Should State Regulators Have More Power Over Banks


Could this whole housing bubble including the nationwide foreclosure mess have been avoided or at least been arrested before things got so out of hand?

According to the article Regulators flawed in foreclosure oversight published in The Washing Post this morning, three years ago some state bank regulators were concerned that some of their residents were losing their homes unnecessarily and "asked the biggest national banks for details about their foreclosure operations."

Two banks, J.P. Morgan Chase and Wells Fargo refused to cooperate and the state regulators asked The Office of the Comptroller of Currency to intervene. John Dugan, the comptroller at the time, refused because they were planning on collecting their own foreclosure information and thought that the states' inquiries risked "confusing matters". The Office of the Comptroller of Currency then "chose itself not to scrutinize the foreclosure operations of the largest national banks, forgoing any examination of their procedures and paperwork. Instead, the agency relied on the banks' in-house assessments. These provided no hint of the problems to come until they had tripped the nation's housing market, agency officials later acknowledged."

Why are robo signers suddenly big news?

For some reason robo signers have become big news back in October of this year. I personally don't understand why this is big news all of a sudden. Lenders rubber stamped loans without proper review causing the bubble, why would anyone expect them to behave differently when foreclosing?

The way mortgages were split up and securitized and the poor records keeping of the lending industry made it difficult in some instances for the lenders to prove they still owned the mortgages and had the right to foreclose.

Before going to court lenders are supposed to verify certain information about the property and mortgage. You know, simple things like they property location, owner, that the borrower is actually in default and oh yeah, that they actually own the note and have a right to foreclose.

But lenders were lax with their reviews and for years attorneys used this to help stay a foreclosure and gain leverage in negotiating a way to clear the complaint.

Back in 2008 Enrie Harpster in Florida  was able to delay his foreclosure for nearly a year by forcing his lender to prove their case.

"About 80 percent of foreclosure lawsuits don't contain the original mortgage note - the proof that the lender has a right to foreclose, lawyers said. This is because mortgages often were sold in bundles to investors during the housing boom. The notes were sometimes misplaced."

There were numerous instances even before this including a class action suit in Boston. Why is this news all of a sudden?

"Based on what we were seeing and what we were concerned about, it felt like a chronic underreaction at the federal level," said John Ryan, a senior official with the Conference of State Bank Supervisors

Even when the mortgage industry itself identified possible flaws in foreclosure paperwork, the agency was slow to act. In September, Ally Financial suspended foreclosures after discovering problems with tens of thousands of cases. But even then, the OCC did not begin to examine the operations of other major banks. Instead, the agency asked them to undertake internal reviews and told them it would conduct its own examination later, an OCC official said.

If the states were allowed to inspect the lender's foreclosure processes would it be possible that robo signers wouldn't be a hot topic?

Even worse, was John Dugan (a former bank lobbyist) and the Office of the Comptroller of Currency conspiring with the banking industry because they all knew that there were problems with the bank's foreclosures and didn't want to hold up bank ability to repossess property or was he just negligent in his duties?

This isn't the first time the OCC has intervened on behalf of banks when states tried to stem their local foreclosure problems.

Back in Aug '08 I wrote an article about how states tried to stem predatory lending as early as 2002. New Jersey was one of the states that tried to prevent the sub-prime mortgage crisis when it enacted the New Jersey Home Ownership Security Act of 2002.

Abusive mortgage lending has become an increasing problem in this State, exacerbating the loss of equity in homes and causing an increase in the number of foreclosures in recent years. One of the most common forms of abusive lending is the making of loans that are equity-based, rather than income-based. The financing of points and fees in these loans provides immediate income to the originator and encourages the repeated refinancing of home loans. The lender's ability to sell loans reduces the incentive to ensure that the homeowner can afford the payments of the loan. As long as there is sufficient equity in the home, an abusive lender benefits even if the borrower is unable to make the payments and is forced to refinance. In addition, the financing of high points and fees causes the loss of precious equity in each refinancing and often leads to foreclosure.

It basically says lenders were flipping mortgages to earn fees and since they could easily sell mortgages to the secondary market it didn't matter to them if the borrower could pay or not because the bank gets paid with fees and from selling the loan, not when the borrower makes monthly payments.

In response to these regulations the rating agencies implemented policies that made it difficult to pool loans that originated in these states. This is bad for the secondary mortgage market but it's good for the housing market because it would force lenders to be more selective of who they lent money too since they couldn't sell any piece of paper to the secondary market.

Unfortunately all the State's actions were nullified when the Office of the Comptroller of Currency issued regulations in 2004. There was a press release issued by the OCC where then Comptroller of the OCC John D. Hawk Jr. indicated in a speech at a lunch hosted by the Federalist Society on July 24, 2003 that the OCC would overrule the State laws but that press release is now missing from the OCC site.

A portion of that speech is available on Mike Konczal's blog post CFPA I, Preeption, or What  A Bad CFPA Would Look Like.

The OCC will, of course, continue to defend the right of national banks to be free from state efforts to regulate their business…

The GFLA [Georgia Fair Lending Act] imposes severe restrictions on so-called “high-cost” mortgage loans, requiring lenders who offer them to comply with a range of substantive and procedural requirements. The practices proscribed under the Georgia law include the financing of credit insurance, debt cancellation or suspension coverage, limitations on late fees and payoff statement fees, pre-payment penalties, negative amortization, increases in interest rates after default, and balloon payments. Certain categories of loans are restricted as to the number of times they could be refinanced and the circumstances under which a refinancing could occur.

I thought the OCC was supposed to regulate banks, not stand up for them? They haven't been doing a very good job even when addressed with concerns from State regulators.

The States are the ones most affected by foreclosures. They have to deal with the impact to their local economy as well as the cost to handle all these foreclosure cases and auctions. Shouldn't the states have more authority especially considering what a poor job the OCC has done?


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