January 19, 2011 / 1:14 PM / 9 years ago

FDIC's Bair calls for foreclosure claims commission

WASHINGTON (Reuters) - The mortgage servicing industry should fund a new commission to compensate homeowners who may have wrongly been kicked out of their homes, a top U.S. banking regulator said on Wednesday.

Federal Deposit Insurance Corp Chairman Sheila Bair said this claims commission could be modeled on those created to compensate victims of the BP oil spill and September 11, 2001 attacks. She said the size of such a claims fund would have to be negotiated.

The biggest U.S. mortgage servicers, including Bank of America, Wells Fargo and JPMorgan Chase & Co, have been accused of taking possibly illegal shortcuts in some foreclosure proceedings, such as using “robo-signers” to sign hundreds of unread documents a day and advancing foreclosures without proof they held the mortgages.

The allegations have been a reputational and financial hit for the companies. They are facing repurchase demands from investors in mortgage-backed securities and multiple probes from bank regulators and all 50 state attorneys general.

The AGs have already been negotiating with the big banks to set up such a nationwide fund for wrongful foreclosures.

In a speech outlining proposals for broad reforms to the mortgage servicing industry, Bair said she expects the industry to oppose such a commission but argued that this reluctance would be shortsighted.

“Every time servicers have delayed needed changes to minimize their short-term costs, they have seen a deepening of the crisis that has cost them — and the rest of us — even more,” Bair said at an event hosted by the Mortgage Bankers Association.

Iowa Attorney General Tom Miller, who is leading the states’ investigation, said he would review Bair’s proposal.

“We are having our own discussions as a multistate group, and I’m confident that together we will find a fair way to address this foreclosure breakdown,” he said in a statement.

On Wednesday, acting Comptroller of the Currency John Walsh said banking regulators have completed the field work for their probe and are now talking to banks about what type of penalties they may face and what changes they should make to their servicing practices. He said they expect to complete these talks next month.

BUNDLING REFORMS

Bair also used the speech to push her proposal to include national servicing standards in a risk-retention rule regulators are crafting.

Other regulators, such as the Federal Reserve and the Office of the Comptroller of the Currency, support nationwide standards but have balked at including them in the risk retention rule arguing the issue would be best dealt with separately.

Walsh said his agency has made proposals to other regulators that could be included in a standalone rule on servicing standards that his agency believes could deal with the issue in a more comprehensive way.

The risk retention rule, mandated by the Dodd-Frank financial reform law, will force loan originators and securitizers to retain in their portfolios at least 5 percent of the value of loans, rather than shifting all of the risk to investors as the debt gets resold. Certain mortgages could escape this requirement if they meet standards set by regulators.

Bair singled out the issue of second-lien mortgages, which have long been an obstacle to resolving defaulted loans, as a particular problem that could be addressed in the risk rule.

Owners of the second-liens — primarily the four biggest U.S. banks — have been reluctant to take writedowns on their junior holdings when modifying terms of the first-lien, creating friction with owners of the main mortgage.

“As part of any resolution of claims regarding large servicers, a fixed formula should be established to govern the treatment of first and second mortgages when the servicer or its affiliate owns the second lien,” she said.

Reporting by Dave Clarke, Editing by Derek Caney, Dave Zimmerman and Bernard Orr

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