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March 3rd, 2011

Penalizing servicers is nothing but a sticky situation

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Buying justice macroSince the infamous robo-signing scandal, we’ve been keeping up on the potential penalties lawmakers have threatened to bestow upon mortgage servicers for their faulty or improper actions against struggling homeowners.

Just last week we reported that the head of the Federal Housing Finance Agency said that Fannie and Freddie “will be moving forward with servicer penalties… in the coming weeks.”

The latest I’m hearing is that a plan could be hatched to use those servicer penalties to help modify more mortgages. Sounds like victory, right? Not so fast. This isn’t sitting right with me for one main reason: I don’t think the “real” victims are going to get their due.

Let’s remember, the reason that these servicer penalties are being handed down in the first place is because of improper foreclosures. In the investigative process it was determined that an insurmountable number of borrowers had their paperwork improperly handled. Even so, we said before that it stands to reason that the majority of these borrowers affected by the robo-signing scandal were delinquent on their loans and essentially weren’t wrongful foreclosures.

That said, there were still wrongful victims.

The White House is currently in the process of deciding what to do with the servicer penalties that will be collected. According to sources close to the Washington Post, here are a couple possible ideas:

Under one option, the government would set a number of loans that the mortgage servicers as a group would have to modify. A second option would entail quotas for individual firms.

Another approach, rather than designating a number of loans to be reworked, would instead require the mortgage servicers to spend a certain amount of money modifying troubled loans.

This is where I see the red flags. Under these two solutions, I don’t see how regulators will determine who the true victims of the robo-signing scandal are and how they will be sought out and properly compensated.

More from The Washington Post:

But forcing the banks to reduce the principal on distressed loans could pose its own problems. Some people familiar with the discussions are concerned that if banks are required to meet a loan quota, they would put the top priority on modifying mortgages for borrowers who need relatively little help. By doing so, the banks could limit the losses they face in reducing the principal on loans.

“It creates some potential strange choices for the servicers,” one source said.

Mortgage costs could rise even more

These penalties are designed to assist struggling homeowners. But what about new borrowers? We’ve already explained that the Fannie, Freddie reform is going to send mortgage rates (and overall costs) upward. You would be re-missed if you thought that large financial firms would be socked with billions in penalties and those costs wouldn’t be passed onto their customers.

While I agree that the underwater problem in this country is an ongoing issue, one that has yet to find a viable solution (we’re still rooting for our Value Gap Refi plan), I’m not sure if these two ideas out of Washington are going to get aid to the real victims — those who were wrongly foreclosed upon.

Do you agree?

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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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