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United States Government Accountability Office: 
GAO: 

Report to Congressional Requesters: 

May 2011: 

Mortgage Foreclosures: 

Documentation Problems Reveal Need for Ongoing Regulatory Oversight: 

GAO-11-433: 

GAO Highlights: 

Highlights of GAO-11-433, a report to congressional requesters. 

Why GAO Did This Study: 

Mortgage servicers-—entities that manage home mortgage loans-—halted 
foreclosures throughout the country in September 2010, finding that 
documents required to be provided to courts in some states may have 
been improperly signed or notarized. In addition, academics and court 
cases are raising questions over whether foreclosures are being 
brought properly because of concerns over how loans were transferred 
into mortgage-backed securities (MBS). GAO was asked to examine (1) 
the extent to which federal laws address mortgage servicers’ 
foreclosure procedures and federal agencies’ past oversight, (2) 
federal agencies’ current oversight and future oversight plans, and 
(3) the potential impact of these issues on involved parties. GAO 
reviewed federal laws, regulations, exam guidance, agency documents, 
and studies, and conducted interviews with federal agencies, mortgage 
industry associations, investor groups, consumer advocacy groups, and 
legal academics. 

What GAO Found: 

Federal laws do not specifically address the foreclosure process, and 
federal agencies’ past oversight of servicers’ foreclosure activities 
has been limited and fragmented. State laws primarily govern the 
foreclosure process and specify what, if any, documentation is 
required to foreclose on a property. Several federal laws include 
mortgage servicing provisions, but they largely are focused on 
consumer protection at mortgage origination, not specific foreclosure 
requirements. Although various federal agencies have authority to 
oversee most mortgage servicers, past oversight of their foreclosure 
activities has been limited, in part because banking regulators did 
not consider these practices as posing a high risk to banks’ safety 
and soundness, and some servicers have not been under direct federal 
oversight. Federal housing and other agencies typically do not monitor 
servicers’ foreclosure activities. 

In response to the disclosed documentation problems, federal agencies 
have recently increased attention to servicing activities. Banking 
regulators conducted a coordinated review of 14 mortgage servicers and 
identified pervasive problems with their document preparation and 
oversight of foreclosure processes, although they did not find 
widespread instances of foreclosures that should not have proceeded. 
The regulators issued enforcement actions requiring servicers to 
improve these practices and plan to assess their compliance, but have 
not fully developed plans for the extent of future oversight. Further, 
regulators are considering the need for uniform servicing standards, 
but whether such standards will address foreclosure activities is yet 
unclear. Federal housing and other agencies are also reviewing 
servicer foreclosure practices and considering corrective actions. In 
July 2011, the newly created CFPB also will have responsibility for 
mortgage servicing, including over certain nondepository firms 
currently without federal oversight. How regulators and CFPB will 
interact and share responsibility for ongoing oversight of servicers 
is yet unclear, leaving the potential for continued gaps and 
inconsistency in oversight until final plans are developed. 

Foreclosure documentation problems have slowed the pace of 
foreclosures across the United States, but most entities GAO 
interviewed indicated that such errors were correctable and that 
affected foreclosures would proceed. Delays in the pace of 
foreclosures as servicers correct and refile cases and implement more 
rigorous processes may benefit borrowers by providing more time to 
modify loans, but communities may be negatively affected as any vacant 
properties in foreclosure remain unoccupied for longer periods. Some 
foreclosures are also being delayed because of allegations that 
practices commonly used for transferring loans when creating MBS were 
not completed properly, which some commentators argue may affect 
whether servicers can prove legal authority to foreclose. Regulators 
did not always verify these transfer practices during their reviews or 
assess the potential risks of transfer problems to institutions. The 
potential financial costs resulting from these issues for investors, 
institutions that create MBS, and the overall financial system likely 
will remain uncertain until sufficient numbers of courts render 
decisions on the appropriateness of these practices. 

What GAO Recommends: 

GAO recommends that banking regulators and the Bureau of Consumer 
Financial Protection (CFPB) develop plans for overseeing mortgage 
servicers and include foreclosure practices in any servicing standards 
that are developed. GAO also recommends that regulators assess the 
risks that documentation problems pose for their institutions. The 
agencies generally agreed with the recommendations. 

View [hyperlink, http://www.gao.gov/products/GAO-11-433] or key 
components. For more information, contact A. Nicole Clowers at (202) 
512-5837 or clowersa@gao.gov. 

[End of section] 

Contents: 

Letter: 

Background: 

Federal Laws Do Not Specifically Address the Foreclosure Process, and 
Past Federal Oversight of Foreclosure Activities Has Been Limited and 
Fragmented: 

Federal Regulators Have Conducted Reviews in Response to Foreclosure 
Documentation Problems, but Extent of and Roles in Future Oversight 
Are Unclear: 

Documentation Problems Will Likely Result in Delays in the Foreclosure 
Process, but the Impact on Financial Institutions and Others Is Less 
Clear: 

Conclusions: 

Recommendations for Executive Action: 

Agency Comments and Our Evaluation: 

Appendix I: Objectives, Scope, and Methodology: 

Appendix II: Comments from the Bureau of Consumer Financial Protection: 

Appendix III: Comments from the Federal Deposit Insurance Corporation: 

Appendix IV: Comments from the Board of Governors of the Federal 
Reserve: 

Appendix V: Comments from the Comptroller of the Currency: 

Appendix VI: Comments from the Department of the Treasury: 

Appendix VII: GAO Contact and Staff Acknowledgments: 

Figures: 

Figure 1: Flow of Payments in a Basic Securitized Transaction: 

Figure 2: Typical Judicial and Nonjudicial Foreclosure Processes: 

Figure 3: Regulatory Oversight of Top 25 Servicers, by Percentage of 
Mortgage Loans Serviced, December 2010: 

Figure 4: Year-End Foreclosure Starts and Foreclosure Inventory, 2000 
to 2010: 

Figure 5: Volume and Share of Enterprises and Private Label MBS 
Issuances, 1995 to 2010: 

Abbreviations: 

CFPB: Bureau of Consumer Financial Protection: 

FDIC: Federal Deposit Insurance Corporation: 

FHA: Federal Housing Administration: 

FHFA: Federal Housing Finance Agency: 

FIRREA: Financial Institutions Reform, Recovery, and Enforcement Act: 

GSE: government-sponsored enterprise: 

HAMP: Home Affordable Modification Program: 

HUD: Department of Housing and Urban Development: 

LPS: Lender Processing Services: 

MBS: mortgage-backed securities: 

MERS: Mortgage Electronic Registration System: 

MHA: Making Home Affordable: 

OCC: Office of the Comptroller of the Currency: 

OTS: Office of Thrift Supervision: 

RESPA: Real Estate Settlement Procedures Act of 1974: 

SAFE Act: Secure and Fair Enforcement for Mortgage Licensing Act of 
2008: 

SCRA: Servicemembers Civil Relief Act: 

SEC: Securities and Exchange Commission: 

TILA: Truth in Lending Act: 

UCC: Uniform Commercial Code: 

[End of section] 

United States Government Accountability Office: 
Washington, DC 20548: 

May 2, 2011: 

Congressional Requesters: 

With record numbers of borrowers in default and delinquent on their 
loans, mortgage servicers--entities responsible for managing home 
mortgage loans--are initiating a large number of foreclosures 
throughout the country. As of December 2010, an estimated 4.63 percent 
of the about 50 million first-lien mortgages outstanding nationwide 
were in some stage of foreclosure--an increase of over 370 percent 
since the first quarter of 2006, when just 1 percent of mortgages were 
in foreclosure.[Footnote 1] Requirements for proceeding with 
foreclosure are largely contained in state laws, and some states 
require the party seeking foreclosure to prepare documents that are 
notarized or signed by someone with knowledge of the case and submit 
them to a court. Beginning in September 2010, several servicers 
announced that they were halting or reviewing their foreclosure 
proceedings throughout the country after allegations that the 
documents accompanying judicial foreclosures may have been 
inappropriately signed or notarized. The servicers subsequently began 
resuming some foreclosure actions after reviewing their processes and 
procedures, but following these allegations, some homeowners have 
challenged the validity of foreclosure proceedings brought against 
them. In other states, foreclosures may be processed without the 
involvement of courts, but challenges to the documentation associated 
with foreclosures can occur and are occurring in these states as well. 
In addition, questions over whether documents for loans that were sold 
and packaged into mortgage-backed securities were properly handled 
have prompted additional challenges regarding whether the parties 
filing for foreclosure have the necessary authority to do so.[Footnote 
2] In response, numerous federal agencies have initiated reviews of 
foreclosure practices at major servicers. Additionally, state 
attorneys general are engaged in a review of servicers' foreclosure 
practices. 

