A Growing Field And Shrinking Options

An October 26th New York Times article reports that the Federal Reserve has jumped into the ring of government interests now actively investigating mortgage servicing and foreclosure practices. Federal Reserve Chair, Ben Bernake has announced that an "in depth" review of the nation's largest morgage servicers' is underway, and that preliminary results should be announced next month. So, similar to the States, the federal government is looking for evidence of improper foreclosures.

For those keeping score, we now have a cooalition of every State Attorney General's office, scores of State banking commissioners,the Federal Reserve and HUD all investigating the same issues. And, while the State Attorneys General are fielding daily press inquiries and pressure for a foreclosure moratorium, HUD Secretary Shaun Donovan was quoted as saying that "the federal government has found no systemic issues underlying legal documents," which is a fairly astonishing comment for two reasons. First, the Fed's preliminary report is not even due out until November. Second, and more importantly, it is the first signal that there is likely to be a chasm of perspective between the feds and the State law enforcement officials that are investigating this issue. From a policy perspective, the federal government cannot allow the mortgage servicing industry to be imperiled, and a lengthy foreclosure moratorium is untenable. The scope of the related economic impact would simply be too large. Meanwhile, the States are faced with identifying an actual cooalition that must be centered on similar policy and State laws and who can work together toward a global resolution,another difficult challenge.

So, how does this play itself out? Well, mortgage servicers are not likely to be singled out individually, because there simply aren't sufficient resources to conduct the number of necessary investigations. The States will want an industry task force, similar to the one that the States themselves have designed, to interface with the States and forge a resolution. Initially, those involved will be down in the weeds arguing over issues such as robosigning and improper notarization, but that will ultimately give way to broader policy discussions and a resolution that is palatable to the industry and that focuses more on the future than on the past.

In the mean time, look for words of encouragement to the industry from the federal government, a flat report from the Federal Reserve and relative quiet from the State Attorneys General, whose boots-on-the-ground lawyers have already seen the problems and are concerned with identifying a practical solution. Turns out, it is lost on no one that as goes the mortgage servicing industry and the resolution of the current issues, so goes the economy for the foreseeable future, but the States aren't ready just yet to concur that all should be forgiven. That will take some work. In the interim, what is the worst mistake that a mortgage servicer can make? That would be to say that there are no issues in its shop without knowing...really knowing, not robo-knowing, for sure that the statement is correct. The most clear and present danger? Tone deafness and misunderstanding that it may well be better to admit some problems now and fix them than to claim perfection and force investigators' hands. Sometimes it is better to be part of the crowd.