The Federal Deposit Insurance Corporation (FDIC) is yet another branch of our government that is on the hook for trillions of dollars in the failed orgy of corruption, incompetence and greed that has become our American system of property ownership. Our leaders are doing their best to keep the lid on this crisis, but it truly is a crisis of epic proportions that will not go away. Here is the first real recognition of this reality from a high ranking federal official:
The Robo-Signing Controversy and the Need to Modify Mortgages
The latest controversy over securitization relates to concerns that legal documents required for foreclosure have in some cases been improperly exercised ““ or “robo-signed” ““ by mortgage servicers. We are working closely with our fellow regulators to get to the bottom of this problem. Our initial review suggests that FDIC supervised non-member state banks have limited exposure to the robo-signing situation, but we continue to work on this issue with the regulators of other insured institutions through our backup examination authority.
In addition, we are in contact with investors who have purchased failed bank assets from the FDIC ““ both our loss-share partners and structured transaction managers ““ to verify that their foreclosure claims are compliant with the law. We have made clear that losses associated with improperly executed foreclosures will not be eligible for loss-share arrangements until problems are appropriately remediated.
In retrospect, there were warning signs that servicing standards were eroding. Those signs should have caused market participants and regulators alike to question current practices. For example, servicing fees declined significantly over the past several years. We should have been asking how servicers were able to achieve such efficiencies without sacrificing quality. Sadly, those types of questions were not asked.
As regulators embark on changes to our supervisory programs, we need to get back to basics and spend more time understanding and ““ where necessary ““ questioning the business models that drive the earnings and create the risks present in the banking system. The robo-signing controversy underscores just how time-consuming and expensive foreclosure really is for all parties concerned.
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. At the same time, I fear that the litigation generated by this issue could ultimately be very damaging to our housing markets if it ends up unduly prolonging those foreclosures that are necessary and justified.
The regrettable truth is that many of the properties currently in the foreclosure process are either vacant or occupied by borrowers who simply cannot make even a significantly reduced payment and have been in arrears for an extended time. Ultimately, this problem will require some type of global solution. And in developing that solution, I would suggest that all interested parties consider some type of “triage” on foreclosures, perhaps providing safe-harbor relief if the property is vacant or if the servicer offered a meaningful payment reduction ““ say a minimum of 25 percent ““ and the borrower could still not perform on the loan.
We know from experience that reducing the monthly payment through modification raises the chance that the borrower will make good on the loan. We also know that in too many instances, servicers have not made meaningful efforts to restructure loans for borrowers who have documented that they are in economic distress. Our research, based on loans modified by the FDIC at Indy Mac, shows that raising the size of the payment reduction from 10 percent to 40 percent or more can cut redefault rates by half.
Given foreclosure backlogs and bloated housing inventories, timely and meaningful loan restructuring efforts make economic sense now more than ever. Unfortunately, those efforts have been impeded by overly complicated processes and insufficient servicing staff.
In a larger sense, the robo-signing controversy is just another indication of the need to improve institutional practices all along the chain of securitization — from origination, to securities underwriting, to servicing. The misaligned incentives that have been built into the securitization process have left back-office operations far too weak to support a robust system of mortgage finance.
If we want to rebuild housing finance into a more solid foundation for our economic future, we will need to act decisively to fix the underlying problems that led to the current crisis.