In light of these developments, you asked us to examine various 
aspects of federal oversight of the residential mortgage foreclosure 
process. In response to your request, this report addresses (1) the 
extent to which federal laws address mortgage servicers' foreclosure 
procedures and federal agencies' authority to oversee activities and 
the extent of past oversight; (2) federal agencies' current oversight 
activities and future oversight plans; and (3) the potential impact of 
foreclosure documentation issues on homeowners, servicers, regulators, 
and mortgage-backed securities investors. 

To address these objectives, we reviewed relevant federal laws, 
regulations, examination guidance, and other agency documents. We also 
reviewed relevant literature, examples of reported court cases 
involving these issues, congressional testimonies, and other relevant 
publicly available documentation. In addition, we examined agency 
documentation on current oversight activities, such as an examination 
worksheet, checklists, and supervisory letters summarizing examination 
findings. We conducted interviews with representatives of federal 
agencies, including the Bureau of Consumer Financial Protection 
(CFPB), Department of Housing and Urban Development (HUD), Department 
of Justice (Justice), Department of the Treasury (Treasury), Federal 
Deposit Insurance Corporation (FDIC), Federal Housing Finance Agency 
(FHFA), Board of Governors of the Federal Reserve System (Federal 
Reserve), Office of the Comptroller of the Currency (OCC), Office of 
Thrift Supervision (OTS), and Securities and Exchange Commission 
(SEC). We also interviewed legal experts and representatives of the 
mortgage industry--including the Federal National Mortgage Association 
(Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie 
Mac), investor groups, and consumer advocacy groups. 

We conducted this performance audit from October 2010 through April 
2011 in accordance with generally accepted government auditing 
standards. Those standards require that we plan and perform the audit 
to obtain sufficient, appropriate evidence to provide a reasonable 
basis for our findings and conclusions based on our audit objectives. 
We believe that the evidence obtained provides a reasonable basis for 
our findings and conclusions based on our audit objectives. 

Background: 

Mortgages and Mortgage Market Participants: 

When individuals purchase residential real property with borrowed 
funds, they usually enter into a contractual agreement, typically 
called a promissory note, in which they agree, among other things, to 
make principal and interest payments to the originating lender for a 
period of time. To secure their debt, lenders obtain a lien on the 
underlying property as collateral against borrower default, which 
grants the holder of the lien the right to seize, and usually sell, 
the property should the borrower fail to pay.[Footnote 3] In other 
words, what may be commonly referred to as a mortgage consists of both 
a promissory note evidencing the debt to be paid by the borrower and 
the lien or security interest in the underlying property, which 
generally is provided for in a deed of trust or a mortgage document. 
In the past, the institution providing the loan was typically a bank 
or thrift and would normally hold the loan as an interest-earning 
asset in its portfolio. All activities associated with servicing the 
loan--including accepting payments, initiating collection actions for 
delinquent payments, and conducting foreclosure if necessary--would 
have been performed by this originating institution. 

Over the last few decades, the number of participants in and the 
complexity of the market for home mortgage loans in the United States 
have increased. Now, institutions that originate home mortgages 
generally do not hold such loans as assets on their balance sheets but 
instead sell them to others, who then acquire the right to receive 
borrowers' monthly payments. In recent years, originating lenders 
generally have sold or assigned their interest in both the note and 
the deed of trust to other financial institutions for the purpose of 
securitizing the mortgage. Through securitization, the purchasers of 
these mortgages then package them into pools and issue securities 
known as mortgage-backed securities (MBS) for which the mortgages 
serve as collateral. These securities pay interest and principal to 
their investors, which include other financial institutions, pension 
funds, or other institutional investors. 

Multiple entities--including the mortgage servicer, a trustee for the 
securitized pool (trust), and the investors in the MBS that were 
issued based on the pooled loans--have specific roles regarding loans. 
After a mortgage originator sells its loans to another investor or to 
an institution that will securitize them, another financial 
institution or other entity is usually appointed as the servicer to 
manage payment collections and other activities associated with these 
loans. Mortgage servicers, which can be large mortgage finance 
companies or commercial banks, earn a fee for acting as the servicer 
on behalf of the owner of a loan.[Footnote 4] In some cases, the 
servicer is the same institution that originated the loan and in other 
cases it may be a different institution. The duties of servicers for 
loans securitized into MBS are specified in a contract called a 
pooling and servicing agreement, which can vary widely, but may mirror 
the servicing guidelines issued by the government-sponsored 
enterprises (GSE) Fannie Mae and Freddie Mac.[Footnote 5] Servicing 
duties can involve sending borrowers monthly account statements, 
answering customer service inquiries, collecting monthly mortgage 
payments, maintaining escrow accounts for property taxes and hazard 
insurance, and forwarding proper payments to the mortgage owners. In 
the event that a borrower becomes delinquent on loan payments, 
servicers also initiate and conduct foreclosures in order to obtain 
the proceeds from the sale of the property on behalf of the owners of 
the loans. 

When loans are sold, they are generally packaged together in pools and 
held in trusts pursuant to the terms and conditions set out in the 
underlying pooling and servicing agreement. These pools of loans are 
the assets backing the securities that are issued and sold to 
investors in the secondary market. Another entity will act as trustee 
for the securitization trust. Trustees act as asset custodians on 
behalf of the trust, keeping records of the purchase and receipt of 
the MBS and holding mortgage liens that secure the investment. 
Trustees are also the account custodians for the trust--pass-through 
entities that receive mortgage payments from servicers and disperse 
them among investors according to the terms of the pooling and 
servicing agreement. Although trustees may be the legal owners of 
record of the mortgage loans on behalf of the trust, they do not have 
a beneficial interest in the underlying loans of the securitization. 
[Footnote 6] However, any legal action a servicer takes on behalf of 
the trust, such as foreclosure, generally may be brought in the name 
of the trustee. The beneficial interests in these loans accrue to or 
"are held by" purchasers of the MBS, typically large institutions such 
as pension funds, mutual funds, and insurance companies. 

Figure 1: Flow of Payments in a Basic Securitized Transaction: 

[Refer to PDF for image: illustration] 

Flow of payments for a pool of three mortgages securitized into a 
single mortgage-backed security: 

Borrowers: 
A; 
B; 
C. 

Payments sent to Servicer. 

Services sends payment to: 

Trust managed by a trustee: 
Contains: 
Assets: 
Mortgage 1; 
Mortgage 2; 
Mortgage 3. 
Liabilities: 
Mortgage-backed security. 

Fund sent from Trust to Investors. 

Source: GAO (analysis); Art Explosion (images). 

[End of figure] 

The Foreclosure Process: Overview and Recent Concerns: 

If a borrower defaults on a mortgage loan secured by the home, the 
mortgage note holder is entitled to pursue foreclosure for the 
property to be sold at auction and obtain title to the property and 
sell it on behalf of the mortgage owner to repay the loan. Once the 
borrower is in default, the servicer must decide whether to pursue a 
home retention workout or other foreclosure alternative or to initiate 
foreclosure.[Footnote 7] The mortgage owner or servicer generally 
initiates foreclosure once the loan becomes 90 days or more 
delinquent. As shown in figure 2, states generally follow one of two 
foreclosure methods. In a judicial foreclosure, a judge presides over 
the process in a court proceeding. Servicers initiate a formal 
foreclosure action by filing a lawsuit with a court and in some states 
may submit supporting documents, such as notarized sworn statements, 
or affidavits, as part of the lawsuit.[Footnote 8] A nonjudicial 
foreclosure process takes place outside the courtroom, typically by 
the trustee named in the deed of trust.[Footnote 9] Trustees, and 
sometimes servicers, generally send a notice of default to the 
borrower and publish a notice of sale in area newspapers or legal 
publications. 

Figure 2: Typical Judicial and Nonjudicial Foreclosure Processes: 

[Refer to PDF for image: illustration] 

1) Borrower: Misses payments. 

2) Workout period: Servicer and borrower may pursue loss mitigation 
and home retention strategies. 

3) Notice of default: Written notice to borrower that there has been a 
default and legal action is possible. 

Two types of action: 

Judicial foreclosure: 
Involves a judge or court official that presides over the case. 

Services file foreclosure lawsuit: 

4A) Foreclosure initiation: Servicer initiates formal foreclosure 
action by filing a lawsuit through court. 

5A) Judgment: Judge grants servicer right to dispose of property, and 
schedules the foreclosure sale. 

6A) Foreclosure sale: Property is sold to a third party through an 
auction or conveyed to the servicer. 
Cancel/Reschedule: Servicer may cancel or reschedule foreclosure sales. 

7A) Redemption period: For specified period of time, the borrower may 
reclaim his/her property by matching the winning bid at the 
foreclosure sale. 

Statutory foreclosure: 
Without court action but in accordance with state law(also called 
“nonjudicial” or “power-of-sale”). 

