Key to success of mortgage pact: Enforcement
The $25 billion agreement reached last week includes more rights for consumers in their dealings with loan servicers. But will anything really change?
One provision in the $25 billion mortgage settlement reached last week between the five largest banks and the state and federal governments is the pledge that loan servicers are going to treat borrowers better.
Think you've heard this before? You have.
Did anything improve? Not that anyone could tell. Banks are still losing documents and giving borrowers the runaround, not to mention forcing expensive homeowners insurance on borrowers who sometimes already have insurance.
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Whether this agreement will finally provide borrowers with some better service from servicers is a big question mark. It all depends on whether, finally, the government can put some bite behind its bark.
As Gretchen Morgenson wrote in The New York Times:
But perhaps the largest question looming over this settlement is how it will be policed. Recent history is littered with agreements that required banks to take specific steps to make amends. All too often, the banks have skated away from their promises. …
So many borrower programs have failed since the foreclosure crisis began. Another nonstarter will only add to the mistrust that many people harbor toward those large institutions, both public and private, that contributed so mightily to this mess.
This provision would have real meaning if we applied the same standard our nation has applied in other areas: a zero tolerance rule. What would happen if each bank knew that any violation would result in a minimum fine of $1 million? I suspect bank behavior would change significantly.
The new servicing standards include:
- Borrowers will have the right to see all of their loan documents to make sure any potential foreclosure is legal.
- Borrowers will be given every opportunity to first modify their loans before facing foreclosure, and foreclosure will not proceed while negotiations on a loan modification are under way.
- Lenders and servicers will be required to have "an appropriate number of well-trained staff members."
- Borrowers will have the right to deal with a "reliable, single point of contact" throughout the modification or foreclosure process.
- Servicers cannot levy late fees while a modification is under consideration or pay themselves late fees from a customer's payment before applying the payment to principal and interest.
It all sounds very good – if it happens.
"It would be a major improvement," Alan White, a law professor at Valparaiso University, told The Huffington Post. "But much of this is restating obligations loan servicers already have."
He added: "It is very hard for law enforcement to make a large company do its job effectively if it is bound and determined not to."