Mortgage Servicing News - November 27, 2007
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Congress May Force Servicers to Aid Borrowers
By Ted Cornwell
With foreclosure rates rising, Congress is considering legislation that would dramatically change the way servicers manage defaulted loans.
While various proposals are being bandied about, most would tighten the rules for foreclosing on a defaulted mortgage. Consumer advocates want to make it more difficult for lenders to repossess a home and add fees and costs to delinquent loan balances.
The National Association of Consumer Bankruptcy Attorneys recently got into the act. NACBA, citing data from the Center for Responsible Lending, says two million U.S. homeowners are currently "on track to lose their homes to foreclosure." The consumer attorneys are promoting the passage of a bill, H.R. 3609, the "Emergency Home Ownership and Mortgage Equity Protection Act," which would allow borrowers to "restructure" a mortgage on a primary residence in the case of bankruptcy. Lenders with long memories will understand what this is all about. The consumer attorneys want to "cram down" the amount of secured debt on home loans.
The bill may never become law, but it illustrates the increasing pressure servicers are under to accommodate seriously delinquent borrowers with forbearance, restructurings and workouts designed to keep borrowers in their homes. The bill also highlights a new political landscape, in which a more liberal Congress has become is receptive to consumer protection legislation.
H.R. 3609 has lending groups hopping mad. Despite the increasing emphasis being placed on loan restructuring and forbearance, lenders don't want to see changes to the loan contract terms imposed on them by bankruptcy courts. Only a couple of years after legislation strengthening the hands of creditors cases was enacted, the pendulum has clearly shifted back in favor of consumers.
Groups like the Mortgage Bankers Association and America's Community Bankers say that the bill, sponsored by some of the most liberal members of Congress, would undermine the mortgage market and make it more difficult and costly for consumers to obtain a mortgage loan.
As the ACB put it, the bill "injects risk into the secured lending process and will increase the cost of owning a home, through a higher down-payment, interest rate or both."
Meanwhile, some of the pressure on servicers isn't coming from the federal government at all. It's coming from the states. California Governor Arnold Schwarzenegger brokered an agreement with the state's four largest mortgage servicers, allowing them to extend their introductory rates on adjustable-rate, subprime mortgage loans to borrowers at risk of foreclosure. As Aite Group analyst Eva Weber puts suggests, as California goes, so may go the nation.
"A California experiment has potential implications for the whole country, and regulators will be watching closely."
A California Congresswoman, Linda Sanchez, is spearheading the effort to pass H.R. 3609. Noting that the number of foreclosures nationally increased 42% last year and is expected to rise even more dramatically this year, she said that the foreclosure rate is "approaching that of the Great Depression." That may be hyperbole, but there's enough of it fueling political discussions these days to keep a lot of pressure on servicers.