Standard advice when you’re in a hole is – before you do anything else, stop digging. But that strategy doesn’t seem to be working for the financial institutions trying to find a way out of the foreclosure morass in which they are buried. While the institutions have tossed their shovels aside, lawmakers, consumer advocates, class action attorneys and investors are digging furiously around them, widening a hole that is already plenty deep.
Courts, which had been approving foreclosure petitions almost automatically, are now requiring lenders and loan servicers to provide clear and copious proof that their standing to foreclose is clear and their documentation is in order. Under newly adopted rules in Maryland, for example, judges can appoint outside experts to review foreclosure paperwork and require attorneys representing lenders to attest to the accuracy of the documents they file. A similar rule in New York State requires attorneys to submit an affidavit affirming “under pains and penalties of perjury” that they have verified the accuracy of their foreclosure documents. Judges in Ohio County, meanwhile, have given attorneys 30 days to verify the accuracy of their foreclosure documents; if they can’t provide that assurance, their foreclosure actions will be dismissed.
The courts are now aware of potential “flaws” in the foreclosure system, “and we decided we couldn’t turn a blind eye to that,” Judge Eileen Gallagher, head of the Cuyahoga County court system’s foreclosure committee, told the Washington Post. Attorneys in New York City estimate that the courts are dismissing between 20 percent and 50 percent of foreclosure petitions because of flawed paperwork, the Post reported.
Expressing similar concerns, the sheriff of Cook County, IL (which includes Chicago) has said he won’t enforce foreclosure evictions initiated by bank of America, JP Morgan Chase and GMAC/Ally Financial until they can provide assurances that their foreclosures were handled “properly and legally.”
“I can’t possibly be expected to evict people from their homes when the banks themselves can’t say for sure everything was done properly,” Sheriff Thomas Dart said in a press statement.
As media coverage of the foreclosure mess intensifies, more borrowers are challenging foreclosure actions, collectively as well as individually, and consumer class action suits are mounting. One proposed class action suit filed against Morgan Stanley asks the court to dismiss pending foreclosure actions against thousands of borrowers, declare their loans null and unenforceable, award members of the class actual and punitive damages plus court costs and attorneys’ fees. Other financial institutions facing similar suits have acknowledged that they can’t estimate their potential losses from mortgage-related litigation.
Investors are also beginning to rattle litigation swords that are, if anything, more threatening than those being waved by consumers. Investors sustained “enormous damages” from securities they purchased between 2005 and 2007, when the housing bubble was inflating and the subprime mess was brewing, one attorney representing investors in a suit against a Massachusetts hedge fund, told Reuters.
“This could be a large hit for the entire industry,” Brian Maillian, CEO of Whitestone Capital Group, agreed. “It’s a very, very large problem,” he told MSNBC, adding, “we really don’t know how deep the hole is.”
The Congressional Oversight panel charged with monitoring TARP (shorthand for the financial industry assistance plan, or ‘bail-out’, depending on how you felt about it) has warned that the foreclosure fiasco could have far-reaching and potentially devastating impacts on financial institutions and the broader economy. In an extensive and unusually blunt analysis, the committee notes that Bank of America alone faces a potential $47 billion buy-back claim from one investor. “It is possible that widespread challenges along these lines could pose risks to the very financial stability that [TARP] was designed to protect,” the report says.
The committee doesn’t suggest that this worst case scenario is inevitable, only that it is possible if financial institutions are forced to reimburse investors on a large scale for the toxic mortgages the investors purchased.
Assurances from Treasury Department officials that the foreclosure problems pose “no systemic risk to the financial system” drew a skeptical response from members of the oversight panel during a recent hearing. Given the litigation against major financial institutions pending and rumored, “it is not a plausible position that there is no systemic risk here,” Damon Silvers, a member of the panel and director of policy and special counsel to the AFL-CIO, said.
Sen. Ted Kaufman (D-DL), the panel’s outgoing chairman, agreed. “If investors lose confidence in the ability of banks to document their ownership of mortgages,” he said, “The financial industry could suffer staggering losses. “ That prospect is particularly “alarming,” Kaufman added, “coming so soon after taxpayers spent billions of dollars to bail out these very same institutions.”
Foreclosure Preemption?
Growing concerns about flawed foreclosure procedures (see above item) have triggered calls for national foreclosure rules to replace the state-by-state regulatory framework that governs foreclosures now. Echoing the debate over federal preemption, advocates of national standards say they are needed to eliminate disparities that harm both borrowers and lenders and to ensure efficiency and fairness in the foreclosure process; opponents say state control provides specific and tailored protection for state residents that federal oversight can’t duplicate.
Nationalizing the foreclosure process would represent “a major incursion” by the federal government into an area in which state’s rights have long prevailed, Alan Kaplinsky, a partner at Ballard Spahr LLP, told American Banker. “Every court and every state has different procedures that need to be followed and tailored to the needs of the state.”
The Conference of State Bank Supervisors, which led the battle to curb the federal preemption authority of the Comptroller of the Currency, is predictably opposing the imposition of national foreclosure standards. But some consumer advocacy groups, which have generally opposed federal preemption of consumer protection laws, are taking the opposite position in the foreclosure debate.
