On October 20, 2010, the White House issued the following Fact Sheet: 

FACT SHEET: Federal Government Efforts to Support Accountability, Stability and Clarity in the Housing Market

Today the Department of Housing and Urban Development, the Department of the Treasury, the Department of Justice, the Board of Governors of the Federal Reserve System, the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, the Federal Trade Commission, the Securities and Exchange Commission, the Federal Housing Finance Agency and the Office of Thrift Supervision met to discuss ongoing interagency action to support accountability, stability, and clarity in the housing market and residential mortgage backed securities markets. 

We are working together to review practices that do not comply with state foreclosure law or applicable federal laws, including taking the following actions:

• The Federal Housing Administration (FHA) has been reviewing servicers for compliance with loss
mitigation requirements.  These reviews are being broadened to include a larger range of processes,
focusing in particular on servicer procedures during the final stages of the foreclosure process.  These
reviews are expected to be complete within nine weeks. 

• The Financial Fraud Enforcement Task Force, led by the Department of Justice, has brought together more than 20 federal agencies, 94 US Attorney’s Offices and dozens of state and local partners to share information about foreclosure and servicing practices.  The Task Force’s collaborative efforts are ensuring that the full resources of the federal and state regulatory and enforcement authorities are being brought to bear in addressing this issue.  

• The Financial Fraud Enforcement Task Force has also been coordinating with State Attorneys General in their joint review of “robo-signing” practices in foreclosure cases.  

• The Department of Justice, including through the Executive Office for U.S. Trustees, is also working
with regulators to investigate and, where appropriate, litigate against servicers, their law firms, and
third-party providers regarding their foreclosure and bankruptcy processes.  

• The Federal Housing Finance Agency (FHFA) directed Fannie Mae and Freddie Mac to remind
servicers of their contractual and legal responsibilities in foreclosure processing.  On October 13, FHFA directed Fannie Mae and Freddie Mac to implement a policy framework for dealing with possible foreclosure process deficiencies that requires servicers to review their foreclosure processes and fix any processing problems they identify.  The FHFA policy framework includes specific steps servicers should take to remedy mistakes in foreclosure affidavits so that the information contained in the affidavits is correct and that the affidavits are completed in compliance with applicable law. 

• The Office of the Comptroller of the Currency (OCC) directed all large national bank servicers on
September 29 to review their foreclosure management processes, including file review, affidavit
processing and signatures, to ensure that the processes are fully compliant with all applicable state
laws. 

• The Office of the Comptroller of the Currency and the Federal Reserve System are jointly examining
foreclosure and securitization practices at the nation's largest servicers.  The examinations will include intensive review of the firms’ policies, procedures, and internal controls related to loan modifications, foreclosures and securitizations, seeking to determine whether systematic weaknesses are leading to improper foreclosures.  The reviews will also evaluate controls over the selection and management of third-party service providers.  

• In coordination with the work of the other agencies, the Office of Thrift Supervision (OTS) is reviewing the mortgage related policies, foreclosure processes and staffing levels of the largest servicers it supervises.   The OTS has gathered preliminary information through its regional offices about the servicer practices across the country.  It also issued correspondence on October 8 to all savings associations involved in servicing residential mortgages requiring the immediate review of their actual practices associated with the execution of documents related to the foreclosure process.  

• The Federal Deposit Insurance Corporation is participating in the reviews by the OCC, the Federal
Reserve System, and the OTS of the foreclosure and securitization practices of the largest mortgage
servicers in its role as back-up supervisor.  The FDIC also is verifying that the servicers it supervises do not exhibit the problems that others have identified as well as reviewing the processes used by
servicers of loans subject to loss share agreements and other loans from receiverships of failed banks. The regulators are also evaluating foreclosure and securitization practices in electronic registration systems.

• The Federal Trade Commission (FTC) is monitoring servicers under existing public orders to confirm
proper servicing and foreclosure processes, is conducting reviews in line with past servicing abuses
and monitoring the market closely for any fraud or foreclosure scams.

• The US Treasury has implemented a strong compliance framework for the Home Affordable
Modification Program (HAMP) servicers. On October 6, Treasury issued a notice to HAMP servicers
reminding them of their requirement to comply with all applicable state and federal laws, as well as a
reminder that prior to foreclosure sale, servicers must certify to the foreclosure attorney or trustee that
all loss mitigation options have been considered and exhausted.   Treasury also recently instructed its
HAMP compliance agent to review internal policies, procedures, and processes for completing the pre- foreclosure certifications at the ten largest servicers.

