he pointed to the perverse set of incentives for homeowners with underwater mortgages and noted that homeowners who try to obtain a modification of the terms of their mortgages are all too frequently subject to delay and disappointment. He concluded that there is a strong case to be made that broader solutions are needed both to address structural problems in the mortgage servicing industry and to accelerate the pace of mortgage modifications or other loss mitigation efforts.
It remains to be seen how, or how quickly, the regulators act on these concerns as they pursue the rulemaking mandates of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. Those calling for fast action believe that the regulators can address servicing standards along with the new risk retention requirement, which will force lenders to hold on to 5 percent of the assets unless they meet the definition of qualified residential mortgages. There is no unanimity in the regulatory community on that point, however.
According to a December 22 report in American Banker, the FDIC has been quicker than the Comptroller of the Currency or the Fed to consider servicing standards an appropriate adjunct to the risk retention rulemaking, but there is a move afoot in Congress to urge regulators to take up the servicing issue as well.
Said the Whalen group, We cannot wait for uncertain future legislation to accomplish something that is clearly appropriate under the Section 941 risk retention rules of Dodd-Frank and current law, namely a national standard for loan servicing.
Summing up why he was one of the 52 who signed the letter, Allan Grody, a veteran financial industry consultant who is president of New York-based Financial InterGroup Holdings, says, I believe there is an urgent need to develop national standards for mortgage loans to unfreeze the private residential mortgage securitization market. A new definition for what constitutes a qualified residential mortgage should be offered. The situation in the mortgage market today demands such immediate action to support a recovery in real estate markets and the entire U.S. economy.
Clifford Rossi, an executive in residence and Tyser Teaching Fellow at the University of Marylands Robert H. Smith School of Business, who formerly worked at Fannie Mae and Freddie Mac and has proposed a comprehensive housing finance reform plan of his own, says he does not generally sign on to such statements but supports greater standardization of servicing practices and believes it will go far in addressing a number of process deficiencies and gaps that plague borrowers today. I would actually like to go farther and in the GSE [government-sponsored enterprise] reform proposal expected early this year would like to see a national servicing capability for mortgage-backed securities that carry a government guarantee.