One of the most heart-rending recurrences featured in the congressional hearing this past week about home mortgage foreclosure problems is the so-called “dual track” problem—when a family is negotiating a modification of its mortgage loan and suddenly the mortgage servicing company handling the monthly mortgage payments takes the home away before the modification takes effect. The hearing highlighted how mortgage servicers have two separate operations, with one office talking to customers about mods and another one keeping the foreclosure process moving at the same time.
The dual-track problem symbolizes why our foreclosure mess is so fundamentally unfair to too many families. Mortgage servicing companies (and the lenders and investors they work for to collect monthly mortgage payments) collect the documents needed to consider modifying the mortgages of many responsible but overburdened families, but then swoop in nonetheless to take the home away. Senator Jeff Merkley (D-OR) summed it up this way: “Can’t we just change this policy and suspend the foreclosure proceedings when a modification is underway, not keep it going forward and create this enormous confusion and stress for America’s families?”
Well, the Obama administration has taken significant steps to do just that, though more enforcement authority over mortgage servicing companies and their modifications are needed. The Obama administration’s much-maligned Home Affordable Modification Program, or HAMP, included Supplemental Directive 10-02, which was issued in March of this year and incorporated into the HAMP Handbook. This directive, which all the servicers that participate in HAMP (including all the major banks) have agreed by written contract to abide by, contains an entire set of consumer protections. Notably, servicers:
- Can’t refer any loan to foreclosure until a borrower has been evaluated and determined to be ineligible for HAMP or reasonable solicitation efforts have failed
- Must halt existing foreclosure actions when a homeowner begins a three-month trial modification
- Cannot begin a foreclosure sale for 30 days after a written notice is given to the family that they have been turned down for a mortgage modification
- Must still consider a request for a modification even as the time for a foreclosure sale nears, specifically until seven days before a foreclosure sale
These rules don’t apply in some circumstances, such as when the family has failed to make their monthly mortgage payments on a HAMP-modified loan. But the overarching principle at the heart of the HAMP directive is that foreclosures should not happen until homeowners get a fair shot at modifying their mortgage.
These rules are good for responsible homeowners because the rules are supposed to deal with the dual-track problem and protect families from unwarranted foreclosures until the modification process determines whether the homeowners can in fact pay monthly mortgages on a modified home loan. So why aren’t these rules a complete solution to the dual-track problem?
A big reason is that HAMP was created as part of the 2008 Troubled Asset Relief Program. TARP does not provide any statutory penalties or enforcement provisions for violations of HAMP. The lack of statutory authority limits Treasury’s enforcement powers even though servicers have signed contracts agreeing to follow HAMP rules and Treasury has created a compliance office for the program. Without enforcement power, too many servicers do not follow the rules they have agreed to.
Then there’s a trickier problem. HAMP consumer protection rules apply only to HAMP modifications, which meet eligibility requirements such as owner-occupied homes, moderate loan size, and loans made before 2009. HAMP rules don’t apply to other home loans, such as those over the HAMP dollar limit or those subject to contractual provisions imposed by some investors in the mortgage-backed securities in which so many home loans were packaged and sold. Probably more importantly, they don’t apply to non-HAMP mortgage modifications that servicers offer, such as the increasingly common practice where lenders offer their own terms for modifications and then don’t seek payment from the federal funds for HAMP.
Going forward, there are several steps that are administratively manageable for servicers and may be helpful to improve compliance by servicers with the HAMP requirements and address the dual track problem more generally.
First, violations of HAMP requirements should be reported to the HAMP program. Although far from perfect, there is a case escalation process designed to address problem cases under HAMP. The Treasury could usefully explain in greater detail what steps it is taking to ensure compliance with the HAMP requirements about the dual-track problem. And bank regulators could explore supervisory actions against mortgage service companies owned by banks that promise to follow HAMP rules but do not do so, or perhaps build these protections into banking regulations.
Second, the major banks should announce that they will halt the foreclosure process for the many loans on their own books, a step Bank of America at the recent congressional hearing says it is considering. The administration and Congress can keep a spotlight on this issue so that these common-sense measures are part of whatever reforms emerge in response to the robo-signing and other problems in the servicing sector.
Third, the Federal Housing Finance Agency should enforce HAMP consumer protection rules for the many loans serviced for Fannie and Freddie, the two mortgage finance giants now in federal conservatorship. There does not appear to be any public statement to date by FHFA that it expects the rules to be applied for those loans.
Fourth, the state attorneys general who are currently investigating robo-signing and other foreclosure-related problems should include stricter enforcement provisions in any settlements or consent decrees. A common feature of consent decrees is to have specific procedures to detect and enforce against continuing violations, and those procedures can apply to violations of HAMP rules.
Finally, Congress should consider whether to build protections against the dual-track problem into legislation. After all, the major banks have already agreed in writing to the federal government that they will follow these homeowner protections. Putting the agreements into a more enforceable form, for a wider range of loans, would be a useful step in making sure that these dual-track problems are reduced even further.
Peter Swire is a Senior Fellow at the Center for American Progress and the C. William O’Neill Professor of Law at the Ohio State University. Until this August, he served as special assistant to the president for economic policy, working extensively on housing and foreclosure issues.