A proposed overhaul to regulate mortgage loans could impact how the banks treat struggling homeowners fighting to prevent foreclosure.
Current government loan modification programs have been mostly voluntary, with few rules governing bank practices. Most loan modification programs have been deemed a failure for not helping more homeowners keep their homes, further contribuing to the ailing housing market by creating a glut of below-market value properties.
Recently the nation's biggest banks, including Ally Financial, Bank of America, Citigroup, and Wells Fargo, received a lengthy proposal from the 50 state attorneys general and federal agencies to change their mortgage-servicing policies.
The document is separate from financial penalties the banks face after last fall's government investigation sparked by the robo-signing controversy. In that case, the banks were not following proper procedures, and simply fast tracking, or stamping paperwork without properly reviewing it before foreclosing proceedings. That settlement could require the banks to write down more than 20 billion dollars in loan balances, helping some distressed borrowers hang onto their homes and avoid foreclosure.
The proposal was just delivered by all the attorneys general, along with the U.S. Justice Department, the Department of Housing and Urban Development, the Federal Trade Commission, and the Consumer Financial Protection Bureau.
The code of conduct is seen as a starting point for negotiations.
Borrowers and housing counselors say homeowners are forced through a maze of confusion to apply for a
loan modification, leaving borrowers further behind on payments and more vulnerable to foreclosure. They hope this document leads to more transparency in today's housing market.
Here are some highlights of the reforms it wants to see from the banks:
- Adopt formulas forcing banks to regularly consider offering loan write-downs to underwater borrowers.
- Enforce firm modification timelines for servicers to meet, including notifications to borrowers of actions on modification requests.
- Increase supervision of foreclosing law firms and other third-party vendors.
- Outline steps for banks to verify the accuracy of amounts owned, and place limits on fees the banks can charge distressed borrowers.
- Provide a single point of contact for borrowers over the course of the modification process.
- Require a freeze on foreclosures during modification considerations.
Modifications by both sides are to be expected. The banks say they are reviewing the proposal.