Publication of sale: 

4B) Foreclosure initiation: Servicers are required to publish the 
notice of foreclosure or sale in accordance with state law. 

5B) Foreclosure sale: Property is sold to a third party through an 
auction or conveyed to the servicer. 
Cancel/Reschedule: Servicer may cancel or reschedule foreclosure sales. 

6B) Redemption period: For specified period of time, the borrower may 
reclaim his/her property by matching the winning bid at the 
foreclosure sale. 

Source: GAO (analysis); Art Explosion (images). 

[End of figure] 

Beginning in September 2010, several major servicers announced 
potential problems with their internal procedures for executing 
documents required to be submitted in a judicial foreclosure. These 
procedural problems referred to servicers' practice of having a small 
number of employees sign a large number of affidavits and other legal 
documents that mortgage companies subsequently submitted to courts and 
other public authorities to execute foreclosures, so-called 
robosigning. This practice has raised concerns as to whether 
individuals who claimed in affidavits to have personal knowledge of 
the facts necessary to legally foreclose on a property actually had 
that knowledge and whether legal documents were properly notarized in 
accordance with state law. As a result, questions were raised about 
whether mortgage companies had met the necessary prerequisites to 
foreclose on certain properties, particularly in the judicial 
foreclosure states that have such documentation requirements. 

In addition, questions have been raised about servicers being able to 
prove that they have authority to act on behalf of the mortgage owner, 
or are able to prove who the owner is in order to foreclose. State 
laws may vary on who has authority to bring a foreclosure action, but 
in all cases the legal holder of the mortgage note (and its legal 
representatives, acting in the name of the mortgage holder) generally 
has the right to foreclose on the property. Challenges over this 
authority, or standing, in foreclosure actions have been raised. 
[Footnote 10] Some of these challenges may center on whether the 
servicer has acquired the rights of a mortgage holder when paperwork 
documenting a sale or assignment of interest in a mortgage is missing 
or deficient in some way--for example, if it is not properly endorsed 
by the parties or if the assignment occurred after the foreclosure 
complaint was filed. 

Federal Agencies Involved in Overseeing Institutions That Originate 
and Service Loans: 

Several federal agencies share responsibility for regulating the 
banking industry in relation to the origination and servicing of 
mortgage loans.[Footnote 11] Chartering agencies oversee federally and 
state-chartered banks and their mortgage lending subsidiaries. At the 
federal level, OCC has authority to oversee nationally chartered 
banks. OTS oversees state-and federally chartered savings 
associations, or thrifts, (including mortgage operating subsidiaries) 
as well as savings and loan holding companies and lenders owned by a 
savings and loan holding company.[Footnote 12] The Federal Reserve 
oversees insured state-chartered member banks, while FDIC oversees 
insured state-chartered banks that are not members of the Federal 
Reserve System. Both the Federal Reserve and FDIC share oversight with 
the state regulatory authority that chartered the bank. In addition, 
OTS shares oversight for state-chartered savings associations with the 
state regulatory authority that chartered the savings association. The 
Federal Reserve also has general authority over entities that may be 
owned by federally regulated holding companies but are not federally 
insured depository institutions. The Federal Trade Commission has 
authority to enforce certain federal consumer protection laws for 
nonbank financial services providers. Upon assumption of its full 
authorities on July 21, 2011, CFPB will have the authority to regulate 
mortgage servicers with respect to federal consumer financial law. 
[Footnote 13] On that date, consumer financial protection functions 
from seven existing federal agencies will transfer to the new agency. 
[Footnote 14] For mortgage servicers that are depository institutions 
with more than $10 billion in assets or their affiliates, CFPB will 
have exclusive supervisory authority and primary enforcement authority 
to ensure compliance with federal consumer financial law.[Footnote 15] 
Additionally, if a servicer is a nondepository institution, CFPB will 
have both supervisory and enforcement authority to ensure compliance 
with federal consumer financial law.[Footnote 16] Finally, CFPB will 
have rulemaking authority with respect to mortgage servicers, 
including authority that transfers from other federal agencies such as 
the Federal Reserve and the Federal Trade Commission.[Footnote 17] 

Other agencies are also involved in overseeing certain aspects of U.S. 
mortgage markets but do not have supervisory authority over mortgage 
servicers. For example, FHFA has direct supervisory authority over 
Fannie Mae's and Freddie Mac's activities, but does not have 
supervisory authority over servicers in general.[Footnote 18] The 
Federal Housing Administration (FHA) oversees institutions approved to 
service loans that FHA insures for the servicers' compliance with 
servicing regulations on, for example, the timing of foreclosure 
initiation. Similarly, Treasury has a contractual relationship with 
servicers that voluntarily participate in the Home Affordable 
Modification Program (HAMP) and can review these servicers' compliance 
with Treasury's loan modification guidelines.[Footnote 19] In 
addition, staff from SEC also review some of the registered offerings 
that private issuers of MBS file. Justice has authority to investigate 
and prosecute civil or criminal enforcement cases. In particular, the 
Financial Fraud Enforcement Task Force, led by Justice, is charged 
with coordinating an interagency effort to combat mortgage, loan, and 
lending fraud committed against the U.S. Treasury, among other 
financial crimes. Additionally, the Federal Trade Commission is 
responsible for enforcing certain federal consumer protection laws for 
brokers, lenders, and servicers that are not depository institutions, 
including state-chartered independent mortgage lenders. 

Federal Laws Do Not Specifically Address the Foreclosure Process, and 
Past Federal Oversight of Foreclosure Activities Has Been Limited and 
Fragmented: 

Requirements for Foreclosure Processes and Needed Evidence Are 
Governed Mostly by State rather than Federal Laws: 

State rather than federal laws largely govern foreclosure processes in 
the United States. Foreclosure proceedings, including specifying who 
can bring foreclosure actions and what procedures must be followed as 
part of such actions, are generally governed by state laws. State 
foreclosure laws establish certain procedures that mortgage servicers 
must follow in conducting foreclosures and minimum time periods for 
various aspects of the foreclosure process. State laws on who has 
authority, or standing, to bring a foreclosure action generally 
provide that the legal holder of the mortgage note (and its legal 
representative, such as a servicer or trustee acting in the name of 
the mortgage holder) has the right to foreclose on the property. 
[Footnote 20] In addition, although state laws vary greatly, in order 
to foreclose on a property, servicers generally may need evidence that 
(1) they are the original owner of (or are a holder in due course of) 
the mortgage on the property or have authority to act on behalf of the 
owner (or holder) and (2) the borrower is in default on the mortgage. 

State laws also vary on the evidence required to support a 
foreclosure. In states with judicial foreclosure processes, the state 
laws generally require that a foreclosing party file an action--which 
may have to include certain documentation--with a court. For example, 
mortgage holders often are required to prove the amount of the 
borrower's outstanding obligation and that the borrower is in default 
through notarized affidavits. In addition, to prove the authority, or 
standing, to foreclose, a foreclosing entity may be required to submit 
to the court the original promissory note and mortgage. State laws may 
allow foreclosing entities to submit other evidence to establish 
standing. For instance, the relevant state law may allow for the 
submission of affidavits attesting to the fact that the entity had the 
note but that the original note is lost, destroyed, or otherwise 
cannot be produced for the court. In other instances, mortgage holders 
may produce copies of the original note and mortgage, or deed of 
trust, accompanied by an affidavit attesting to the fact that the 
holder has physical possession of the originals. Affidavits may 
require a testament that the signers have personal knowledge of the 
facts to which they are swearing or that they have personally examined 
the attested facts. Affidavits usually must be signed in the presence 
of a notary or other witnesses. 

In states that allow parties to bring foreclosure actions without 
court approval--nonjudicial foreclosure states--foreclosing parties 
are generally required to adhere to all of the procedural and notice 
requirements established by state law. Mortgage holders are expected 
to be able to meet the same two criteria that are required in a 
judicial foreclosure process--that they have authority, or standing, 
to foreclose and that the borrower is in default. However, evidence 
documenting these facts is not usually required to be filed with a 
court or any other entity. If the borrower being foreclosed upon 
believes that the action is unjustified, he or she must file a lawsuit 
with a court to contest the foreclosure. In nonjudicial foreclosure 
states, therefore, servicers might not need to produce documentation 
supporting their right to foreclose or proving the borrower's default 
unless a foreclosure is contested. 

