At the Mortgage Bankers Association
annual convention this week in Atlanta, there remains a huge question mark of what exactly Dodd-Frank is meant to accomplish. Here's the rub: for all the act's good intentions, it appears to leave mortgage servicing in the same suspended state of self-policing that was prevalent in the boom and bust -- years before the legislation's recent passage into law.
Actually, it's worse than that.
Mortgage servicers need to largely rely on self-policing, but face hugely restrictive – what I would say business-ending – penalties as a result of noncompliance.
In many parts of the industry, there are problems in this regard, most recently with the robo-signing 'scandal' not far from everyone's lips in Atlanta. There are many readers who write in to HousingWire who complain about our editorial approach to the debacle: that for what it's worth, the nation's corporate resolution authority enabled robosigning in the first place.
The state attorneys general will no doubt point to the mortgage servicing industry's inability to self-police as evidenced by robo-signing, but where is a change occurring on this front?
Appraisal management companies maintain several black lists that they "scrub up against," one appraiser told me at the MBA conference. For instance, if a certain appraiser is expected of theft, one AMC can notify the others of the suspicious activity.
For its part, the Dodd-Frank act did not expressly prohibit the use of in-house appraisers or AMCs, leaving it open to interpretation until a new rule replacing the Home Valuation Code of Conduct is drafted. Meanwhile, the Federal Reserve
is implementing an interim rule until April 1, 2011.
Civil penalties for noncompliance are severe, running $10,000 per day for the first offense, $20,000 per day for each subsequent offense.
Operation Stolen Dreams, the largest crackdown on mortgage fraud the U.S. has seen, hasn't given new numbers since June when it paraded its 500 or so arrests. Then, $147 million in fraud was "recovered."
That seems like a drop in the bucket when it comes to stopping fraud.
Lenders and servicers alike are more likely to file a SAR (suspicious activity report) and write down fraud-related losses. It remains a crime with disproportionate numbers, a mismatch of perpetrators and money taken versus arrests and monies recovered. Angelo Mozilo, arguably a fraudster, walked away with no more than a slap on the wrist and no one seems especially troubled.
This is because the focus remains on the illiquid qualities of the equation, in this case, the home. The industry will always scrub against the collateral but sees no certain gains in putting potential fraudsters on watch lists.
"The nature of fraud is to follow the money," a fraud analyst at MBA said. "They just go somewhere else, keep moving along." In these cases, he said, the FBI
has to pretty much set up some sort of sting to catch mortgage fraud at work. That's hardly an activity considered integral to a servicer's bottom line. Yet, secondary market investors seek assurances that mortgages are completely free of fraud. The mortgage servicing industry touts its technology to that effect, but can regrettably offer no such assurances.
And with financial reform unlikely to be changed meaningfully, even after November elections, the self-policing mortgage servicing industry will remain unable to keep track of most of the real criminals.
Jacob Gaffney is the editor of HousingWire.
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