WASHINGTON (Reuters) - U.S. regulators who failed to restrain excessive lending in the subprime mortgage market may be able help defaulting borrowers from losing their homes by persuading banks to avoid rushing to foreclosure.
While U.S. house prices were rising in the past five years, Wall Street investors rushed into the mortgage market by bankrolling companies that made risky loans to less creditworthy borrowers.
Those loans were often bundled into mortgage backed securities and sold off to investors who farmed out the debt collection work to mortgage servicers, but because the mortgages were not funded by bank deposits, U.S. regulators had little say over lending criteria.
While many of the mortgage lenders that originated subprime loans have now gone out of business, the companies servicing the loans are still in business, and the nation’s largest banks are among their ranks.
Bank regulators may have untapped authority to scrutinize banks’ servicing practices and can pressure them to be lenient on defaulting borrowers, analysts said.
“Can the bank regulators do anything with the servicer? The answer is ‘yes’,” said Gene Ludwig, a former bank regulator who now heads Promontory Financial Group in Washington.
Countrywide Financial, Chase Home Finance, CitiFinancial, Wells Fargo Home Mortgage, and HSBC Mortgage Services, were among the top ten subprime mortgage servicers at the end of the year, according to National Mortgage News. Each is overseen by one of the nation’s five federal lending regulators.
The regulators “should hold the servicers’ and the investors’ feet to the fire,” Sheila Bair, chairman of the Federal Deposit Insurance Corp., said at a congressional hearing last week.
A joint statement from Bair and other regulators that same day encouraged institutions to “pursue reasonable workout arrangements” with troubled borrowers.
Servicers can often waive penalties, lower interest rates, and take other steps to help a borrower avoid foreclosure.
“We do not believe that they have been doing enough,” said David Berenbaum of the National Community Reinvestment Coalition, a consumer-advocacy group.
Servicers are often too quick to push a mortgage into foreclosure, Berenbaum said, adding that regulators could demand servicers audit troubled loans and craft reasonable workout terms.
Such an effort would “send an important message,” he said.
Spokespersons for the FDIC, Office of the Comptroller of the Currency and Office of Thrift Supervision said that their agencies were encouraging institutions to help borrowers where possible. A spokeswoman for the Federal Reserve referred to the joint statement of two weeks ago.
Regulators have said that complicated accounting and contract rules governing mortgage investments often leave them hamstrung when they try to help troubled borrowers.
No national servicing standards exist but roughly a third of servicing is done by lenders and so bank regulators have a duty to define servicing principles, said Howard Glaser, an independent mortgage analyst in Washington.
“There’s no question that (bank) regulators can have enormous influence on servicing,” Glaser said, arguing that they should do more given the abuse seen in the sector.
In 2003, Fairbanks Capital Holdings Corp. paid over $40 million to settle claims the company forced illegal charges onto subprime borrowers it claimed were delinquent.
Disreputable servicers can extract big fees from borrowers pushed to the edge of foreclosure and “this is the last unregulated frontier in banking,” Glaser said.
Whatever additional steps regulators decide to take “they won’t do it just willy nilly,” said Ludwig, a former Comptroller of the Currency. “But if they believe the servicer is putting the bank at risk or is otherwise behaving badly they can go after the servicer.”
Regulators “have visitation rights at a minimum” and can report “if they think there is something rotten” with the servicing work, Ludwig said.