Sen. Christopher Dodd on Tuesday requested that the U.S. Treasury Department’s Financial Stability Oversight Council examine the threat that foreclosures pose to the nation’s financial system.
“I urge the secretary of Treasury to convene that council to seek broad solutions to this crisis,” Dodd, D-Conn., said at a hearing in Washington, D.C., of the U.S. Senate Banking, Housing and Urban Affairs Committee, which he chairs.
The council was recently created to identify and head off serious risks to the system — like the collapse of Lehman Brothers in the fall of 2008.
Some mortgage servicers in the past month have admitted to errors in how they process foreclosures and vowed to fix them.
But critics question whether financial incentives now in place motivate servicers to favor foreclosures over less damaging alternatives such as short sales, loan modifications and principal forgiveness.
Senators described constituents who were advised by employees of mortgage servicers to miss loan payments to qualify for a modification, only to then be pushed into foreclosure.
“I’ve had 22 months of town-hall meetings with people bringing their documents and transcripts of voice mails and e-mails from servicers telling them that what they’re doing is OK, that they’re in compliance with the law. And then they find out that they’ve been hit by a penalty of some kind or another,” Sen. Michael Bennet, D-Colo., said at the hearing.
Bennet questioned why mortgage servicers aren’t always acting in the best interests of investors, homeowners and the economy, a charge that mortgage servicers denied.
“The best outcome is to keep a person in their home and to keep them paying,” said David Lowman, chief executive of Chase Home Lending. “We are all advantaged by doing that.”
Dodd suggested a servicer’s failure to pursue a modification that was in the best interest of both the borrower and investors in a mortgage should be allowed as a defense against foreclosure.
Georgetown University law professor Adam Levitin went even further, suggesting that loan modifications and foreclosures be handled by an outside party other than servicers.
Iowa Attorney General Tom Miller said a 50-state investigation into foreclosure practices wasn’t seeking such a radical overhaul.
“We are trying to figure out ways to change the paradigm with them (the servicers) staying in place,” he said.
That would include reforms such as a dedicated employee handling an individual foreclosure and making sure loan modifications are pursued and rejected before a foreclosure is started.
Penalties and sanctions are also needed for servicers that don’t comply.
Aldo Svaldi: 303-954-1410 or asvaldi@denverpost.com
