Banks face deadline on tougher mortgage standards
By Ronald D. Orol, MarketWatch
WASHINGTON (MarketWatch) — Big banks struggling with stalled mortgage modifications face a new hurdle — tighter standards due to take effect in just over two months from housing giants Fannie Mae and Freddie Mac.
Servicers will be required from January to meet tougher rules from Fannie and Freddie, which own or guarantee more than two-third’s of all new single family mortgages, or face fines.
The new standards, which went into effect on a voluntary basis Oct. 1, come in the wake of revelations about foreclosure-documentation errors at big banks and a delayed application process for many troubled borrowers seeking to modify their mortgages and stay in their homes.
Bank servicers collect a fee for administering all aspects of a loan, including sending monthly payments to mortgage investors, maintaining records and collecting and paying taxes.
Under the new rules, after a mortgage is more than 30 days delinquent, the servicer is required to send a package of foreclosure mitigation alternatives to the borrower, who has 30 days to consider it and respond.
Once the servicer receives a complete package from the borrower they have another 30 days to consider all foreclosure alternatives, taking into account the borrower, servicer and investor, and make a decision.
The servicer must consider whether the borrower can reinstate the loan or eliminate the delinquency by setting up a repayment plan. If that doesn’t work, a servicer would determine if the borrower is eligible for a government modification program and if not, if they qualify for a private modification program, a Making Home Affordable short-sale program or private short-sale process.
“In that 30-day time period the borrower is going to be evaluated for the best alternative,” said Freddie Mac servicing director Robert Kimble.
Those new tight response times are expected to be a major headache for the top four U.S. mortgage servicers, Bank of America Corp. BAC +0.17% , Wells Fargo WFC +0.45% , J.P. Morgan Chase & Co. JPM +0.20% , and Citigroup Inc. C +0.31% . These four companies are also top securitizers of mortgage loans.
The banks for their part say they will meet the new rules.
“We are working closely with Fannie and Freddie to get up to full compliance with their servicing alignment,” said Chase spokesman Patrick Linehan.
“We expect to meet the compliance requirements deadline set by the FHFA agencies,” added Wells Fargo spokesman Vickee Adams. Citigroup and Bank of America declined to comment.
The new standards are known as the servicer alignment initiative because Fannie and Freddie worked together to create a unified approach. Previously, they had different approaches. The new rules might also set the template for mortgages that aren’t purchased or guaranteed by the two firms that are under government conservatorship.
Philadelphia Unemployment Project Director John Dodds said he is worried that big bank servicers aren’t structured to make “good, intelligible decisions” about whether borrowers qualify for modifications in the short time-frame set out by the standards.
“If they have to do it that quickly they would be more likely to deny someone because they don’t have enough time to consider it,” Dodd said.
Manoj Singh, formerly senior vice president of pricing and securitization at Freddie Mac, said the two mega-firms can easily take enforcement actions if needed. He questioned whether the same sort of standards could be applied to mortgages not purchased or backed by the two housing giants.
“Here you have the agencies closely monitoring the performance of the servicers,” Singh said. “With private securities, whose role is it to monitor whether servicing is being done in this uniform mechanism?”
Fines can be handed out if the new standards aren’t met. Freddie Mac, for example, has set performance benchmarks using a formula designed to get servicers to help distressed borrowers quickly.
While the servicers could get a bonus of $500 per application if over 60% of troubled mortgage modification requests are handled at a high standard, the lenders also face $500-per-application fines for those handled below standard.
Those $500 hits could add up for the big banks. Between June 2010 and June 2011, about 6.6 million mortgages were originated by U.S. lenders, the largest part of which was issued by the biggest banks, according to CoreLogic.
Ronald D. Orol is a MarketWatch reporter, based in Washington.