Will large national mortgage servicers get a free pass on Oregon’s foreclosure mediation law?

By Erik Kancler of Bend, Oregon. Erik works in government and media relations and is writing on behalf of Economic Fairness Oregon. A former BlueOregon contributor, Erik has previously worked as a scientist, journalist, nonprofit director, and as policy adviser to the Oregon Senate Democrats. Previously, Erik contributed "Insurance companies should play by the same rules as everyone else in Oregon".

Banking industry articles about mortgage industry transactions make for pretty boring reads. But scratch below the surface even just a little and some striking evidence of an impending paradigm shift in how home loans are serviced quickly emerges.

The nature of the changes currently taking place point the way to how large national loan servicers could exploit an exemption in the foreclosure mediation law Oregon lawmakers are currently debating intended for local banks and credit unions.

Late last week, Walter Investment Management (aka Greentree) reported planned acquisitions of $300 billion worth of home loans from big banks and other servicers. This announcement and the increasing number of those like it represent what's very likely the front end of a massive unloading of home loans from big banks like Bank of America, Chase, and Wells Fargo to a new wave of non-bank investment firms focused on servicing "distressed" accounts.

For those of us working on foreclosure mediation reform policies – such as Oregon Senate Bill 558A – as well as at-risk homeowners who would hope to benefit from such policies, the rapidly accelerating pace of this trend should be cause for considerable alarm.

Industry experts predict that we're only about halfway through what's become the worst foreclosure crisis in our nation's history. Recent data suggests that 1 out of every 13 Oregon mortgages are a month or more behind or in foreclosure, and 132,000 mortgages are underwater.

The single most effective means of keeping people in their homes, or finding other workouts that are mutually beneficial for homeowner and lender, is to establish effective and broadly- inclusive foreclosure mediation policies. And that is exactly what SB 558A, which is currently working its way through Oregon's Legislature, is intended to accomplish.

The Senate passed the bill by a margin of 22-7 on April 16th and the House held its first public hearing on the matter last Wednesday. But just as debate on the bill is set to wind down, it's becoming apparent that the landscape is changing far more rapidly than previously believed.

During testimony last week, one housing counselor with expertise in foreclosures detailed the impacts the increase in transfers is having on her clients. With greater and greater frequency, they're having to deal with loan transfers from big banks to new servicers right in the middle of negotiating a modification. This creates expensive delays, confusion, and often forces homeowners to start the process over.

Given the way SB 558A is drafted, these problems will be compounded by the fact that many Oregon homeowners will no longer be able to participate in Oregon's mediation program post- transfer.

The reason for this is that SB 558A includes an exemption for servicers that conduct 175 or fewer foreclosures in the previous year. Take the case of Ally Bank, for example, which recently sold off its entire portfolio of home loans, including more than 30,000 Oregon loans, to companies like Ocwen and Quicken. In 2012, Ocwen and Quicken conducted only 3 foreclosures in the Portland Metro Area. As a result, none of the foreclosures they initiate in 2013 would have to adhere to SB 558A's mediation requirements.

Proponents of the exemption state that the intention is to give small banks and local credit unions an opportunity to opt out with the presumption being that these sorts of institutions, which handle perhaps a couple dozen foreclosures per year at most, are already handling foreclosures effectively.

But for servicers like Ocwen and Quicken which ramped up from practically zero, pretty much any exemption becomes a massive loophole. This could be avoided by getting rid of the exemption entirely. But by lowering it to a number that's more representative of how small banks and credit unions operate, the damage could at least be mitigated.

With announcements such as Greentree's and the early warnings of foreclosure counseling professionals, we have the benefit of a crystal ball into the future. We hope lawmakers will take advantage of this opportunity to get in front of the issue now rather than having to revisit it yet again in down the road.

SB 558A is scheduled for a public hearing and work session this Tuesday at 1pm in front of the House Committee on Consumer Protection and Government Efficiency in Hearing Room D.