Financial Stability Oversite Committee

Members of the Financial Stability Oversight Committee


c/o Secretary Geithner, Chairman of the FSOC

1500 Pennsylvania Avenue NW

Washington DC, 20220



In light of the recent report from the Congressional Oversight Panel regarding mortgage irregularities, we are writing to support the panel’s call for a new round of stress tests to examine stability issues arising from residential mortgages held in securitized pools. Stability issues that have not been included in previous stress tests include liabilities for breaches of representations and warranties in Pooling and Servicing Agreements, liabilities arising from systemic mortgage documentation irregularities, and conflict of interests for servicers affiliated with firms that hold significant portfolios of second liens. We urge the council to recommend that its members conduct specific, thorough reviews of the potential effects of these issues on the risk profiles of the institutions they regulate and also that the Federal Reserve incorporate these potential liabilities into the new round of stress tests it announced earlier this week. We urge that the Financial Stability Oversight Council consider, in light of those stress tests, requiring that some financial companies divest affiliates involved in servicing securitized mortgages.



First, we urge that the members of the Council examine a representative sample of collateral loan files of each major servicer to determine if the files contain all the documents required by contract or by law, including the note; mortgage, deed of trust or equivalent document; and all documents evidencing or constituting the necessary assignment, delivery and recording of those documents. The Council should determine if the documents satisfy contractual representations and warranties in the pooling and servicing agreement or other governing instrument for the mortgages in question, and if not, any potential liability that may result. The collateral loan files examined should be selected at random, not by the servicers.



Questions about the documentation of securitized mortgages have received much recent attention. The financial institutions involved in securitization, including sponsors, trustees and servicers, have said publicly that any problems are isolated, technical in nature and easily cured. Others contend that the problems are pervasive, incapable of cure, and may ultimately require financial institutions involved in the securitization of residential mortgages to repurchase at face value hundreds of billions of dollars of mortgages, many of which are now non-performing. Many of the financial companies with potential liability to repurchase those mortgages are on any list of systemically significant firms.

More to the story here.

Second, we urge the Council to examine the servicing of first mortgages by servicers that hold second liens or are affiliated with firms that hold second liens. The largest servicers hold almost half a trillion dollars in second liens, which are valued for accounting purposes at approximately 85 percent of face value. Those servicers, also systemically significant firms, assert that the second liens are performing, as are the first mortgages on the same property, and thus the second liens are accurately valued. The servicers contend that any interest the servicers may hold in second liens has not affected their servicing of securitized first mortgages. Others contend that there is an indefensible conflict of interest for servicers of securitized first mortgages to hold second liens on the same property, that servicers have acted contrary to the interest of the beneficial owners of first mortgages to avoid accounting losses on second liens, and that servicers face significant unrealized losses on those second liens.



An important purpose of the Dodd-Frank Act is to identify risks to the financial system as early as possible, so that regulators can take corrective action or minimize the disruption to the financial system that results from the insolvency of systemically significant financial companies. It is also a purpose of the Act to make risk to our nation’s financial system transparent in order to restore the confidence of the American people in the financial system and in their government. It would serve those purposes to examine these issues and make the result of that examination public.



Finally, we urge that the Council consider use the authority under the Dodd-Frank Act to require that financial companies divest affiliates or other holdings involved in servicing securitized mortgages. There is no apparent advantage in having financial companies that securitized mortgages also act as trustees or servicers, and there is an obvious conflict of interest. The uncertainty about the extent of the risk to our nation’s financial stability posed by the mortgage irregularities is largely the result of the control of critical information by financial companies at risk of insolvency from potential legal liability to mortgage investors and others. The control of critical information by financial companies with a possible motive to conceal systemic risks is incompatible with the intent of the Dodd-Frank Act, and is a grave threat to our nation’s financial stability.



Thank you for your attention to this matter.



Andre Carson (IN)

Stephen Lynch (MA)

Joe Baca (CA)

Jackie Speier (CA)

Danny K. Davis (IL)

Laura Richardson (CA)

Barney Frank (MA)

John Conyers (MI)

Luis Gutierrez (IL)

Maxine Waters (CA)

The Moral Hazard argument regarding mortgage foreclosure

The moral hazard argument has been the standard line from the banks and the government regarding mortgage relief and principal write downs for home owners.  The theory is that there would be too much out cry from the general public if certain people received more help with their mortgage.  There are people who would be upset about this of course.  However, it appears that we all may suffer longer if something isn't done to eliminate the rapid increase in  underwater mortgages.

Homeowners have decisions to make regarding property

I am all for free markets and personal responsibility and think there are people that have tried to game the system. However, the vast majority of homeowners are not losers. Mortgages are still being paid on time by well over 90% of the people in the country. The individual homeowner has been used as a whipping post in order to let the banks and brokers milk the system for 2 more years while try to keep people from realizing they have to make a very important financial decision with their real estate. When values were down 15% the case could be made that is it much more valuable to keep the home and your credit in tact rather than walk away. However, the story is not the same when people are 35-45% or more underwater. The home can become an albatross around someone’s neck and the financially prudent thing to do would be to walk away if something drastic isn’t done with the principal. I would imagine there are many bright, successful, hardworking winners out there that may have to make just such a decision if we continue to see falling prices. (Which is not out of the question if we keep letting the big banks yank the chain of government whenever they need capital)? Can any financial adviser actually look a homeowner straight in the eye and say although your home is 50% underwater, you will be paying mostly interest over the next 10 years with little principal reduction, your 20% down payment is wiped out, and the economy is crap, and the government seems set on bailing out big banks while housing prices tank, but all that being said, you should go right no paying your mortgage and hope your home goes up 150% in the next 10 years in order to get you back to even? I highly doubt anyone with integrity could tell their clients that this sounds like a good idea. Santelli says some great things on air but this wasn’t one of them.