Federal Reserve’s Tarullo wants banks boost for mortgage mods
Federal Reserve Gov. Daniel Tarullo told banks that many of them haven’t done enough to stem the tide of home foreclosures in the U.S. "While some banks and other industry participants have stepped forward to increase the rate of modifications relative to foreclosures, many have not done enough," Tarullo said Friday at the George Washington University conference on Dodd-Frank and financial reform. Tarullo said the robo-signing scandal should make servicers and mortgage holders take pause not to only correct documentation flaws, but "to invigorate the modification process." The scandal, which broke earlier this fall when it was revealed that an Ally Financial (GJM) employee had signed thousands of foreclosure documents without any knowledge of their contents quickly spread to other mortgage servicers. The scandal drew attention to homeowners who tried to get a modification but were frequently told no, while borrowers who simply stop paying their mortgages often find they can stay in their homes more than a year without payment before the foreclosure moves forward. "This simply is not a good outcome from any broad perspective — not for the revival of housing markets, not for the banks and investors that hold the delinquent mortgages, and in the longer run, not even for the homeowners themselves, who will ultimately have to move out, taking with them a dark cloud over their creditworthiness," Tarullo said. Explanations for the current state of affairs have included the lack of servicer capacity for modifications, financial incentives for servicers to foreclose rather than modify, limits on the authority of securitization trustees, and conflicts between primary and secondary lien holders Whatever the merits of the various explanations, the social costs are high, Tarullo said. So too, are the deadweight costs of foreclosure such as the distressed sale discount, he said. Write to Kerry Curry.