“There should be a standard that ensures for responsible management of the foreclosure process with documentation and processes that ensure fairness [for consumers] and opportunities to avoid foreclosure,” John Taylor, president of the National Community Reinvestment Coalition, said. “In some of these red states,” he told American Banker, “the protections for the people relative to financial institutions are abysmal, so having a federal standard is the right [solution].”
Changing Profile
First-time buyers dominated the home purchase market during the past year, accounting for a record-setting 50 percent of all purchases completed between July 2009 and June 2010, according to the National Association of Realtors’ (NAR’s) annual survey of buyers and sellers. That’s the largest percentage recorded since the NAR began collecting this information in 1981.
Most first-time buyers and, in fact, 31 percent of all buyers responding to the survey, took advantage of the federal tax credits offered between Jan. 1, 2009 and April 30, 2010 in an attempt to bolster the battered housing market, the NAR reports.
The survey, designed to identify key characteristics of buyers and sellers, also found that, as in the past, first-time buyers were generally younger than both repeat buyers and the broader pool of buyers, had lower incomes, and planned to stay in their homes for an average of 10 years, vs. a projected time frame of 15 years for repeat buyers.
Reflecting changes both in the housing market and in buyer expectations, only 11 percent of repeat buyers had owned the homes they sold for three years or less compared with 30 percent in the 2006 NAR profile, at the height of the housing boom, when rapid sales and re-sales were the norm.
Typical sellers had owned their home for an average of 8 years (compared with 7 in the 2009 profile) and sold for a median of $30,000 more than they had paid.
“Sellers who purchased at the top of the market and had to sell in a short time frame were hurt by the price correction,” NAR President Vicki Cox Golder noted in a press statement. “But the vast majority who were able to stay for a normal period of homeownership, generally built enough equity to make a trade-up purchase,” she said.
The survey did not indicate the number of sellers who had refinanced or obtained home equity loans that might have reduced or eliminated the gain they realized on the sale and/or affected the price of the trade-up home they were able to buy.
Another Reappraisal
Appraisers who have railed against the Home Valuation Code of Conduct Fannie Mae and Freddie Mac adopted last year are getting their wish - sort of. A provision of the Dodd-Frank financial reform legislation scuttled the code and ordered the Federal Reserve to draft a new set of appraisal rules addressing industry concerns. Those new rules (which take effect on an interim basis in December, pending final approval in the spring) generally do a better job than the valuation code of insulating appraisers from pressure to “adjust” their valuations, industry executives agree. But critics say the Fed rules don’t eliminate the pressure to reduce appraisal fees and speed up the review process, both of which undermine appraisal quality, according to industry critiques.
The Fed’s interim final rule, now open for public comment, specifies that appraisers must be “free to use their independent professional judgment in assigning home values, without influence or pressure from those with interests in the transactions,” and that the compensation appraisers receive must be “customary and reasonable” for the services they provide. The problem, industry executives say, is that many financial institutions are requiring appraisers to sign affidavits verifying that their compensation is “reasonable and common” when it is neither.
Appraisers say the Fed rules also fail to address the major unintended consequence of the Home Valuation Code -- appraisal management companies (established to create the arm’s length relationships between lenders and appraisers that regulators require) are hiring only appraisers willing to accept below-market fees and promise above-market turnaround times, putting an increasing share of appraisal assignments in the hands of less experienced or less professional appraisers willing to accept terms that more qualified appraisers reject.
Even if the Fed’s interim rules are adopted in final form, they may not be the last word on this subject. The Dodd-Frank legislation directed the Government Accountability Office (GAO) to study appraisal issues, focusing specifically on how federal regulations and lender policies handle potential conflict-of-interest problems. The results of that study are to be published next summer.
Mark Linne, executive vice president of Appraisal World, an on-line appraiser community, thinks the current debate about appraisal practices is healthy and long overdue. “What will come out of this is really a renaissance of valuation, where good practices will come into play,” he told MarketWatch. In the end, Linne predicts, “everyone will benefit.”
Interchange Challenge
Banking industry executives have been complaining loudly about ‘interchange fee” legislation, directing the Federal Reserve to ensure that the “swipe fees” financial institutions charge retailers for debit card usage are “reasonable and proportional.” But one bank has filed suit to block the legislation, saying it is both unreasonable and unconstitutional.
Minnesota-based TCF national Bank has taken up this battle “and we believe we are going to e successful,” the bank’s chief executive officer, William Cooper, told the Washington Post.
The bank’s suit contends that the legislative language (contained in a provision of the massive financial reform legislation enacted earlier this year), does not allow the Fed to consider all the costs related to the issuance and management of debit cards. The bank also argues that the law is unfair, because it applies only to large institutions, with assets of $10 billion or more. (Community banks and credit unions have also opposed the interchange fee legislation, even though most are exempt from it, arguing that competitive pressures will require them to slash their fees anyway.)
Retailers supported the interchange fee limits, arguing that the swipe fees are excessive and harmful to consumers. But TFC and other banking industry executives maintain that any threshold established under the “reasonable and proportional” standard will be arbitrary, and any fee reductions that result will only benefit retailers, who are not required to pass on those savings to consumers.
Although the American Bankers Association is not a party to the suit, Edward Yingling, the association’s chief executive, issued a statement supporting TFC’s core argument: “There is no justification,” Yingling said, “for the government providing a direct subsidy to large retailers by legislating a price for a service.”