• In addition to its role enforcing the federal securities laws, the Securities and Exchange Commission
(SEC) has issued proposed rules that would provide greater transparency and disclosures in the
securitization market and provide investors with additional tools to evaluate actions in the securitization market. 

I do not wish to come across as too jaded and skeptical, but this trumped up effort by the full panoply of the Federal government seems to be a well-timed effort to say that the administration is doing something about the foreclosure disaster.  With the mid-term elections right around the corner, it is only appropriate that it appear that the government watchdogs are doing something, albeit reactionary to scrutinize lenders' foreclosure efforts. 

While it seems a nice gesture, I am much more concerned with why we have thrown so much money at the flailing HAMP program (See Jon Prior's article on why TARP has failed) and why we ever allowed Fannie Mae and Freddie Mac to get into the mortgage-backed securities market in the first place.  We the taxpayers are the ones mopping this up now. 

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The Federal Housing Finance Agency, which has served as the conservator of Fannie Mae and Freddie Mac since 2008, is looking to recoup on serious losses that the government sponsored entities have suffered as a result of their heavy purchases of mortgage-backed securities during the hey days of the real estate bubble.  The FHFA has hired Quinn Emanuel Urquhart & Sullivan LLP, a large law firm out of L.A. and has issued sixty-five subpoenas to various banks.  The probe is focused on private-label securities that were originated by mortgage companies, packaged by Wall Street firms, and then sold to investors.  This has the potential to throw open the floodgates of litigation against originators of loans who securitized these loans and sold them to investors like Fannie Mae and Freddie Mac. 

With the financial backing of the US government and a large LA law firm set to push forward, the stage is set for a serious inquiry into the originating and securitization practices of many institutions.  Quoting Joshua Rosner of Graham Fischer & Co, the Wall Street Journal recently reported if the FHFA is successful in proving that loan files didn't meet underwriting standards or that their ownership chain wasn't properly transferred during the securitization process, that could pave the way for other investors to make similar challenges. 

Fannie and Freddie were two of the largest investors in mortgage backed securities during the height of the real estate bubble.  "Those securities were often backed by subprime loans and mortgages that required little or no documentation of borrower incomes, which deteriorated sharply once home prices fell."  Indeed, Fannie and Freddie purchased $227 billion of bonds backed by subprime and other risky loans in 2006 and 2007. 

In the end, they paid the price for trying to keep pace with the returns that investment banks and retail banks were making, all of which led to the financial crisis in 2008.  Once again, the US taxpayer is on the hook for those losses, which the FHFA is now trying to recoup.  However, some analysts are saying that FHFA is going to have a hard time proving that Fannie and Freddie, which "touted their unparalleled mortgage-market expertise," didn't know what they were buying.  Either way, the new associates at Quinn Emanuel are going to have plenty to do in meeting their 2000+ hour billable requirement and the US taxpayer paying dearly for those new associates.

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MERS or the Mortgage Electronic Registration Systems, little known before the foreclosure tsunami struck, was developed in the early 1990's by a number of financial entities, including Bank of America, Countrywide, Fannie Mae, and Freddie Mac, allegedly to allow consumers to pay less for mortgage loans, streamline the mortgage process through electronic commerce, and eliminate the need to prepare and record assignments when trading residential and commercial mortgage loans.  MERS describes itself as "innovative process that simplifies the way mortgage ownership and servicing rights are originated, sold and tracked."  Sounds nice, right? 

Well, as detailed by Floyd Norris of the New York Times in his article "Some Sand in the Gears of Securitizing," and elsewhere, MERS has been under attack for its part in the massive securitization of the American housing market. 

Indeed, as alleged in a Nevada class action called Lopez vs. Executive Trustee Services, et al., MERS was a very serious contributor to the financial crisis: "Before MERS, it would not have been possible for mortgages with no market value . . . to be sold at a profit or collateralized and sold as mortgage-backed securities. Before MERS, it would not have been possible for the Defendant banks and AIG to conceal from government regulators the extent of risk of financial losses those entities faced from the predatory origination of residential loans and the fraudulent re-sale and securitization of those otherwise non-marketable loans." 

In other words, without MERS, transparency would have ruled the day, counties would have been paid their recording fees, consumers, attorneys, and title companies could easily track chain of title, and foreclosures would have been processed much more effeciently.  Instead, we have servicers with their own vested interests pitted against investors who cannot readily make decisions about their pooled notes; thus, the entire foreclosure process grinds away glacially, subject to legal attack at every turn.

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