Federal Laws That Apply to Mortgage Lending Focus on Loan Origination 
and Do Not Specifically Address the Foreclosure Process: 

Because state laws primarily govern the foreclosure process, federal 
laws related to mortgage lending are focused on protecting consumers 
at mortgage origination and during the life of a loan, but not 
necessarily during foreclosure. Among the federal laws that apply to 
residential mortgage lending and subsequent servicing of such loans 
are the Fair Housing and Equal Credit Opportunity Acts, which address 
granting credit and ensuring nondiscrimination in lending; the Truth 
in Lending Act (TILA), much of which addresses disclosure requirements 
for consumer credit transactions; the Real Estate Settlement 
Procedures Act of 1974 (RESPA), which focuses primarily on the 
regulation and disclosure of mortgage closing documents; the Fair 
Credit Reporting Act, which addresses consumer report information, 
including use of such information in connection with mortgage lending; 
and the Secure and Fair Enforcement for Mortgage Licensing Act of 2008 
(SAFE Act), which requires licensing and/or registration of mortgage 
loan originators.[Footnote 21] 

These various federal consumer protection laws address some aspects of 
mortgage servicers' interactions with borrowers, but do not include 
specific requirements for servicers to follow when executing a 
foreclosure. For example, TILA, as amended by the Dodd-Frank Wall 
Street Reform and Consumer Protection Act (Dodd-Frank Act), requires 
servicers to notify borrowers of impending interest rate changes on 
hybrid adjustable rate mortgages and will require certain disclosures 
in monthly statements to borrowers.[Footnote 22] Amendments to the 
regulations implementing TILA that took effect in October 2009 also 
prohibit, for certain loans, imposing a late fee on a late fee. 
[Footnote 23] In addition, RESPA requires a servicer of a federally 
related mortgage loan to provide initial and annual escrow account 
statements, notices of transfer of servicing, and timelines for 
responding to certain written requests from borrowers, such as 
requests for the identity, address, and other relevant contact 
information of the lien holder.[Footnote 24] RESPA also outlines rules 
regarding referring borrowers to affiliated businesses for services 
and requirements for maintaining escrow accounts that the servicer 
establishes or controls on behalf of a borrower to pay taxes, 
insurance premiums, or other charges.[Footnote 25] With respect to 
foreclosure processing specifically, according to Federal Reserve 
officials, among the only federal laws that address the foreclosure 
process they had identified were the Protecting Tenants at Foreclosure 
Act of 2009, which protects certain tenants from immediate eviction by 
new owners who acquire residential property through foreclosure; the 
Servicemembers Civil Relief Act (SCRA), which restricts foreclosure of 
properties owned by active duty members of the military; and federal 
bankruptcy laws.[Footnote 26] 

Past Oversight of Foreclosure Activities by Bank Regulators Has Been 
Limited and Fragmented: 

Bank regulators are responsible for overseeing most entities that 
conduct mortgage servicing, but their oversight of foreclosure 
activities generally has been limited. As part of their mission to 
ensure the safety and soundness of financial institutions, banking 
regulators have the authority to conduct reviews of any aspect of 
banks' activities, including mortgage servicing activities. The 
majority of the mortgage servicing in the United States is performed 
by financial institutions and other subsidiaries of holding companies 
that are under the oversight of OCC, OTS, Federal Reserve, or FDIC. 
Federal banking regulators have responsibility for helping ensure the 
safety and soundness of the institutions they oversee, promoting 
stability in the financial markets, and enforcing compliance with 
applicable consumer protection laws. To achieve these goals, 
regulators establish capital requirements for banks and conduct on-
site examinations and off-site monitoring to assess their financial 
condition, including assessing their compliance with applicable 
banking laws, regulations, and agency guidance.[Footnote 27] 
Additionally, federal bank regulators can take a variety of 
enforcement actions to rectify any identified deficiencies, including 
deficiencies in financial institutions' mortgage origination, 
transfer, securitization, and foreclosure processes.[Footnote 28] 
These enforcement actions include the ability to issue cease-and-
desist orders, to impose civil money penalties, and to suspend or 
prevent entities or individuals from conducting business on behalf of 
a financial institution, under certain circumstances. Although federal 
laws do not specifically address the foreclosure process, officials at 
the federal banking regulatory agencies stated that their agencies 
have the necessary authority to oversee the compliance of institutions 
under their jurisdiction with any applicable state laws, including 
those pertaining to foreclosing on a home mortgage. 

As part of overseeing the safety and soundness of banks, the banking 
regulators have developed a variety of guidance that outlines 
expectations for banks to follow in conducting their operations, but 
the extent to which this guidance addresses how foreclosures should be 
conducted has been limited. Each of the banking regulators has 
guidance that addresses various aspects of lending, including for home 
mortgages, and that establishes expectations regarding extending 
credit, conducting appraisals of properties, and other activities. For 
example, the federal banking regulators have developed uniform real 
estate lending standards that require depository institutions to 
establish and maintain comprehensive, written real estate lending 
policies that are consistent with safe and sound banking practices. 
[Footnote 29] These policies must address certain lending 
considerations, loan administration procedures, and portfolio 
diversification standards, among other requirements. Regarding 
foreclosure, these lending guidelines noted only that institutions 
should have procedures that address foreclosure timing and compliance 
with servicing agreements. Further, the Interagency Guidelines 
Establishing Standards for Safety and Soundness state that 
institutions should have loan documentation practices that ensure that 
any claim against a borrower is legally enforceable.[Footnote 30] 

The examination handbooks that FDIC, Federal Reserve, OCC, and OTS 
examiners follow when conducting examinations of banks' servicing 
activities do not address the specifics of how foreclosures are to be 
conducted, but the guidance does address a number of foreclosure- 
related activities. For example, these regulators' examination 
guidance addresses such topics as how to assess the costs of 
foreclosure or the value of the homes for which ownership is acquired 
through foreclosure. In addition, the guidance addresses how to value 
servicing rights, which provide the stream of income that servicers 
receive from conducting servicing on behalf of other loan owners, such 
as MBS trusts. The value of this income is shown as an asset on the 
balance sheet of the servicer. Each of the regulators' guidance also 
notes that institutions should have foreclosure procedures and that 
examiners should assess whether the institutions' procedures address 
the timing of foreclosure. For example, the Federal Reserve guidance 
suggests selecting a sample of loans to determine whether foreclosure 
was instituted in a timely manner. The regulators' examination 
guidance also expects institutions to consider the risks that arise 
when contracting with third parties to conduct any business activities 
on their behalf and the controls and monitoring that should be 
established throughout the arrangement. The guidance for OCC, OTS, and 
the Federal Reserve also instructs their examiners to assess the 
methods--such as policies and procedures or management reports--that 
institutions use to ensure that their foreclosure procedures comply 
with applicable laws, regulations, and investor guidelines. Finally, 
OCC and OTS guidance notes that examiners should review internal bank 
reports on foreclosure trends. 

The extent to which bank regulators have conducted reviews of the 
foreclosure activities of banks or banking subsidiaries that perform 
mortgage servicing has been limited because these practices generally 
were not considered as posing a high risk to the safety and soundness 
of the institutions. Because mortgage servicers generally manage loans 
that are actually owned or held by other entities, they are not 
exposed to significant losses if the loans become delinquent.[Footnote 
31] In addition, we have previously reported that the percentage of 
loans in foreclosure had historically been very low (less than 1 
percent) from 1979 to 2006.[Footnote 32] According to OCC and Federal 
Reserve staff, these agencies conduct risk-based examinations that 
focus on areas of greatest risk to their institutions' financial 
positions, as well as some other areas of potential concern, such as 
consumer complaints. Because they determined that the risks from 
mortgage servicing generally had not indicated the need to conduct 
more detailed reviews of these operations, federal banking regulators 
have not regularly examined servicers' foreclosure practices on a loan-
level basis. Instead, previous federal regulatory examinations of 
mortgage servicers have focused on loan modifications or on the income 
banks earn from servicing loans. 

Oversight also has been fragmented, and not all servicers have been 
overseen by federal banking regulators. Multiple agencies have 
regulatory responsibility for most of the institutions that conduct 
mortgage servicing, but until recently, some nonbank institutions have 
not had a primary federal or state regulator. As shown in figure 3, of 
the top 25 servicers in 2010 that represent 75 percent of the market, 
the majority--over 90 percent--were depository institutions that are 
subject to oversight by one of the federal banking regulators. For 
example, 

* OCC is the primary regulator for banks that service 78.3 percent of 
loans serviced by the top 25 servicers. 

* The Federal Reserve oversees bank holding companies or their 
depository institution subsidiaries and state-chartered member banks 
that may conduct servicing that together account for 4.1 percent of 
the loans serviced by the top 25 servicers. 

* OTS, whose functions are scheduled to be transferred to OCC, FDIC, 
and the Federal Reserve on July 21, 2011, oversees servicers that are 
savings associations, which account for 4.7 percent of the volume of 
the top 25 servicers.[Footnote 33] 

* FDIC acts as the primary regulator for servicers that represent 1.1 
percent of the loans serviced by the top 25 servicers. 

