Foreclosure problems show major flaws in the housing industry

State and federal officials are investigating “robo-signing” where managers signed off on hundreds of foreclosure cases a day without properly reviewing the documents. 

Although she doesn’t expect that legislation will be needed to address the foreclosure paperwork problem if the issue is mostly procedural, she did say “we must now clarify the rules for government support of mortgage securitization.”

The extended foreclosure problem will require some type of “triage” and a global solution that would allow banks to take ownership of properties, such as providing safe harbor relief for vacant properties or payment reductions for borrowers — maybe a minimum of 25 percent —and the borrower could still not perform on the loan, she said. 

The “regrettable truth” is that most of the homes in foreclosure are either vacant or homeowners are unable to make even significantly reduced payments,” she said. 

“As I have repeatedly said, foreclosure should be a last resort, undertaken only where bona fide loan restructuring efforts have not succeeded and all legal and procedural requirements have been fulfilled.”  

She also urged all those involved in mortgage financing to pay attention to evidence of problems in the system in the future. Leading up to the recent housing market crisis, the system provided warning signs “that servicing standards were eroding” that should’ve caused market participants and regulators to question practices, such as a decline in servicing fees.

“In the end, the flaws of the system boiled down to three fundamental and interrelated problems: misaligned incentives, implicit government support, and the emergence of financial companies that were Too Big To Fail,” she said.

“Insufficient attention was paid to both safety and soundness and basic consumer protection. With each of these parties acting in its own best interest, the system as a whole lurched toward disaster.”

Several major mortgage servicers including Bank of America Corp., Ally Financial Inc.’s GMAC Mortgage and JPMorgan Chase & Co. are among those banks that had temporarily halted foreclosures. Bank of America had a 50-state moratorium but ended that to focus on the 23 states where courts handle foreclosures. 

The Federal Housing Finance Agency recently released a four-step plan that banks must follow as they look into whether or not they moved forward with foreclosures despite questions surrounding paperwork problems — flawed court papers and missing documents.  

The FDIC, the Federal Reserve and the Office of the Comptroller of the Currency are also involved in investigations. 

Federal officials, including the White House, have pushed for banks to move quickly so as to not cause additional problems in the slowly recovering housing market.