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The verdict is out. Now, banks will need to gear themselves up and follow the National Mortgage Settlement (NMS) deal servicing standards more precisely.
As per the report released by Joseph A. Smith, the independent monitor overseeing the progress of NMS deal, all banks except for one have failed to comply with the new servicing regulations. Last year, five major mortgage servicers – JPMorgan Chase & Co. (JPM - Analyst Report), Bank of America Corp (BAC - Analyst Report), Ally Financial Inc., Citigroup Inc. (C - Analyst Report) and Wells Fargo & Company (WFC - Analyst Report) – signed an agreement with 49 state attorney generals to improve their servicing standards and provide relief to distressed borrowers.
These banks were required to assess their performance under the NMS deal, with the help of 29 different metrics. Only Ally Financial, known as ResCap Parties, whose mortgage servicing is now handled by Ocwen Financial Corporation (OCN - Analyst Report), Green Tree Servicing and Berkshire Hathaway Inc. (BRK.A - Snapshot Report) (BRK.B - Analyst Report), fulfilled all the criteria.
JPMorgan had problems related to its failure to remove forced-placed insurance and inability to notify borrowers about mortgage modification decisions in time. Citigroup, on the other hand, failed to clear three metrics – one requiring the dispatch of letters enclosing correct information to borrowers prior to foreclosure and the other two demanding borrowers to be informed about missing documents in time.
BofA lagged two metrics – collection of mortgage modification documents and sending of the pre-foreclosure letter. Wells Fargo also failed with regard to collection of the loan modification documents metric.
Further, roughly 60,000 complaints were received, the majority of which criticized the absence of any single point of contact for distressed borrowers.
However, the banks are striving to make amends and compensate the aggrieved borrowers. Notably, if the problems persist, the NMS deal has provisions for penalties and court actions. The banks will then be subject to penalties of up to $5 million for each unfulfilled metric.
Moreover, lapses by the banks could prevent borrowers from making timely payments, consequently causing them to lose their homes. This in turn, could lead to higher foreclosure activity.
Though the banks have failed to conform to all servicing standards, problems such as robo-signing and charging of high fees to process mortgage modifications have significantly disappeared. Additionally, the banks are providing more transparency and accountability while dealing with distressed homeowners.
Moreover, both homeowners and banks are expected to benefit from the resurgence in home prices. At the same time, banks are required to meet all the servicing standards and fulfill their deal obligations. The stabilizing housing sector, increase in jobs and low mortgage rates will likely make homeowners avoid foreclosures.