FDIC’s Bair: Mortgage Industry Should Compensate Consumers. by Alan Zibel

By Alan Zibel

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Sheila Bair, chairman of the Federal Deposit Insurance Corp.

The lending industry should compensate consumers harmed by shoddy foreclosure practices and is in need of far-reaching reforms to ensure that homeowners get better treatment in the future, a top U.S. banking regulator said Wednesday.
Sheila Bair, head of the FDIC, called for a “foreclosure claims commission” to handle complaints from homeowners who say they have lost their homes through errors made by their mortgage companies. The commission, she said, could distribute claims to affected borrowers–much like Gulf Coast oil spill fund–and would be paid for by the mortgage industry.
“We need to provide remedies for borrowers harmed by past practices,” Bair said in a sternly worded speech at a Mortgage Bankers Association conference in Washington. She called for broad changes across the industry, potentially as part of a settlement with attorneys general investigating allegations that mortgage servicers broke state laws.
“The fact is, 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,” she said. “It is time for government and industry to reach an agreement that will finally bring closure to the crisis.”
Mortgage servicers, which collect homeowners’ payments and distribute them to investors, have been under intense scrutiny amid revelations that lenders cut corners when processing foreclosure cases. Lenders have pledged to fix their problems. However, banks say the vast majority of affected homeowners have missed mortgage payments and will still face foreclosure.
The problems with mortgage-servicing companies show that the industry’s business model and fee structure are “fundamentally flawed and in urgent need of reform,” Bair said.
The industry, Bair said, has done a poor job of assisting homeowners on the verge of foreclosure. “Many servicers have refused to commit the resources necessary to pursue it in a coordinated and efficient manner,” she said. “Fair dealing with borrowers and adherence to the law are not optional.”
Bair’s remarks come as regulators are devoting heightened attention to mortgage-servicing companies. Federal housing regulators said Tuesday they will develop a new compensation structure for the industry.
The Federal Housing Finance Agency is working on the initiative with the Department of Housing and Urban Development and federally controlled mortgage buyers Fannie and Freddie. Since the pair dominate the mortgage market, any new rules would likely become an industrywide standard.
Compensation for mortgage servicers is currently based on a minimum servicing fee that is deducted from a borrowers’ interest payments. Consumer advocates and some regulators say mortgage servicers don’t have enough incentive to modify loans for troubled homeowners, which has led to poor results from loan-modification programs.
Industry officials say they have hired thousands of workers to deal with a crush of foreclosures and defaults. But some acknowledge that the industry was ill-prepared. “The current model does not work,” said Thomas Marano, head of Ally FInancial Inc.’s mortgage operations. “It’s not built for a calamity.”
Bair, meanwhile, proposed several other reforms. Borrowers, she said, should have the right to appeal to an independent third party if they are denied for loan assistance, and consumers seeking assistance with their loans should be provided a single person to contact.