In addition, many federally regulated bank holding companies that have 
insured depository subsidiaries, such as national or state-chartered 
banks, may have nonbank subsidiaries, such as mortgage finance 
companies. Under the Bank Holding Company Act of 1956, as amended, the 
Federal Reserve has jurisdiction over such bank holding companies and 
their nonbank subsidiaries that are not regulated by another 
functional regulator.[Footnote 34] These nonbank subsidiaries 
accounted for about 5.9 percent of the top 25 servicers' volume in 
2010. In some cases nonbank entities that service mortgage loans are 
not affiliated with financial institutions at all, and therefore were 
not subject to oversight by one of the federal banking regulators. 
These entities accounted for about 6 percent of the top 25 servicers' 
volume in 2010. 

Figure 3: Regulatory Oversight of Top 25 Servicers, by Percentage of 
Mortgage Loans Serviced, December 2010: 

[Refer to PDF for image: pie-chart] 

Regulated: 
OCC: 78.3%; 
OTS: 4.7%; 
Federal Reserve: 4.1%; 
FDIC: 1.1%. 

Limited regulation: 
Nonbank subsidiary: 5.9%. 

Unregulated: 
Other nonbank servicer: 6.0%. 

Source: GAO analysis of Inside Mortgage Finance data. 

Note: We identified institutions' share of the mortgage servicing 
market as reported in an industry publication, Inside Mortgage 
Finance. According to our analysis of these data, the home mortgage 
loans serviced by the top 25 institutions accounted for about 75 
percent of all loans outstanding. 

[End of figure] 

In addition to fragmented oversight among multiple regulators, past 
oversight of servicers has been uneven, particularly with respect to 
nonbank entities. Although the Federal Reserve has authority over 
nonbank subsidiaries that are affiliates of bank holding companies, 
until recently the Federal Reserve had generally not included these 
entities in its examination activity because their activities were not 
considered material risks to the bank holding company. In a previous 
report on predatory lending, we raised questions about the activities 
of some of these less regulated nonbank entities and recommended that 
federal regulators actively monitor their activities.[Footnote 35] 
However, regulators continued to view the firms as not posing material 
risks. In 2007, after widespread defaults on mortgage loans began 
occurring, the Federal Reserve conducted a targeted review of consumer 
compliance supervision at selected nonbank subsidiaries that originate 
loans. Additionally, in October 2009, the Federal Reserve began a loan 
modification initiative, including on-site reviews, to assess whether 
certain servicers, including nonbank subsidiaries of bank holding 
companies, were executing loan modification programs in compliance 
with relevant federal consumer protection laws and regulations. A 
Federal Reserve official recently testified that the current 
foreclosure documentation problems underscore the importance of using 
the agency's authority to send examiners into nonbank affiliates of 
bank holding companies.[Footnote 36] Further, the Federal Reserve 
received certain authority in the Dodd-Frank Act to supervise certain 
nonbank financial institutions that have been determined to pose a 
potential threat to the financial stability of the United States. 
[Footnote 37] 

There also have been gaps in past oversight. For example, nonbank 
servicers have historically been subject to little or no direct 
oversight by state or federal regulators. We have previously reported 
that some states require mortgage servicers (including state-chartered 
banks) to register with the state banking department.[Footnote 38] 
State banking regulators generally oversee independent lenders and 
mortgage servicers by requiring business licenses that mandate meeting 
net worth, funding, and liquidity thresholds. According to officials 
representing state banking supervisors, bank examinations focus on 
loan origination and, until recently, did not include an evaluation of 
servicing or foreclosure practices. In our 2009 report on how the U.S. 
financial regulatory system has not kept pace with the major 
developments in recent decades, we noted that the varying levels, and 
in some cases complete lack, of oversight of nonbank institutions that 
originated mortgages created problems for consumers or posed risks to 
regulated institutions.[Footnote 39] 

Other Federal Agencies' Involvement in Reviewing Servicing Activities 
Also Has Been Limited: 

In addition to federal banking regulators, federal housing agencies 
and others have oversight responsibilities for various aspects of 
mortgage servicing, but these agencies' past efforts also focused 
primarily on servicers' loan modification and preforeclosure 
activities rather than the processes associated with foreclosure. 

* FHA, which oversees mortgage servicers that manage the home mortgage 
loans insured by that agency, uses a risk-based approach to monitor 
those institutions. Furthermore, according to FHA staff, the agency's 
mortgage insurance contract provisions do not authorize direct 
oversight of the mortgage foreclosure process. FHA does have 
regulations that provide expectations for servicers related to 
foreclosure activities.[Footnote 40] These regulations address the 
timely initiation of foreclosure, completion of foreclosure within 
specified time frames, and conveyance to HUD of properties with clear 
and marketable title following foreclosure sale.[Footnote 41] 
According to FHA staff, past servicer reviews have focused on 
monitoring compliance with requirements for assisting delinquent 
borrowers to remain in their homes by considering loan modifications, 
payment plans, or other options to avoid foreclosure, called loss 
mitigation. For example, FHA examiners would review whether servicers 
considered all loss mitigation alternatives before foreclosure was 
initiated. The staff noted, however, that examiners have not 
previously conducted in-depth reviews of servicers' foreclosure 
practices. 

* FHFA also conducts housing oversight activities, but its past 
oversight of foreclosure activities has also been limited. FHFA has no 
direct authority over servicers, but does have authority to ensure 
that the housing GSEs are being run in a safe and sound fashion, as 
well as the power to impose operational, managerial, and internal 
control standards on the companies.[Footnote 42] According to FHFA 
staff, their agency has monitored foreclosure trends and policies at 
Fannie Mae and Freddie Mac, but the agency did not in the past 
routinely examine these enterprises' oversight of their servicers' 
foreclosure procedures. Like the banking regulators and FHA, FHFA has 
focused its past efforts on the institutions' loan modification and 
preforeclosure efforts. For example, according to FHFA staff, recent 
oversight activities have included an operational risk assessment of 
the GSE's HAMP program as well as reviews of GSE oversight of servicer 
performance in adhering to foreclosure timeline standards and 
oversight of retained foreclosure attorney networks and examinations 
of foreclosure claim filing performance. Similarly, the GSEs also were 
not actively taking steps to ensure that the servicers they contracted 
with to manage the loans they purchased or pooled into MBS were 
following appropriate foreclosure practices. Representatives from the 
GSEs reported that they conduct targeted reviews of servicers that 
focus on evaluating processes and procedures. While the GSEs conducted 
reviews of delinquent loans and tested whether certain key elements of 
the servicers' management of loans in default were being properly 
followed, the reviews did not specifically check that servicers were 
in compliance with foreclosure practices based on state-specific laws 
and guidance. They said that they require servicers to follow proper 
legal procedures with respect to all aspects of their business 
operations, including their foreclosure documentation practices, as 
part of their contractual obligations with the GSEs and expect 
servicers to report problems with their activities. 

* Treasury ordinarily does not have any direct role in oversight over 
entities that conduct mortgage servicing. However, under HAMP, which 
was initiated in 2009, mortgage servicers contract with Treasury to 
help troubled homeowners obtain modifications of their mortgage loans. 
As part of this program, Treasury has conducted compliance reviews and 
is assessing servicer compliance with HAMP requirements. These 
requirements, and thus Treasury's oversight, do not cover foreclosure 
activities. 

* SEC is involved in ensuring that appropriate public disclosures are 
made as part of the issuance of MBS, but it does not have a direct 
role with respect to foreclosure activities related to the loans in 
these pools. SEC staff told us they receive a first annual report on 
publicly traded residential MBS that includes information such as the 
overall performance and status of loans in the pool.[Footnote 43] When 
MBS are underwritten and issued, a company (usually an investment 
bank) must disclose certain information about the securities to inform 
potential investors of the risks involved. SEC has the authority to 
enforce civil securities fraud statutes related to any inaccurate 
disclosures, such as about the performance or ownership of the loans 
in the pool.[Footnote 44] However, we previously reported that 
officials from SEC told us that they did not examine servicers' 
policies or activities for these securitized assets. SEC staff told us 
that they also reviewed information included in the publicly filed 
financial statements of publicly traded companies engaged in mortgage 
servicing. This information generally included aggregate trends in 
foreclosure activity but did not address actions taken related to 
individual loans. 

* The Federal Trade Commission is responsible for enforcing certain 
federal consumer protection laws for entities that are not depository 
institutions, including state-chartered independent mortgage lenders. 
As a result, it can take enforcement actions against nonbank mortgage 
servicers if it receives a complaint and then determines that such an 
entity had violated one of the various federal consumer protection 
laws. In recent years, the Federal Trade Commission has completed a 
number of enforcement actions against mortgage servicers.[Footnote 45] 
However, the Federal Trade Commission is not a supervisory agency and 
thus does not conduct ongoing monitoring of compliance, including of 
nonbank mortgage servicers. 

