MarketWatch: Treasury rapped for not fining mortgage lenders

By Ronald D. Orol

The head of a congressional housing committee on Thursday said the Treasury Department hasn't done enough to push lenders to modify mortgages that are close to default.

Rep. Maxine Waters, chairwoman of the subcommittee on Housing and Community Opportunity, joined other Democratic lawmakers at a hearing on problems in mortgage servicing in saying that the department has not adequately penalized loan servicers at big banks for failing to assist troubled borrowers with an Obama administration loan modification program entitled the Home Affordable Modification Program.

In many cases, Waters argues, borrowers have waited for a loan modification to be processed only to be served with a foreclosure notice.

Phyllis Caldwell, chief of the Treasury's Homeownership Preservation Office, acknowledged that the department has not taken back incentives that have already been paid to lenders as part of the HAMP program. But she added that Treasury has pursed many "non-monetary" remedies such as subjecting lenders to further evaluations.

"There have been no monetary penalties from what I'm hearing from you, but you have done some work to say they have to change their practices and procedures," Waters said.

Also Democratic lawmakers raised concerns that bank servicers have not fulfilled their obligation to offer borrowers HAMP modifications.

In response, Caldwell said that Treasury has found that in less than 5% of the time bank servicers have not met requirements under HAMP. In those situations, she added, Treasury has instructed the servicer that they may not decline a homeowner from access to the HAMP modification program and they "must go in and fix the process."

As part of HAMP program, servicers have been receiving $1,000 for each successful permanent modification, as well as additional government funding for each month the borrower stays current on its loan. Homeowners also receive $1,000 a year for five years as part of the program, as long as they stay current on their loan payments. The Special Inspector General from the Troubled Asset Relief Program in October noted that just $600 million of the $50 billion has been expended.

Waters also said the problems were "systemic" in nature.

"There is significant evidence to suggest that the speed-driven, corner-cutting operations endemic in the mortgage servicing industry have produced systemic and damaging consequences for the nation's homeowners and for our housing and financial markets," said Waters.

The White House so far has said there aren't systemic problems as it has resisted calls for a national foreclosure moratorium. Several banking regulators including the Federal Reserve, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp. are probing mortgage servicers.

The hearing comes as a group of large financial institutions have admitted to having used the tactic of robo-signing, where institutions assign one person to quickly approve numerous foreclosures with only cursory glances at the paperwork to determine whether all the documents are in order.

Waters and other lawmakers added that additional issues that have arisen include situations where banks have failed to properly record transfer and ownership of mortgages and situations where financial institutions have failed to maintain proper custody of the mortgage title.

Despite this list of concerns, John Walsh, Acting Comptroller of the Currency at the OCC, testified that he does not believe the paperwork mess represents a systemic problem.

"We are not aware of a reason to believe that there is some systemic reason to doubt the functioning of the system but certainly there were some systematic failures within the individual servicers," Walsh said.

Rep. Randy Neugebauer, R-Texas, said he worried that the paperwork problems are being used as a tool by attorneys to deliberately slow down the foreclosure process, all of which will slow down foreclosures, limit house sales and hurt the economic recovery.

"I am concerned that the paperwork problems are being used as a tool to deliberately slow down the mortgage foreclosure process," Neugebauer said. "Because of these actions foreclosure processes have slowed significantly. I am also concerned about the ballooning foreclosure back-lock will prevent the market from clearing which will lead to further decline in housing prices."

Waters joined Senate Banking Committee Chairman Christopher Dodd (D., Conn.) and a Congressional Oversight Panel in arguing that a newly formed Financial Stability Oversight Council, which comprises banking and securities regulators, needs to address the paperwork issue.