Thursday, January 20, 2011

The FDIC to the Rescue--Sheila Bair's Plan to Compensate Foreclosure Victims

Appearing on Fox Business Channel, yesterday, FDIC chairwoman Sheila Bair pitched her proposal for a BP style commission to compensate victims of poorly executed foreclosures (the infamous robo-signing scandal).  "We need to provide remedies for borrowers harmed by past practices.  A foreclosure claims commission, modeled on the BP or 9/11 claims commissions, could be set up and funded by servicers to address complaints of homeowners that have wrongly suffered foreclosure through servicer errors."  Bair wants to see a "broad settlement" for homeowners who were foreclosed on improperly, stating that, "such a settlement should prohibit foreclosure sales when a loan is in loss mitigation, except in specific situations where delay would disadvantage the investor, violate existing contracts, or reward a borrower in bad faith."

The funds for this new commission will be supplied by servicers who will pay the costs to run it.  But Bair believes that since it will save them the cost of litigating individual cases, it will save servicers money over time.  She also believes that the commission will benefit individual borrowers who would otherwise have to wait to go to court to have their cases examined.

To me, the entire concept of comparing the foreclosure problems with the BP oil spill or 9/11 is just outrageous. The victims of BP and 9/11 were minding their own business going about their daily lives when they were impacted by a major disaster that they had no power to prevent or minimize.  For the most part, the victims of the foreclosure mess are homeowners who for one reason or another did not make their payments.  Of course, we have all seen national stories of cases of mistaken foreclosures where the banks sent foreclosure notices to properties that were actually paid in full and terrorized the homeowners.  And certainly, in any such case, the homeowner is entitled to justice and restitution for the costs of saving his property, or renumeration for a property falsely seized.  But the majority of individuals foreclosed on were individuals who were not making the payments--some for as many as 400 days.  So to set up a commission to review the cases of individuals who may be protesting a foreclosure on a technicality, but who are nevertheless in default of their notes, is ridiculous.

Fox Business Channel asked Ms. Bair whether the commission is likely to impact on the costs of mortgage loans since the servicers would be required to fund the commission.  Did Ms. Bair believe that those servicers from the major banks would pass those costs on to the consumer?  She answered that there are a number of ways to cover extra expenses, including cutting bonuses and dividends, but that at the end of the day, this would be an additional cost of doing business.  Now what are the chances that Wells Fargo, Bank of America and Citimortgage are actually going to cut executive compensation and bonuses rather than passing the additional costs of this new mandate onto the consumer?  Not good.  And that means that we will see more of what we have been seeing over the past few years--the responsible homeowner with good credit who makes his payment on time paying for the problem homeowner who for one reason or another went into foreclosure and is now being compensated for his poor life choices.

Of course, the commission does not exist yet, but Sheila Bair believes that she can get the support to create it.  And she has some heavy hitters in her camp--reportedly David Stevens of HUD and Congresswoman Maxine Waters (D-CA) are on board with the plan.  So the commission may become reality sooner rather than later.  But at the end of the day, this is just another example of rewarding bad behavior.

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