* Justice has general authority to investigate and prosecute instances 
of fraud, through both civil and criminal enforcement, and thus can be 
involved in mortgage-related activities if fraud against the 
government, lenders, borrowers, or investors occurs. However, 
according to Justice staff, their agency does not have bank regulatory 
authorities; therefore, it does not engage in routine review of 
servicers' activities as bank regulators do.[Footnote 46] Justice 
staff could not comment on any ongoing investigations, but said that 
cases completed in the past involving mortgage servicers involved 
issues other than foreclosure.[Footnote 47] In 2009, the Obama 
administration established the Financial Fraud Enforcement Task Force 
in response to the financial crisis. The task force's Mortgage Fraud 
Working Group is focused on a wide array of mortgage fraud, including 
mortgage lending fraud and foreclosure rescue schemes. To date, this 
group's activities have focused on investigating issues related to 
mortgage origination, short sales, and appraisals and tracking the 
market for indications of mortgage fraud. 

Federal Regulators Have Conducted Reviews in Response to Foreclosure 
Documentation Problems, but Extent of and Roles in Future Oversight 
Are Unclear: 

Federal Regulators Have Recently Increased Attention on Servicing 
Activities and Identified Problems through a Coordinated Review: 

In response to the foreclosure process deficiencies that various 
mortgage servicers publicly announced beginning in September 2010, 
federal banking regulators have conducted specific reviews of certain 
servicers' foreclosure activities. When reports of foreclosure 
documentation problems surfaced, banking regulators initially ordered 
servicers to conduct self-assessments of their foreclosure management 
processes and correct any deficiencies. Consequently, some servicers 
temporarily halted foreclosure proceedings in order to review their 
foreclosure processes and to verify the soundness of documentation 
preparation procedures. Further, OCC, the Federal Reserve, OTS, and 
FDIC began a coordinated on-site review of 14 mortgage servicers to 
evaluate the adequacy of controls over servicers' foreclosure 
processes and to assess servicers' policies and procedures for 
compliance with applicable federal and state laws.[Footnote 48] 

Regulatory staff told us that as part of these reviews, their 
examiners evaluated internal controls and procedures for processing 
foreclosures and reviewed samples of individual loan files to better 
ensure the integrity of the document preparation process and to 
confirm that files contained appropriate documentation. Examiners 
reviewed more than 2,800 loan files--which they noted was a relatively 
small number of foreclosure files given the volume of recent 
foreclosures processed by these servicers--comprising approximately 
200 foreclosure loan files with a variety of characteristics from each 
servicer. According to one of the banking agencies, 9 of the servicers 
included in the file review had completed about 608,000 foreclosures 
in 2010.[Footnote 49] The foreclosure files selected for review 
included ongoing and completed foreclosures, foreclosures conducted in 
both judicial and nonjudicial states, and a judgmental sample of files 
based on the findings of initial file reviews and consumer complaints. 
The on-site reviews were conducted largely in November 2010. 

The reviews uncovered similar weaknesses in many of the mortgage 
servicers' foreclosure practices, although one regulator noted that 
each weakness was not evident at every servicer, nor was every 
deficiency uncovered in each loan file. Generally, the examinations 
revealed severe deficiencies in three primary areas: 

* First, examiners identified shortcomings in the preparation of 
foreclosure documents. For example, according to agency officials, 
affidavits used in foreclosures frequently were signed by persons who 
did not satisfy personal knowledge requirements and were not properly 
notarized, which represented practices not conducted in accordance 
with state laws. 

* Second, regulators found that most servicers did not have adequate 
policies, staffing, or oversight of their internal foreclosure 
processes. Regulators' reviews revealed that most servicers lacked 
sufficient policies to guide personnel engaged in foreclosure 
activities, including policies that outlined how affidavit documents 
should be legally prepared and notarized. Additionally, examiners 
found that most servicers did not have effective quality controls or 
internal review processes in place to detect deficiencies in 
foreclosure procedures. Regulatory staff reported that servicers did 
not generally review document execution processes or verify compliance 
with regulations and state and local laws during internal audits of 
foreclosure processes. Further, the regulators' reviews also revealed 
that most servicers did not maintain sufficient staffing levels to 
process the increasing volume of foreclosures, nor were staff 
adequately trained to perform this work in compliance with relevant 
laws and regulations. For example, regulators found that one servicer 
that had previously understaffed this function and had not provided 
adequate training increased its document-signing staff from 5 to 80 
and revised its training to include guidance for judicial foreclosures 
to address deficiencies in foreclosure processing. 

* Third, regulators found that all the servicers had not sufficiently 
overseen the activities of third-party service providers, particularly 
in oversight of foreclosure attorneys, who were performing foreclosure 
activities on behalf of these servicers. Regulatory staff said that 
their reviews indicated that servicers had relied on attorneys to 
execute foreclosures in compliance with applicable laws, but had 
failed to conduct due diligence assessments of these attorneys' 
foreclosure practices. Many servicers had also failed to adequately 
supervise other firms that also conducted foreclosure activities on 
behalf of servicers, such as firms that track loan ownership or 
process foreclosure-related documents. 

As a part of the reviews of foreclosure documentation problems, 
banking regulators also conducted on-site reviews of two bank service 
providers that were involved with processing or maintaining 
foreclosure-related documents and found similar weaknesses. In 
conjunction with staff from other regulatory agencies, OCC staff led 
an examination of MERSCORP and its wholly owned subsidiary, Mortgage 
Electronic Registration System (MERS), an electronic registry 
established by the mortgage finance industry that tracks mortgage 
ownership and transfers of servicing rights, and Federal Reserve staff 
led a similar on-site review of foreclosure-related activities at 
Lender Processing Services (LPS), which provides various data and 
document processing services to mortgage lenders and servicers. 
[Footnote 50] The regulators identified some weaknesses in governance 
and oversight at both firms and found that internal controls were 
insufficient to identify deficiencies. To address these issues, the 
agencies are taking formal enforcement actions against MERS and LPS. 
[Footnote 51] 

Bank Examiners Found That Borrowers in Files Reviewed Were Delinquent 
and Servicers Generally Had Necessary Documents to Foreclose: 

While the bank regulators' examinations of the 14 servicers revealed 
material weaknesses in these entities' overall foreclosure management 
processes, examiners generally did not find in the files they reviewed 
cases in which the borrowers were not seriously delinquent on the 
payments on their loans or that the servicers lacked the documents 
necessary to demonstrate their authority to foreclose. The reviews did 
not include an analysis of the payment history of each loan prior to 
foreclosure or potential mortgage-servicing issues outside of the 
foreclosure process.[Footnote 52] For example, examiners focused their 
reviews on foreclosure procedures and documentation preparation and 
did not examine whether servicers had followed other requirements, 
such as FHA requirements for assessing the borrower for a loan 
modification or other loss mitigation alternatives, before initiating 
foreclosure. Nonetheless, regulatory staff told us that examiners or 
internal servicer reviews of foreclosure loan files had identified a 
limited number of cases in which foreclosures should not have 
proceeded--even though the borrower was seriously delinquent--and 
servicers' internal controls over, for example, procedures for staff 
knowledge of the case, could have made a difference.[Footnote 53] For 
example, one supervisory letter noted that one servicer's internal 
review had identified instances of foreclosures that proceeded despite 
the borrower having received a loan modification, which should have 
halted the foreclosure process. A Federal Reserve official told us 
that while its examiners uncovered only one case in its file review 
where foreclosure was initiated against a borrower in a loan 
modification status, the examinations raised concerns about the level 
of communication between servicers' foreclosure and loan modification 
staff. In addition, regulatory staff told us that some servicers 
reported instances where foreclosures proceeded against military 
service members on active duty in violation of SCRA.[Footnote 54] 
According to regulatory staff, violations of SCRA were not reported by 
all servicers. According to our discussions with regulatory staff, 2 
servicers of the 14 included in the regulators' review preliminarily 
identified almost 50 instances of foreclosures proceeding against 
military service members on active duty in violation of SCRA. They 
noted that some of these cases may have been prevented had servicers 
had better internal controls, such as procedures to ensure that staff 
reviewing files took steps to obtain information to verify active duty 
status and borrower eligibility for SCRA protection prior to taking 
foreclosure action. 

