Issues regarding the process of handling mortgage foreclosures have cap-tured widespread attention during the last several weeks. While this is largely a documentation issue that is likely to be rectified relatively promptly by most lenders and servicers, allegations that large numbers of foreclosures have been processed without an adequate review of the relevant facts and that documents used in the foreclosure process did not meet legal require-ments have raised broad concerns among the government and industry, in-vestor and consumer groups about the mortgage finance business. Thus, the continuing task is the reconstruction of the credibility of mortgage finance systems.
On the ground, there are significant aftershocks from the documentation disclosures, in the form of market and regulatory reaction:
- Borrowers’ lawyers have brought a range of challenges in an effort to protect them from foreclosure, including allegations regarding allegedly improper foreclosure practices, claims relating to the use of the Mortgage Electronic Recording System (MERS) and challenges to the operation of the Home Af-fordable Modification Program (HAMP) in regard to loan modifications.
- The Attorneys General of all 50 states have announced a coordinated investigation of the mortgage servicing industry.
- The Office of the Comptroller of the Currency has reportedly initiated examinations of the foreclosure and loss-mitigation procedures at large national banks.
- The Federal Housing Finance Agency has in-structed Fannie Mae and Freddie Mac to re-quire their servicers to review foreclosure-related actions to ensure that any affidavits that have been filed were correct and com-plied with applicable law.
- Institutional investors, as well as the Federal Reserve Bank of New York, are seeking with increasing insistence to have the mortgage-backed securities they hold repurchased, based on questions regarding the servicing or credit quality of the underlying mortgage loans.
- To the extent that issues related to foreclo-sure processing may impact the stock price or financial performance of bank holding companies, shareholders may explore the possibility of alleging securities violations or mounting derivative actions against direc-tors or officers.
Firms that participate in all phases of the home mortgage process from origination to securitiza-tion, servicing and foreclosure are likely to be drawn into some aspect of the current controversy and investigations. Our experience suggests that, to prepare for such potential challenges to past and current business practices and to reestablish credibility in the marketplace and with regulators, these parties should consider the following:
- An independent review of potential trouble areas to provide objective support for the essential integrity of the processes used in the past or to guide future efforts to identify potential remedial steps for operational and legal processes;
- Participation by the audit committee or a special committee of the board of directors in order to provide appropriate board oversight and reassur-ance;
- Developing a strategy to address the concerns of regulators, particularly where companies may be subject to the jurisdiction of more than one state or federal financial regulatory agency, including how to deal with potential concurrent civil and criminal investigations, cease and desist orders, civil money penalties and various forms of restitu-tion;
- The dynamics of responding to multiple Attorneys General investigations and multi-faceted litigation and settlement processes, including shareholder and derivative suits;
- The impact on and potential liability of or to busi-ness partners, service providers, counterparties, investors and others in the mortgage finance chain.
While the documentation deficiencies that have been alleged appear to be fixable, the aftermath of address-ing regulatory, investor and consumer concerns in order that the country can once again enjoy an efficient, effec-tive and reliable mortgage finance system will require more attention and thought. Success in that regard is likely to be the product of significant remedial and pro-active actions that rebuild confidence in institutions and processes.