FDIC Proposes Foreclosure Claims Commission: “Adherence to the Law Not Optional”

Sheila Bair, Chairman of the FDIC, spoke at a meeting on residential mortgage servicing sponsored by the Mortgage Bankers Association this morning.  She proposed a “foreclosure claims commission” that would be set up and funded by servicers in order to try to settle claims of borrowers who had wrongfully suffered due to servicing errors.

Bair commented:

“Throughout the mortgage crisis, from the earliest days of the subprime credit problem to the current robo-signing controversy, the most persistent adversary has been inertia in the servicing and foreclosure practices applied to problem loans. Prompt action to modify unaffordable subprime loans in 2007 could have helped to limit the crisis in its early stages. Instead, we saw one and a half million foreclosures that year, contributing to a decline in average home prices that eventually totaled about one-third.”

Bair said that misaligned incentives and a failure to deal with second mortgages are the biggest impediments to more mortgage modifications.  There are simply not incentives in place that would cause mortgage servicers and second lien holders to commit to mortgage modifications.  Bair said that “many servicers have refused to commit the resources necessary to pursue [mortgage modifications] in a coordinated and efficient manner.” Some of the proposals that Bair suggested to solve the problems are as follows:

• Servicers much provide a single point of contact to assist borrowers in distress, and that point of contact must be well-educated and remain constant throughout the modification process.
• In conjunction with the above, servicers must agree to hire adequate staffing and commit to more training for loss mitigation.
• A fixed formula that would deal explicitly with first and second liens with regard to modifications.
• Independent review of loss-mitigation denials.
• Cessation of bad foreclosure paperwork.
• In conjunction with the above, banks and servicers must foreclose in their own name rather than in the name of MERS.  Further, complete chain of title and promissory note transfer history would be needed to establish standing to foreclose.
• Prohibition of foreclosure sales when a loan is in loss mitigation.  No more dual track modifications and foreclosures.
• Foreclosure claims commission similar to the BP or 9/11 claims commissions.

Bair further commented:

“If we fail to act decisively now to deal with the foreclosure crisis, we risk triggering a double-dip in U.S. housing markets that could roll back the progress that has been made to date. The problem is serious, and the need for action is urgent.”

This is all fine and good, most of these proposals seems like good ideas to me.  However, most of the above proposals have been floating around in one form or another since the foreclosure crisis began.  The issues the housing market is having have been well-documented and re-hashed endlessly.  What is less clear to me is who exactly has the political will to make these changes happen.  Nor am I convinced that some sort of commission will be able to make those who have been wrongfully foreclosed upon whole again (see this video on the BP Claims Commission).  I have very real fears that settlements/commissions such as these will amount to slaps on the wrist for the parties who committed the wrongdoing, and then forbear the aggrieved party from further action. I’m curious to know what you think? Would such a commission work?