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March 11th, 2011

Fed declares: No wrongful foreclosures found

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Foreclosure for SaleAfter an investigation that lasted several months, the Fed has declared that they found no wrongful foreclosures. Brought to light by the infamous robo-signing scandal, mortgage servicers have been raked over the coals and accused of wrongful foreclosures and improper practices.

While the banks continue to stand behind the Fed’s findings, saying that the borrowers who were foreclosed upon were already delinquent and thus deserving of foreclosure, consumer advocates have fired back saying that banks, and everyone else for that matter, needs to reevaluate what the definition of “wrongful foreclosure” actually is:

Kirsten Keefe, a member of the Fed consumer panel and an attorney at the Empire Justice Center in Albany, New York, said the Fed’s report defined “wrongful foreclosures” as repossessions of borrowers’ homes who were not significantly behind on their payments.

Based on that definition — the homeowners were already in default — the Fed found the foreclosures to be justified, members said.

But Keefe, who represents troubled borrowers, argued that the definition should be expanded to include foreclosures in which the wrong party brought the foreclosure action or cases that involve significant errors in foreclosure documents, like an inflated past-due amount, for example. Other consumer advocates at Thursday’s public meeting appeared to agree.

“It is so dangerous to make the conclusion that we heard yesterday that there were no wrongful foreclosures,” said Mark Wiseman, a former principal assistant attorney general in Ohio who oversaw consumer protection matters.

Not all about the headline

The Fed has expressed some worry that the mass public will focus too much on the headline of their investigation — no wrongful foreclosures found — and miss out on the fact that they still uncovered improper practices employed by servicers. Furthermore, according to the Fed’s Wednesday briefing on their investigation, they revealed that the loan sample size they examined was relatively small (500 loans):

Citing Wednesday’s briefing, [Rashmi Rangan, a member of the panel and the executive director of the Delaware Community Reinvestment Action Council] said the Fed review found numerous flaws in banks’ procedures and internal mortgage operations, and that the Fed’s bank examiners directed the firms to fix those problems.

One firm was found to be using Microsoft DOS, an outdated computer operating system, to handle home mortgages, Rangan said.

When all is said and done, I’m sure that some wrongful foreclosures will be unearthed. Yet as I mentioned last week, I’m just concerned those borrowers won’t be properly compensated. Penalizing servicers with fines and/or tasking them with additional home-retention efforts could lead to less-deserving borrowers getting help and increased costs to all consumers across the board.

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About the HSH Blog

HSH.com's daily blog focuses on the latest developments in the mortgage and housing markets. Our mission is to relate how changes in mortgage rates and housing policy, as well as the latest financial news, impacts consumers, homebuyers and industry insiders alike. Our 30-plus years of experience in the mortgage industry gives us an edge as we break down the latest changes in an ever-changing market.

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Tim Manni

Tim Manni is the Managing Editor of HSH.com and the author of their daily blog, which concentrates on the latest developments in the mortgage and housing markets.

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