From the sample loan reviews of the 14 servicers, the bank regulatory 
officials said that examiners generally did not identify any concerns 
related to transfers of loan documents that would impede the 
servicer's ability to initiate foreclosure. On the basis of their 
reviews of more than 2,800 files, examiners determined that servicers 
generally were able to effectively demonstrate ownership of promissory 
notes and were generally able to locate original notes and mortgage 
documents that are required to be in the possession of the foreclosing 
party under most state laws. However, bank regulatory officials told 
us that examiners did not always verify, as part of the loan file 
review process, whether documentation included a record of all 
previous mortgage transfers from loan origination to foreclosure 
initiation, as may be required by some state laws or contracts. 
[Footnote 55] In addition, with some exceptions, examiners found that 
notes appeared properly endorsed and mortgages appeared properly 
assigned. In a few instances, examiners uncovered notes that were not 
properly endorsed, which could subject the servicer to challenges on 
its authority or standing to foreclose. Additionally, while each of 
the regulators stated that servicers could generally produce requested 
documentation, servicers at times had required some time to find 
necessary documents. In part, these difficulties in locating necessary 
documents quickly was likely exacerbated by the examiners' finding 
that many servicers did not maintain formal foreclosure files, but 
relied on third parties such as foreclosure attorneys to maintain 
documents, including judicial affidavits and promissory notes, on 
behalf of the servicer. 

Future Oversight Plans of Regulators and the Degree to Which Potential 
National Servicing Standards Would Address Documentation Issues Are 
Yet Unclear: 

On the basis of their findings from the coordinated review, regulators 
are taking formal enforcement actions against each of the 14 
servicers, but the extent of their future oversight of servicing 
activities has yet to be determined.[Footnote 56] Regulators recently 
issued formal enforcement orders to these servicers, and these 
servicers are required to take corrective actions to address 
identified deficiencies and weaknesses.[Footnote 57] According to bank 
regulatory staff and these enforcement orders, each of the 14 
servicers is required to enhance its compliance program with respect 
to oversight of foreclosure processes and to ensure that mortgage 
servicing and foreclosure practices comply with applicable laws and 
regulations. In addition, enforcement orders require servicers to 
align staffing levels with servicing volume and to enhance training to 
ensure that personnel involved in processing foreclosures are aware of 
compliance obligations. Regulators' enforcement actions also require 
servicers to reassess and strengthen their vendor management processes 
to improve supervision over third-party service providers, including 
external law firms and MERS. Because examiners reviewed a relatively 
small number of foreclosure files, enforcement orders require each 
servicer to retain an independent firm to conduct a comprehensive 
review of past foreclosure actions from January 1, 2009 to December 
31, 2010 to identify borrowers who were financially harmed by servicer 
deficiencies identified in the independent review, and to remediate 
those borrowers, as appropriate.[Footnote 58] Further, the servicers 
are required to retain an independent firm to assess the compliance, 
legal, and reputational risks in their servicing operations, in 
particular the risks of deficiencies in foreclosure activities and 
loss mitigation. According to the regulators, some servicers have 
already begun to implement new foreclosure policies and procedures, 
including strengthening internal controls, increasing the number of 
staff, and enhancing training. For example, OTS found that one 
servicer had revised its affidavit processing and notarization 
procedure to come into compliance with state law by requiring signing 
officers to review supporting documentation, including documents used 
by attorneys in preparing affidavits, before signing affidavits and to 
require an authorized notary to witness the affiant's signature. 

Although regulators have taken enforcement actions against servicers, 
they have not identified specifically how they will change the extent 
and frequency of future oversight of servicers going forward. 
According to the regulators' report on their coordinated review, 
regulators will take steps to help ensure that corrective actions 
taken by servicers and as required by the enforcement orders are fully 
implemented.[Footnote 59] Staff at one of these agencies told us that 
they will substantially revise their supervisory strategy to include 
plans to assess servicer compliance with any enforcement orders and to 
evaluate servicers' implementation of corrective action plans. 
However, although regulatory staff recognized that additional 
oversight would likely be necessary for servicers' foreclosure 
activities in the future, as of April 2011 they had not determined 
what changes would be made to guidance or to the extent and frequency 
of examinations. For example, staff from the Federal Reserve 
acknowledged that the recent Dodd-Frank Act directs them to conduct 
additional oversight of bank holding companies and their nonbank 
subsidiaries, including those that perform mortgage servicing. 
[Footnote 60] These staff said that they were developing a 
standardized work plan for examinations of all mortgage servicers 
supervised by the Federal Reserve, but they said that they had not 
finalized plans for the extent and timing for conducting such ongoing 
oversight. 

Moreover, regulators with whom we spoke expressed uncertainty about 
how their organizations will interact with and share responsibility 
with the new CFPB regarding oversight of mortgage servicing 
activities. This agency was established in the Dodd-Frank Act and, 
once it assumes its full authority, will have direct authority to 
conduct examinations of and enforce consumer protection regulations 
for the largest depository institutions and their affiliates as well 
as nonbank institutions, with regard to servicing activities. This 
includes authority to enforce various consumer protection statutes 
currently overseen by other regulators--including authority to enforce 
TILA and RESPA. Although bank regulatory staff told us that they will 
continue to look at banks' mortgage servicing activities to assess the 
potential impact on such institutions' safety and soundness, they have 
not yet determined how this oversight will be shared with CFPB, which 
is to focus on ensuring that consumers are adequately protected. 
According to regulatory staff and the staff standing up CFPB, the 
agencies intend to coordinate oversight of mortgage servicing 
activities as CFPB assumes its authorities in the coming months. In 
addition, the staff standing up CFPB said that supervision of mortgage 
servicing will be a priority for the new agency, but as of April 2011 
oversight plans had not been finalized. As previously discussed, 
fragmentation among the various entities responsible for overseeing 
mortgage servicers heightens the importance of coordination on plans 
for future oversight. In recent testimony, the Acting Comptroller of 
the Currency expressed concern about the lack of clarity regarding 
CFPB's regulatory role and stated the need for CFPB to clearly define 
its role and responsibilities so that regulatory agencies can practice 
appropriate oversight.[Footnote 61] Some of the elements we identified 
as important for ensuring effective regulation in our 2009 report on 
reforming the U.S. financial regulatory system highlight the 
importance of regulatory coordination as part of the oversight of 
foreclosure practices. In that report, we noted that effective 
oversight requires regulators to develop appropriately comprehensive 
regulations and clearly defined goals so that they can effectively 
conduct activities to implement their missions. This report also noted 
that when regulators have different goals, such as the banking 
regulators with their focus on institutions' safety and soundness and 
CFPB's focus on consumer protection, having mechanisms for regulators 
to coordinate oversight is important to prevent gaps and 
inconsistencies in oversight.[Footnote 62] CFPB staff told us they are 
aware of these concerns and said that they would continue to 
communicate with other regulators on servicing issues and general 
coordination of examinations. 

As part of addressing the problems associated with mortgage servicing, 
including those relating to customer service, loan modifications, and 
other issues, various market participants have begun calling for the 
creation of national servicing standards, but the extent to which any 
final standards would address foreclosure documentation and processing 
is unclear. For example, a December 2010 letter from a group of 
academics, industry association representatives, and others to the 
financial regulators noted that such standards are needed to improve 
the certainty associated with mortgage securitizations and ensure 
appropriate servicing for all loans, including those in MBS issuances 
and those held either in portfolios of the originating institution or 
by other owners. This letter outlined various areas that such 
standards could address, including requirements that servicers submit 
written attestations that foreclosure processes comply with applicable 
laws and that loan modifications be pursued whenever economically 
feasible. 

Similarly, some regulators have made statements in support of such 
standards. For example, OCC has developed draft standards, and in his 
February 2011 testimony, the Acting Comptroller of the Currency 
expressed support for such standards, noting that they should provide 
the same safeguards for all consumers and should apply uniformly to 
all servicers. He also stated that standards should require that 
servicers have strong foreclosure governance processes that ensure 
compliance with all legal standards and documentation requirements and 
establish effective oversight of third-party vendors. In addition, a 
member of the Board of Governors of the Federal Reserve System 
testified that consideration of national standards for mortgage 
servicers was warranted.[Footnote 63] Further, in a recent speech on 
the urgent need for mortgage reform, FDIC's Chairman urged servicers 
and federal and state regulators to act now to create national 
servicing standards.[Footnote 64] Most of the regulators with whom we 
spoke indicated that such national servicing standards could be 
beneficial. For example, staff from one of the regulators told us that 
national standards would create clear expectations for all servicers, 
including nonbank entities that are not overseen by the banking 
regulators, and would help establish consistency across the servicing 
industry. The regulators' report on the coordinated review also states 
that such standards would help promote accountability and 
appropriateness in dealing with consumers and strengthen the housing 
finance market. In response to our draft report, multiple agencies 
commented that an interagency effort to develop national servicing 
standards is currently under way. While the banking agencies, HUD, 
Treasury, and FHFA are collaborating to create standards that would 
address problems in mortgage servicing, including deficiencies in 
foreclosure processing, as of April 2011 it was still uncertain what 
any final standards would address and how they would be implemented. 
According to CFPB staff, whatever the outcome of the interagency 
negotiations, CFPB will have substantial rulemaking authority over 
servicing and under the Dodd-Frank Act is required to issue certain 
rules on servicing by January 2013. In the past, we have reported that 
opportunities for problems involving financial institutions and 
consumers increase when activities are not subject to consistent 
oversight and regulatory expectations.[Footnote 65] As a result, 
including specific expectations regarding foreclosure practices in any 
standards that are developed could help ensure more uniform practices 
and oversight in this area. 

