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February 02, 2009
States urge feds to push for affordable mortgage modifications

Attorneys general and bank regulators say reports are misleading

OLYMPIA – Attorney General Rob McKenna joined a group of other attorneys general and state banking regulators in sending a letter urging federal officials to encourage national banks and federal thrift-servicing operations to modify mortgage loans that are becoming unaffordable for consumers.

The letter to U.S. Comptroller of the Currency John C. Dugan and John M. Reich, director of the Office of Thrift Supervision (OTS), was signed by members of the State Foreclosure Prevention Working Group who are working to reduce the number of unnecessary foreclosures by encouraging loan modifications and other sustainable, long-term solutions.

It concerns the availability of reliable data on loss mitigation efforts. The working group contends the Office of the Comptroller of the Currency (OCC) has discouraged national banks from cooperating with the states’ effort to collect such data and instead initiated its own data collection process.

“Every day, our office hears from families struggling to make their mortgage payments and those who have lost their homes,” McKenna said. “They are our neighbors and we have as much of an investment in helping them as do officials in the other Washington. The states want to work with federal regulators – not against them – to help reduce foreclosures.”

The states question a recent report by the OCC and OTS that indicated 55 percent of loan modifications made by national banks and federal thrifts were redefaulting within six months. Other data, including data collected by the states, show a lower redefault rate of 25.8 percent.

The OCC has discouraged national banks from cooperating with the states’ effort to collect data. 

The problem is not modifications, the states argue – it is the quality, effectiveness and aggressiveness of the modifications. One reason previous modifications are defaulting is that the modifications did not actually help borrowers, the states said. In fact, many modifications have actually increased consumers’ monthly payments.

“We want to convey our deep concern about OCC and OTS efforts to encourage and monitor loan modification efforts,” the letter said. “The data suggests that national banks and federal thrifts are relying on traditional loss mitigation techniques common for prime loans in appreciating markets, rather than applying the techniques and lessons learned by subprime servicing specialists on the need to more aggressively adjust payments and principal balances.”

The redefault rate reported by the OCC and OTS is especially troubling to the states because national bank and federal thrifts service the vast majority of prime, Alt-A, and Option-ARM loans, all of which present immediate challenges in 2009.

The states are also concerned that the default rate reported by OCC and OTS could discourage Congress and other policymakers from promoting affordable loan modifications as a crucial response to the nationwide foreclosure crisis. 

The letters asks the two federal regulators to publish a full and transparent report of loan modifications made by national banks and federal thrifts, including detailed information on types and numbers of loan modifications – and whether the modifications had helpful terms for homeowners, such as lower monthly payments.

The group also told federal officials it was ready to work cooperatively with them to develop a comprehensive report.

The letter was signed by the attorneys general of Arizona, California, Colorado, Illinois, Iowa, Massachusetts, Michigan, Nevada, North Carolina, Ohio, Texas and Washington, and the state banking regulators of Maryland, New York and North Carolina.

Media Contact: Kristin Alexander, Media Relations Manager – Seattle, (206) 464-6432


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