Changing the face of foreclosure in America will take some time, several state attorneys general said Wednesday, cautioning that an agreement with major lenders over revamped foreclosure practices was not imminent.
“We want to move as quickly as possibly but it has to be done right,” said Roy Cooper, the attorney general of North Carolina. “We have plowed this ground before.”
Ever since the law enforcement officials from all 50 states signed on last month to a highly publicized investigation of big mortgage lenders, there has been a public tug of war.
The banks, who have been subjected to bad publicity, have played down the investigation and want to see it end as quickly as possible. The state attorneys general, however, say that there is an opportunity to fundamentally change the way banks deal with defaulting borrowers so that more people can stay in their homes by modifying their mortgages, and that they will take the time needed.
“The large banks say they are doing everything they can to avoid foreclosure, but that is not the reality on the ground,” said Patrick Madigan, an assistant attorney general in Iowa who is a lead figure in the investigation. “The question is, Why?”
Mr. Madigan mentioned some theories, saying any or all could be true: “Is it the fact that the current servicing system was not designed to do large numbers of loan modifications, is it being understaffed, incompetence or the servicers having the wrong financial incentives?”
The major lenders are scheduled to appear on Capitol Hill on Thursday for the second hearing this week on their foreclosure procedures. The pressure to reach a settlement with the attorneys general will likely intensify after the hearing, which will be led by Representative Maxine Waters, a Democrat from California and outspoken critic of the mortgage lending industry.
But quick fixes are not likely, the attorneys general said. Richard Cordray, the Ohio attorney general who lost his bid for re-election this month, was hesitant to predict a significant outcome.
“Something will come of this, no question,” Mr. Cordray said of the inquiry. “The question is whether it will be a meaningful resolution that will make a real difference or a missed opportunity. It’s not entirely clear at this point.”
Some experts were willing to go even further, saying the lenders were impervious to change. For 18 months, the Obama administration has promoted modifications that would keep families in their homes over foreclosures that would kick them out. The programs have had some success but ultimately have done little to stem the tide.
“The banks’ act was to put their tail between their legs, act contrite before Congress and change nothing,” said Adam Levitin, an associate profesor of law at Georgetown University who testified before Congress on Tuesday and will testify again on Thursday.
The banks hope to buy off the attorneys general with money, perhaps to establish a compensation fund for victims, Mr. Levitin said. That, he said, would prevent attorneys general from “digging deeper and uncovering more rot in the mortgage system. My fear is that the banks’ calculus is correct.”
There were fresh reports on Wednesday that the foreclosure situation was deteriorating. Another 35,000 households entered foreclosure in October, the data company Lender Processing Service said, despite freezes instituted by lenders as they reviewed their practices. About 4.3 million households are either in serious default or in foreclosure.
The housing market also showed fresh signs of trouble. CoreLogic, a data company, said Wednesday that home prices fell 2.8 percent in the last year. Earlier this week, another information company, DataQuick, said sales in the Southern California market had dropped 24 percent in October from last year.
“We agree with the attorneys general that a housing market recovery is vital to restoring economic growth, and the sooner we resolve the outstanding issues, the better,” said Lawrence Di Rita, a Bank of America spokesman.
For the banks, the immediate cost of halting foreclosure is not significant. Brian Moynihan, the chief executive of Bank of America, said it totaled $10 million to $20 million a month. Bank of America has frozen foreclosures in 27 states.
A far greater threat to the broader financial system is the possibility that investors will force financial institutions to buy back hundreds of billions of dollars in soured mortgages, according to a Congressional Research Service report prepared for Thursday’s hearing and obtained by The New York Times.
Loan buybacks could shift $425 billion in losses on mortgage-backed securities from the investors that owned them to the banks that helped originate or assemble the securities, according to the report, far more than most estimates floated on Wall Street.
Target on the bank's back
“Loan buybacks have the potential to cause the banking system to become undercapitalized once again or to cause individual large banks to fail,” the report says, “even if that outcome is unlikely.”
While bank officials agree that a settlement with the attorneys general is not in the making anytime soon, they remain eager to put the controversy behind them. Bank of America’s reputation, in particular, was hammered last month as the uproar grew over claims that the industry had pursued foreclosures in cases where documents were lost, missing or barely reviewed before they were signed by bank officials, a practice known as robo-signing.
What is more, as the nation’s largest mortgage servicer — it handles roughly 14 million home loans, or one in five American mortgages — it has more to lose as the investigation drags on. The majority of its troubled portfolio was picked up in 2008 when it bought Countrywide, whose aggressive subprime lending practices made it a symbol of industry excess.
“What makes it a little more pressing for Bank of America is their level of exposure,” said Guy Cecala, publisher of Inside Mortgage Finance. “Whatever the issue is, Bank of America seems to have a target on its back from people looking to be compensated for losses.”
As the beneficiary of two government bailouts, both repaid, it has been eager to maintain good relations with regulators.
Representatives from Bank of America and the other main players in the mortgage servicing industry — Ally Financial, JPMorgan Chase, Wells Fargo and Citigroup — will testify at Thursday’s hearing. A top mortgage executive at Citi plans to testify that the company identified 14,000 foreclosure cases where errors may have been made, including 4,000 where a notary may have been absent when they were signed. The bank, which until now has defended its processes, still insists that in each case the original decision to foreclose was correct and that the paperwork will be refiled.
Mr. Levitin, the Georgetown professor, will argue in Thursday’s testimony that the business model at servicing giants like Bank of America and Wells Fargo “encourages them to cut cut costs wherever possible, even if this involves cutting corners on legal requirements, and to lard on junk fees and in-sourced expenses at inflated prices.” That results in foreclosure, rather than modification, being a better bet for servicers.
In removing such incentives, the attorneys general have the task of encouraging a new system that changes behavior. “We are trying to create a paradigm shift in the way foreclosures are handled,” said Mr. Madigan, the assistant Iowa attorney general.