Federal regulators and the top law enforcement officers in all fifty states are looking to make signficant changes to the home loan industry. If these changes are implemented, borrowers who take out home loans and the investors who buy them will work closer together and find common ground to minimize foreclosures, diminishing the the power of the middle men whose task this is.
A 27-page proposed settlement agreement sent last week by a coalition of all 50 state attorneys general and five federal agencies to the nation's five largest home loan firms details how mortgage companies should treat borrowers who fall behind on their payments.
It's the opening salvo in what will be a months-long negotiation between the nation's largest banks and the officials who oversee them to settle state and federal claims that they abused borrowers and illegally foreclosed on homes.
"Laws were not being followed by the servicers," Illinois Attorney General Lisa Madigan said Monday. "That absolutely has to change."
Regulators, investors and consumer advocates have long complained of a crooked system in which the firms that are supposed to collect payments from borrowers and distribute the proceeds to investors, known as mortgage servicers, have worked to their own advantage rather than working for those they're supposed to represent -- investors.
The proposed checklist of changes, the result of federal and state probes into big banks' foreclosure practices, tries to fix that. The Departments of Justice, Treasury, and Housing and Urban Development support the proposal. So do the Federal Trade Commission and the nascent Bureau of Consumer Financial Protection.
Currently, servicers have wide discretion in how they process payments and treat distressed borrowers and the investors who own those mortgages. State attorneys general want that discretion to be narrowed, incentives to be altered, and a new system to emerge in which homeowners would see their payments reduced and investors would experience decreased losses as a result of avoiding foreclosure.