Open letter to regulators: Develop national mortgage servicing standards
Mortgage finance industry executives, leading economists and others are asking regulators to adopt national standards for the securitization of home loans as soon as possible, starting with the disclosure and risk retention rules outlined in Dodd-Frank. An open letter to U.S. regulators regarding national loan servicing standards was sent Tuesday to the heads of the Treasury Department, the Federal Reserve, Federal Deposit Insurance Corp., Securities and Exchange Commission, Federal Housing Finance Agency, and Comptroller of the Currency. See the full letter here. "The private residential mortgage securitization market is frozen as to new issuance. The housing market is suffering from a dearth of credit, which is causing a serious lack of confidence among potential homebuyers," the letter said. In the letter, the market participants said regulators "must develop new standards for the secondary market in mortgage loans" that must promote a sustainable securitization market. The new definition of what is a qualified residential mortgage "should be the gold standard in all areas" of origination, securitization, servicing and disclosure, the letter said. The 52 people who signed the letter urged the regulators to act quickly because of the robo-signing scandal and other issues currently plaguing the mortgage finance industry. Signers included Thomas Day and Leslee Luedke Martin, both of the Professional Risk Managers International Association; Martin Mayer of the Brookings Institution; Harold Simon of the National Housing Institute, Alan Mallach of the Center for Community Progress; Allan Mendelowitz, former chairman of the Federal Housing Finance Board; and NYU economics professor Nouriel Roubini. Signers also included HousingWire publisher Paul Jackson. "Problems of this magnitude are a threat not only to the economic recovery, but to the safety and soundness of all insured depository institutions. Banks rely upon a functioning secondary market in home mortgages for liquidity management purposes," the market insiders said. "The chaotic situation in the mortgage market today demands immediate action to ensure all parties are treated fairly and to restore the confidence needed to support a recovery in real estate markets and the entire U.S. economy." They want to see an end to the "existing discontinuities in servicing practices with regard to loans held in whole-loan form by banks, versus those in securitization vehicles." The letter set out 11 recommendations to protect borrowers and investors, including making lenders accountable for lost paperwork on loan modifications and/or for failing to suspend the foreclosure process during the loan modification process. It also recommended mitigating losses on residential mortgages by taking action to maximize the net present value of the mortgages to the benefit of all investors in a securitization, rather than a particular class. "Servicing standards need not be overly complex, but they must address the misaligned incentives and 'tranche warfare' issues that have bedeviled mortgage servicing throughout this crisis," the letter concluded. Write to Jason Philyaw.