Lawmaker urges to end affiliations between servicers and banks.

Written by Biloxi

Representative Brad Miller, a Democrat from North Carolina, wrote a letter to top officials at six federal agencies or regulators: the Federal Reserve, the Federal Deposit Insurance Corporation, the Federal Housing Finance Agency, the Securities and Exchange Commission, the Office of the Comptroller of the Currency and the United States Treasury create a strict criteria that mortgage loan servicers to follow when working on loan modifications. Representative Miller is advocating that mortgage loan servicers be separated from the institutions that hold a borrower’s loan in order to eliminate potential conflicts. As you may recall, there have been many cases reported in the media in which mortgage loan servicers deny homeowners loan modification because mortgage loan servicers claim that the investors for the loan won't allow mortgage loan servicers to do so. We have later found out that is not true. Investors lose more in the long run in foreclosed homes than in loan modifications whereas the mortgage loan servicers gain more in foreclosing on a home and collecting late fees, attorney fees, and other fees than providing  a loan modification.

In his letter, Representative Miller pointed to the rules set out by Federal Agricultural Mortgage Corporation or  Farmer Mac, a government-sponsored enterprise that finances farm loans.

Those rules under Farmer Mac include requirements about who qualifies for a change in the terms of their mortgage, and a calculation of the likely loss that a foreclosure might create. Mr. Miller wants to use the Farmer Mac rules for a loan modification critieria. Here is an excerpt of Miller's letter:

We especially urge that any exception require that servicers modify mortgages pursuant to established criteria to avoid foreclosure where possible. The statute governing “Farmer Mac” mortgages provides a useful example of such criteria. See 12 U.S.C. 2202a (“Restructuring Distressed Loans”). Foreclosures are catastrophic for homeowners, holders of mortgage-backed securities, the housing market, and the economy as a whole.

The conduct of servicers is largely responsible for much unnecessary hardship. A requirement that servicers modify mortgage according to established criteria to avoid foreclosure can avoid that hardship in the future. Neutral, established criteria will also avoid “tranche warfare” between classes of investors.

Representative Miller is aiming to end affiliations between servicers and banks because it creates a conflict of interest and an advantage to the bank servicers. Currently, the FDIC trying to eliminate bank servicers' conflicts of interest. From the NY Times:

Under its proposal, a servicer would have to disclose an ownership interest that it or an affiliate had in a loan secured by the same property on which another mortgage was outstanding. The servicer would also have to establish a process to address any second lien that it might own where the first mortgage is seriously delinquent.

A separation of the affiliation between bank servicers and banks that hold the note is a good step in the right direction. However, unless incentives and compensations that derive from loans from the bank servicers don't change, then the bank servicers won't change.