By Enma Diaz
Miami, Fl

U.S. mortgage servicers go through a new phase of tighter oversight as regulators seek to shorten the number of messed up foreclosures and increase loan modifications for preoccupied borrowers.

The industry, foretells $10.6 trillion in loans, has been swiped over by more than 3 million foreclosures since 2006. The housing-market collapse demonstrate failures, in the way servicers are paid, track loans and process property seizures that threaten to stop a jump in prices and sales.

``If we fail to act now to deal with the foreclosure crisis, we risk triggering a double-dip in U.S. housing markets,'' Sheila Bair, chairman of the Federal Deposit Insurance Corp., said in a speech last week to mortgage-industry executives in Washington. ``The problem is serious, and the need for action is urgent.''

Changes being analyzed include a new fee structure for servicers, independent reviews of rejected requests to ease loan terms and a fund to compensate victims of improper foreclosures, according to Bair and other federal and state regulators. Lawmakers have proposed reining in the privately run Merscorp, even as the company states it could serve as a national mortgage registry.

While regulators are in the early stages of their work, any changes probably will increase the cost of servicing loans, which would mean higher costs for homeowners. The reforms are in part a response to a long list of court cases that showed banks trying to foreclose using shoddy documentation or without being able to demonstrate they had the standing to do so.

Until last week, Jacqueline Yulee was defending her Jacksonville, Fla., home against foreclosure by two banks, each claiming it owns the $213,750 mortgage she signed on Halloween in 2003.

Wells Fargo & Co., based in San Francisco, filed its complaint against the 58-year-old insurance agent on April 14, more than a year after Minneapolis-based U.S. Bancorp started its proceedings.

The companies are trustees for investors in two separate mortgage pools, and her loan couldn´t be held by both at the same time. Last week, after being asked about the dueling foreclosures, Wells Fargo withdrew its lawsuit.

The second suit shouldn't have been registered, said Ron Bendalin, general counsel at Irving, Texas-based Vantium Capital, whose Acqura Loan Services business is servicing the mortgage for Wells Fargo. The loan was sold to the Wells Fargo trust on Feb. 3, 2010, and the trust should have replaced the plaintiff in the first case, he said.

``I think we put too much trust in banks,'' said Yulee, who stopped paying her mortgage two years ago after losing a previous job. ``We assume they know what they're doing.''

The Mortgage Bankers Association, the industry's Washington-based trade group, is seeking a role in developing new rules and has put together a panel of executives to study proposals, Chief Executive Officer John A. Courson said.

Servicers gather monthly mortgage payments, and may modify or foreclose on a loan in a default.
They often don't own the loans they are servicing. The four biggest companies by portfolio size -- Bank of America, Wells Fargo, JPMorgan Chase & Co. and Citigroup -- service about half of home loans by value.

Industry revenue is based on the size of the loan, not the cost to manage. That means servicers make less money on delinquent or defaulted loans, which are more expensive to administer.

Servicers have an incentive to push for foreclosure, which can generate additional fees, and they also can charge borrowers when they are late making payments, giving them a reason to delay loan modifications. Accounting rules allow banks that foreclose to hold off writing down any loss until the home is sold. They must take the loss immediately when allowing a sale by the owner for less than value of the mortgage.

While the flat-rate fee system worked when the market was rising, it failed during the meltdown, Federal Housing Administration Commissioner David Stevens said in an interview. One alternative would be to impose fees that vary with the cost of servicing a loan, he said.

``Servicers' lack of reserving appropriately and not creating infrastructure to manage nonperforming markets like the kind we're in is inexcusable,'' Stevens said. ``You cannot overstate the concern'' among regulators that the industry doesn't have enough capital, he said.

The FHA can impose triple damages on servicers that violate its rules on handling foreclosures.

The FDIC's Bair is also calling for variable fees.

Banks, which are typically paid 0.25 percent of the principal balance to service a loan, ``created perverse incentives to automate critical servicing activities and cut costs at the expense of accuracy, reliability and currency of loan documents and information,'' she said in written testimony for a Senate hearing last month on housing.

Bair this month proposed giving borrowers the right to an independent, third-party appeal of requests to modify loan terms when they have been denied. She also suggested that servicers fund a foreclosure commission -- modeled after the one formed to distribute money to victims of Gulf of Mexico oil spill last year -- to solve borrower complaints.

Edward DeMarco, acting director of the Federal Housing Finance Agency, on Jan. 18 directed Fannie Mae and Freddie Mac to work with the Department of Housing and Urban Development to consider alternatives to flat servicing fees.

Fannie Mae and Freddie Mac, the two largest mortgage- finance companies, were taken over by the government in 2008 and are overseen by the FHFA. New rules wouldn't be implemented until mid-2012 at the earliest, DeMarco said in a statement.

The U.S. Treasury Department endorsed DeMarco´s approach, while Bair said more rapid change is required. She wants to include new mortgage-servicing standards in risk-retention rules required by the Dodd-Frank Act that are being written now, a position that puts her at odds with the mortgage industry. She has support from consumer groups and state regulators including New York Banking Superintendent Richard H. Neiman.

While regulators are focused on servicers, U.S. Representative Marcy Kaptur has proposed legislation to curb the role of Merscorp, the Reston, Va., company formed in the mid-1990s by the industry to track servicing rights and beneficial ownership of loans. Many large servicers log the changes on the private database run by its Mortgage Electronic Registration Systems unit rather than filing mortgage assignments with county records offices. The system has allowed the industry to save at least $2 billion in filing fees.

Kaptur, a Democrat from Ohio, introduced a bill in November to prohibit Fannie Mae, Freddie Mac and Ginnie Mae from owning or guaranteeing any mortgage for which MERS is the mortgagee of record. The House didn't act on the legislation, and Kaptur plans to push it again this year.

Consumer advocates have said that MERS, which has 60 percent of newly originated loans on its system, masks the real owner of a loan and is subject to lapses and mistakes because it isn't authoritative or transparent. Judges nationwide have issued diverging opinions on whether MERS can act as the nominee, or agent of the lender on the mortgage.

In a statement, MERS said there has never been a requirement that assignments be filed with local land offices and that its system shows the beneficial owner of loans.

By: Enma Diaz, Editor
Mortgage Lending News, LLC
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