The ongoing tangle that has become the foreclosure process in many parts of the country moved in two directions last week, each of which could impact credit unions.
On the one hand, credit union mortgage analysts were encouraged that a nationwide foreclosure moratorium appeared to move off the agenda after the White House made it clear the Obama administration would not support one. Further, Bank of America and other large banks also announced that they had finished their initial review of their foreclosure processes and were ready to start them again.
This signaled that foreclosures would continue, and both analysts and economists have said that will help the overall housing market to recover, benefiting credit unions as mortgage lenders.
On the other hand, continuing investigations by state attorneys general and increased interest from federal regulators, combined with increased litigation, means that the issue of how foreclosures have been conducted and whether all of them have been proper appears likely to continue well into next year and may worsen.
This will only heighten the uncertainty in the housing market and continue to put downward pressure on home prices as potential buyers of foreclosed homes could be scared away, economists said.
One of the more pessimistic or cautionary voices last week belonged to FDIC Chairman Sheila Bair. Speaking to a conference on the future of housing finance, Bair expressed the fear that the litigation around doubts on mortgage procedures and paperwork could really harm the housing market and economy.
"As I have repeatedly said, foreclosure should be a last resort, undertaken only where bona fide loan restructuring efforts have not succeeded and all legal and procedural requirements have been fulfilled," Bair told the meeting during her keynote address. "At the same time, I fear that the litigation generated by this issue could ultimately be very damaging to our housing markets if it ends up unduly prolonging those foreclosures that are necessary and justified."
Bair made it clear that, in her view, far from being a minor problem involving the paperwork in a few thousand mortgages, the foreclosure dilemma may require a systemic solution with even worldwide ramifications.
"Ultimately, this problem will require some type of global solution," she said. "And in developing that solution, I would suggest that all interested parties consider some type of triage on foreclosures, perhaps providing safe-harbor relief if the property is vacant or if the servicer offered a meaningful payment reduction-say a minimum of 25%-and the borrower could still not perform on the loan."
On the same day, Federal Reserve Chairman Ben Bernanke told the meeting that the Federal Reserve was coordinating a broad effort by federal regulators to look into the issue.
"We are looking intensively at the firms' policies, procedures and internal controls related to foreclosures and seeking to determine whether systematic weaknesses are leading to improper foreclosures," Bernanke said in his prepared remarks to the meeting."We take violations of proper procedures seriously. We anticipate preliminary results of the review next month. In addition, Federal Reserve staff members and their counterparts at other federal agencies are evaluating the potential effects of these problems on the real estate market and financial institutions."
The biggest impact the controversy has on the housing and mortgage market continues to be the levels of uncertainty it introduces to an already situation-and this being an election year has only heightened the unease, analysts said.
For example, many consumer groups have praised state attorneys general for investigating how mortgage services have been handling mortgages in their states. If their efforts continue, it is possible they could help speed the way toward a resolution. But a number of those AGs who have been leading the effort in their states and nationally are either in races for higher office or are in close races for their own seats and may not return.
Jerry Brown in California, Andrew Cuomo in New York, and Terry Goddard in Arizona are all running for governor of their states and its not guaranteed that their successors will continue to drive the investigations. Richard Blumenthal, in Connecticut, is running for U.S. Senate, and it's not clear that his replacement will keep up the pressure on the issue.
But at least one analyst hopes that the controversy may die down after election day.
"I have never thought this whole robo-signing thing was all that big a deal," said Christine Pratt, senior analyst at the Aite Group, a financial services consultancy. "A lot of it has been driven by politics, by attorneys general who would love to have their names in the papers during this time of year as helping consumers and by lawyers who smell the chance for big settlements," she said.
Pratt, who had 20 years of experience in the mortgage industry before she joined Aite, pointed out that a similar controversy with student loans, where student signatures were falsified by loan servicing firms, and the matter had been resolved, though the banks and servicing firms had wound up paying fines.
"In the end, the robo-signing controversy doesn't impress me because I haven't seen one case yet where because someone did not make sure all the' i's' were dotted and 't's' were crossed that meant that thousands of foreclosures were not processed properly."
Pratt acknowledged, however, that the controversy has drawn attention to reforms that are necessary in the secondary mortgage market.
"When I was actively working the mortgage industry, I used to wonder sometimes about the deeds and how they are recorded all across the country and that whole system," she said, explaining that this system does not easily meld with a secondary mortgage market that needs to be as fluid as this one has become. "I agree it needs to be reformed. but I am at a loss about who will do it or where the money will come from to pay for it."
One more serious problems that Pratt and other analysts saw rising out of the procedural mix up are the numbers of so called "put backs."
Put backs are mortgages that were sold to investors as part of mortgage bonds which the bond-buyers now allege never met the criteria stated in the bond's prospectus. The investors' solution has been to insist that the originators of the mortgage bond should be forced to take these bad mortgages-and their costs and losses back.
Bank of America faces billions of losses from put backs and has said it will fight any such attempt to force it to take back these bad mortgages, but it faces some pretty stiff opponents, including the Federal Reserve Bank of New York who have found some traction in the courts.
On the surface this trend might be considered good for credit unions. The industry, collectively, is paying the bill for losses suffered by corporate credit unions from the mortgage-backed securities they held and being able to put back some of the mortgages would seem to cut those costs.
But credit union economists Mike Schenk with CUNA and Tun Wai with NAFCU agreed that the matter was more complicated than simply thinking that giving back bad mortgages that are in mortgage-backed securities equals lower losses.
"To the extent that you hope the mortgages and their underlying assets improve in value, all you may be doing by giving them back is locking in your losses," Wai said.
Schenk pointed out that even if the phenomenon helped credit unions on one side it would like further depress the market for all mortgage backed securities, including solid ones that credit unions need to be healthy to help make a secondary market for their mortgage loans. Schenk believed the principal impact of moves to force bond originators to take back some of the mortgages that backed their bonds will be to bring still more insecurity to the secondary mortgage market.