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Effective National Mortgage Servicing Standards Are Essential

Statement Before the Senate Committee on Banking, Housing and Urban Affairs

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SOURCE: Center for American Progress

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Thank you Chairman Johnson and to other distinguished members of the committee. Thank you for inviting me to participate in this hearing on national mortgage servicing standards.

As you are aware, I previously committed to speak in Oregon today, and I thank the committee and its staff for the great flexibility of having me testify online today. I believe that using these online technologies can continue to open up Congress and our political process to participation by the American people.

My testimony today draws on two previously published items, which I have provided to the committee. The first is a report on mortgage servicing that I published in January of this year. The second is an article in the Los Angeles Times from March, which describes some of my personal experiences as a homeowner with the mortgage servicing industry.

As you said, Mr. Chairman, I am now a law professor at the Ohio State University and a Senior Fellow at the Center for American Progress. In 2009 and 2010 I was special assistant to the president for economic policy, serving under Larry Summers on the National Economic Council.

At the NEC, my biggest task was to coordinate the interagency process for housing and housing finance issues. In this role, I worked extensively on mortgage servicing issues and Fannie and Freddie and the FHA, and in that role, I met regulated mortgage servicers as well as many other stakeholders.

My January report was called "What the Fair Credit Reporting Act Should Teach Us About Mortgage Servicing." The report makes a simple point. The sorts of market failures that led to the creation of the FCRA in 1970 also exist today for mortgage servicers. The single-most-important fact is that the consumers, the homeowners, are not the clients. The clients for the credit reporting agencies are the companies that pay for the credit reports, the lenders, and employers. The clients for the mortgage servicers are the companies that pay the services, and those are the investors in mortgages. Mortgage servicers owe their legal duties and market loyalties to the investors, not the homeowners.

Now, in saying this, I am talking about when mortgage servicing rights are sold, and that appears not to be the model that Mr. Hopkins’s bank follows, where they keep the servicing in house, close to the market. But the large majority of mortgage servicing rights today are sold out into the market to new buyers of servicing, often the biggest banks.

So the structure of the market that we have today leads to problems. Consumers have no market or legal checks on the servicer. The homeowner does not choose the service. That choice is made by the company, usually the one that originates the loan. If the homeowner has a bad experience with the servicer, as so many people have, the homeowner cannot even quit. Even if the homeowner refinances a loan to get away from the servicer, the servicing market is so concentrated that the homeowner may get the same servicer all over again the next time.

Homeowners not only lack any market choice but they currently lack legal remedies if the servicer performs badly. That is why national standards for mortgage servicing are so important. Where there are no market forces to protect consumers, something else should fill the gap. An effective set of consumer rights could be embodied in national mortgage servicing standards and I hope that will happen.

Now I will turn to my dispute with Washington Mutual’s servicing arm in 2006 and 2007. To prepare for this testimony, I have brought along and reviewed and provided to the committee files from my 21-month dispute with Washington Mutual in 2006 and 2007, before the crisis, about flood insurance that they incorrectly placed on my family’s home in Bethesda, and that dispute was the subject of the Los Angeles Times article.

Our family was a target of what people have called "force placed insurance" and that this committee has heard about before. In early 2006 WaMu asked for proof of flood insurance coverage. My State Farm agent immediately faxed them the information. It turns out that WaMu had a really cute trick that I discovered after numerous phone calls. They did not even process the proof of coverage unless it contained WaMu’s servicing accounting number. So WaMu received the State Farm certification and simply ignored it and did not tell us until I found it out several months later, and that was how WaMu could bill my family for the duplicate flood insurance.

The next cute trick was to pile up late fees on our monthly mortgage payment. We had automatic payment the first week of every month, and even WaMu admitted we never missed a payment. WaMu’s practice, though, was to charge for the duplicative flood insurance with each monthly payment. That meant they considered our payment too small each month by the amount of that insurance premium. So then they declared our entire monthly payment late and charged a late fee of more than $170 a month.

I provided the committee staff with detailed and contemporaneous documentation of these and numerous other problems with our servicer. Eventually, after 21 months and more than 50 calls to customer service, they finally agreed in late 2007 to withdraw the flood insurance and cancel the fees.

In conclusion on this, I feel fortunate that I was able to get my family’s dispute resolved and cancel more than $4,000 in erroneous fees that they wanted to charge me. Most homeowners, however, are not banking law professors. All of those hours sitting on hold, waiting for customer service, gave me plenty of time to think about the flaws in our mortgage servicing system.

My experience in government and since has taught me there are numerous hard-working and talented individuals in the mortgage servicing industry. I admire the work of Faith Schwartz and Hope Now and many others. The incentives, however, do not work for consumers.

In response to Sen. Corker’s opening statement about getting private capital back into the market, a goal I very much share and the administration has shared, fixing servicing, which is getting the money to flow properly from the homeowner to the investor, is an essential part of reform. And so I agree that working on national mortgage standards should be seen as part of getting the investor part of the thing to work, as well.

In short, in the absence of market discipline on servicers, an effective national set of mortgage standards is essential. There is no other way to have consumers protected.

I thank the committee for its attention to these matters and I welcome any questions you may have.

Peter P. Swire is the C. William O’Neill Professor of Law at the Moritz College of Law of The Ohio State University and a Senior Fellow at the Center for American Progress.

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