Congressman Brad Miller is sending the following letter to the financial regulators, and is currently rounding up additional signatories:
The Honorable Timothy Geithner Secretary
of the Treasury Department of the Treasury
1500 Pennsylvania Avenue, N.W.
Washington, D.C. 20220
The Honorable Edward DeMarco Director
(Acting) Federal Housing Finance Agency
(FHFA) 1700 G Street, N.W. 4th Floor
Washington, DC 20552
The Honorable Sheila Bair Chairman
Federal Deposit Insurance Corporation 550
17th Street N.W. Washington D.C., DC
The Honorable Ben S. Bernanke Chairman
Board of Governors of the Federal Reserve
System 20th Street and Constitution Avenue
N.W. Washington, DC 20551
The Honorable Mary L. Schapiro Chairman
Securities and Exchange Commission 100 F
Street, N.E. Washington, DC 20549
The Honorable John Walsh Comptroller of
the Currency (Acting) Administrator of
National Banks 250 E Street, S.W.
Washington, DC 20219
Dear Secretary Geithner, Chairman Bair, Chairman Shapiro, Acting Director DeMarco, Chairman Bernanke and Controller Walsh:
We are writing to urge that any exception to the credit risk retention requirements of section 941 of the Dodd-Frank Act include rigorous requirements for servicing securitized residential mortgages.
The Act requires that securitizers retain five percent of the credit risk on mortgage-backed securities. The requirement is the subject of a study by Christopher M. James published by the Federal Reserve Bank of San Francisco dated December 13, 2010, and entitled “Mortgage-Backed Securities: How Important Is ‘Skin in the Game’?”, which finds that the requirement will have the intended effect of reducing “moral hazard” and significantly reducing the loss ratios on mortgage-backed securities.
The Act provides for an exception, however, for “qualified residential mortgages” and for other “exemptions, exceptions, and adjustments” to the risk-retention requirement. We strongly urge that you use great care in allowing any exception to the risk retention requirement, and that you be vigilant in assuring that any exception not defeat the purpose of the requirement. Recent experience in financial regulation has been that seemingly modest, reasonable exceptions have swallowed the rules and allowed abusive practices to continue unabated. In considering any requested exception under section 941, please remember that the advocates for rule-swallowing exceptions to other financial regulation have not been entirely candid with regulators or legislators on the likely effect of those exceptions.
The rules adopted pursuant to section 941 must, of course, require rigorous underwriting standards for “qualified residential mortgages” or any other mortgages excepted from the risk retention requirement, but underwriting requirements are not enough. The rules must also address the servicing of securitized mortgages. Much of the turmoil in the housing market, which is largely responsible for the painfully slow recovery, is the result not just of poorly underwritten mortgages, but of conduct by mortgage servicers.
We direct your attention to the “Open Letter to U.S. Regulators Regarding National Loan Servicing Standards” dated December 21, 2010, and signed by 51 people with extensive knowledge of mortgage servicing (the “Rosner-Whalen letter”). We strongly urge that you consider closely the recommendations included in that letter.
The Rosner-Whalen letter makes sensible recommendations regarding the treatment of payments by homeowners, “perverse incentives” in servicer compensation, mortgage documentation, and foreclosure forbearance during mortgage modification efforts.
We especially urge that any exception require that servicers modify mortgages pursuant to established criteria to avoid foreclosure where possible. The statute governing “Farmer Mac” mortgages provides a useful example of such criteria. See 12 U.S.C. 2202a (“Restructuring Distressed Loans”). Foreclosures are catastrophic for homeowners, holders of mortgage-backed securities, the housing market, and the economy as a whole.
The conduct of servicers is largely responsible for much unnecessary hardship. A
requirement that servicers modify mortgage according to established criteria to avoid foreclosure can avoid that hardship in the future. Neutral, established criteria will also avoid “tranche warfare” between classes of investors.
We also especially urge that any rule for securitized mortgages require that servicers not be affiliated with the securitizer. There are obvious potential conflicts of interest, and no apparent countervailing justification. At a recent hearing of the House Financial Services Committee, several witnesses from major servicers were unable to offer any advantage in being affiliated with securitizers, other than to offer “full service” to customers. That justification is entirely unpersuasive. Homeowners may select the bank with which they have a credit card or a checking account, but they have no say in who services their mortgage.
In fact, community banks and credit unions have been reluctant to sell the mortgages that they originate to “private-label securitizers” for fear that the mortgages will be serviced by an affiliate of a bank, and the servicer will use that relationship to “cross market” other banking services to the homeowner. Requiring that servicers be independent of banks, therefore, would advance the goal of increasing the availability of credit on reasonable terms to consumers.
The Dodd-Frank Actives provides you ample authority to reform servicing practices, and regulation of mortgage securitization will be ineffective without such reform.
Rep. Brad Miller [and others]
Word on the Hill is that Miller's letter is getting traction in the House.
The Whalen-Rosner letter, co-signed by prominent economists such as Nouriel Roubini and James Galbraith, is here:
Securitization Standards Letter
As Yves Smith notes:
As we have written, and as experts and foreclosure defense lawyers have reported in Congressional testimony, and as pending lawsuits by attorneys general in Arizona and Nevada allege,
servicer abuses are a significant cause of foreclosures. These include
including delaying and misapplying payments, using false hopes of
pending mods to extract more payments from consumers, and applying
compounding junk fees.
These efforts come at a time when the Federal Reserve and other
regulators have indicated through act and deed that they will not rein
in fraud by the big banks and mortgage servicers or otherwise lift a
finger to help homeowners.
- The Fed, along with the more bank-friendly Office of the Comptroller of the Currency, is resisting moves to craft rules cracking down on banks that charge illegal fees and carry out improper foreclosures (and see this)
- The Fed is trying to make it harder for homeowners to fight mortgage fraud by gutting truth in lending laws
- Neither the Fed or Senate are taking any steps to stop banks from unlawfully breaking into people's homes
help support the efforts of Congressman Miller, Chris Whalen, Josh
Rosner and the others taking a laboring oar on trying to clamp down on
fraud by mortgage servicers, please sign this petition.
While it is tempting to assume that government regulators will get on
top of this without an outcry by the public, remember that:
- As Yves Smith wrote recently about treasury barring use of TARP funds to help borrowers facing foreclosure:
"If you had any doubts about whose side the Administration is on, this story should settle all doubts."
- And as Professors William K. Black and L. Randall Wray note, in a slightly different context:
Fed cannot conduct a credible investigation. It has taken so many
fraudulent nonprime loans and securities as collateral that it is the
leading proponent of covering up these losses."