In response to recently disclosed foreclosure documentation problems, 
federal housing agencies and entities also conducted reviews of 
servicer practices. For example, FHA recently returned to the six 
largest servicers of FHA-insured mortgage loans, following earlier 
examinations on servicers' loss mitigation practices, to review 
servicer foreclosure processes.[Footnote 66] According to agency 
officials, FHA issued questionnaires to targeted servicers--all of 
which were also being reviewed as part of the bank regulators' 
reviews--to obtain information on their foreclosure practices, and the 
agency performed on-site examinations that included review of 
individual loan files. Agency officials also reported that examiners 
reviewed servicing transfer documentation to ensure that assignments 
were properly recorded and exhibited no break in chain of title. FHA 
officials stated that they are in the process of consolidating and 
reviewing exam findings and plan to issue an executive summary report. 
While FHA plans to issue letters to servicers requesting corrective 
action plans, agency officials noted that many of the servicers had 
already implemented corrective measures to remedy deficiencies in 
foreclosure processes. Internally, FHA is also considering changes in 
servicing guidance to better ensure the soundness and timeliness of 
the foreclosure process. 

FHFA is also responding to revelations of foreclosure documentation 
problems. In October 2010, FHFA issued a statement of support for the 
GSEs' efforts in addressing documentation concerns after both Fannie 
Mae and Freddie Mac issued letters to their respective servicers 
reminding them of their legal and contractual obligations and 
requiring that they assess their foreclosure processes and correct any 
deficiencies. Subsequently, FHFA issued a four-point policy framework 
to the GSEs and servicers for assessing and remedying foreclosure 
process deficiencies that asked them to: 

* verify that their foreclosure processes were working properly, 

* remediate any deficiencies identified in their foreclosure 
processing, 

* refer suspicions of fraudulent activity to appropriate regulatory 
officials, and: 

* avoid delaying the processing of foreclosures in the absence of 
identified problems. 

According to GSE officials, in response, some servicers reported 
problems with their foreclosure procedures and are taking steps to 
remediate deficiencies. 

In addition, FHFA and the GSEs are evaluating future measures to 
improve mortgage servicing. As announced by FHFA in a recent press 
release, FHFA directed Fannie Mae and Freddie Mac to work on a joint 
initiative, in coordination with FHFA and HUD, to consider 
alternatives for future mortgage servicing structures and servicing 
compensation for single family loans; however, any changes are not 
expected to be implemented before 2012.[Footnote 67] Separately, FHFA 
also directed the GSEs to work together to align their guidelines to 
servicers to establish, among other things, consistent timelines and 
requirements for communications with borrowers.[Footnote 68] Moreover, 
both Fannie Mae and Freddie Mac have already begun to enhance 
oversight of their attorney networks. According to an official from 
one of the GSEs, changes in oversight include increased staffing 
levels in the GSEs' legal and business units and on-site staff at 
servicer locations in one state. 

Other federal agencies are also taking steps to address foreclosure 
documentation issues. 

* In October 2010, Treasury issued a reminder letter to Making Home 
Affordable (MHA) servicers reiterating servicer obligations to comply 
with applicable federal and state laws.[Footnote 69] As a consequence 
of reported irregularities in the foreclosure process, Treasury 
instructed its compliance agent, MHA-Compliance, to review internal 
policies and procedures governing preforeclosure activities at the 10 
largest servicers.[Footnote 70] While Treasury's efforts are primarily 
focused on loss mitigation efforts and compliance with HAMP 
requirements, Treasury is also working to improve servicer processes 
and to help borrowers. 

* SEC also responded in October 2010 by reaching out to certain 
companies about the adequacy of the disclosures that publicly traded 
companies that perform mortgage servicing, which includes many of the 
largest servicers, have made to their shareholders about the potential 
financial risks to their companies that are associated with mortgage 
foreclosure documentation issues. SEC issued a letter to public 
companies engaged in mortgage servicing activities reminding them of 
their disclosure obligations and identifying items to consider in 
disclosure statements, including potential material impacts on 
operations because of liabilities resulting from documentation 
problems. SEC officials noted that reporting companies did include 
disclosures regarding foreclosure documentation issues in recent 
filings. For example, 2 of the largest servicers disclosed that they 
had instituted a moratorium on foreclosures because of alleged 
irregularities in foreclosure documentation processing. 

* Justice is also taking actions to address foreclosure documentation 
issues. Justice staff could not comment on investigations, but told us 
that they are working with investigatory and regulatory partners to 
look into the servicers' foreclosure practices. While they said that 
federal civil and criminal statutes could apply in complaints or 
charges in areas of mortgage fraud, including mail and wire fraud, 
false statements, Financial Institutions Reform, Recovery, and 
Enforcement Act (FIRREA) civil actions, and fraud against the 
government, if the mortgage loans involved were federally insured or 
guaranteed, Justice staff told us that the state attorneys general and 
other regulators also have enforcement authority to address these 
issues. 

As multiple investigations into mortgage servicer activities are under 
way, numerous federal agencies and state officials recently formed a 
group to help coordinate these efforts. Participants include the 
federal banking regulators as well as agencies such as Justice, 
Treasury, FHFA, HUD, SEC, and FTC, with input from CFPB. Additionally, 
some of these agencies are coordinating with state officials, 
including representatives from the 50-state Attorney General group 
formed to investigate robosigning allegations and other deficient 
servicer practices. Agencies participate in weekly check-ins, and 
meetings are conducted as needed. The goal of this group is to provide 
a comprehensive and coordinated process for conducting reviews of 
mortgage servicing activities, developing solutions, and enforcing 
accountability. The group enables agencies to share information across 
agencies and to minimize duplication in investigative efforts and to 
coordinate remedial actions. 

Multiple federal agencies with the state attorneys general are 
considering resolution options with the largest servicers. According 
to media reports, a concept paper aimed to facilitate discussion and 
input from the servicers was provided to these servicers. Among the 
discussion topics in the paper were potential steps to improve 
foreclosure processes and comply with affidavit preparation standards 
and note transfer requirements as enumerated in the concept paper. 
However, some lawmakers have expressed concerns about some of the 
topics in this paper. As of March 2011, no resolution has been reached. 

Documentation Problems Will Likely Result in Delays in the Foreclosure 
Process, but the Impact on Financial Institutions and Others Is Less 
Clear: 

Improper Documentation Practices Will Likely Add Delays in the 
Foreclosure Process, but as Problems Are Corrected, Foreclosures Will 
Proceed: 

To date, a key impact of the problems relating to affidavits and 
notarization of mortgage foreclosure documents appears to be delays in 
the rate at which foreclosures are proceeding, but many foreclosures 
are expected to be completed eventually. One reason that the rate at 
which foreclosures are being completed has slowed is that servicers 
have been performing internal reviews of their procedures and, in some 
cases, have implemented moratoriums on foreclosures in both judicial 
and nonjudicial states. In addition, several states have called for 
moratoriums on foreclosures or otherwise taken actions that could 
stall the foreclosure process in these states. As shown in figure 4, 
the percentage of loans in some stage of foreclosure (foreclosure 
inventory) increased to a year-end historical high of 4.63 percent in 
December 2010. According to legal academics, financial industry 
representatives, and government regulators, servicers' missteps in 
foreclosure documentation are, in large part, responsible for the 
delays in foreclosure completions. In addition, a recent report issued 
by OCC and OTS notes that the number of foreclosures completed during 
the fourth quarter of 2010 decreased 49.1 percent from the previous 
quarter largely as a result of the foreclosure moratoriums implemented 
by the largest servicers.[Footnote 71] Further, we have reported that 
data on new foreclosure filings and delinquencies suggest that 
servicers are not initiating foreclosures on many loans normally 
subject to such actions.[Footnote 72] New foreclosure starts declined 
from 1.42 percent in September 2009 to 1.27 percent in December 2010. 

Figure 4: Year-End Foreclosure Starts and Foreclosure Inventory, 2000 
to 2010: 

[Refer to PDF for image: multiple line graph] 

Year: 2000; 
Mortgage foreclosures started: 0.43%; 
Mortgage foreclosures inventory: 1.16%. 

Year: 2001; 
Mortgage foreclosures started: 0.47%; 
Mortgage foreclosures inventory: 1.46%. 

Year: 2002; 
Mortgage foreclosures started: 0.42%; 
Mortgage foreclosures inventory: 1.46%. 

Year: 2003; 
Mortgage foreclosures started: 0.46%; 
Mortgage foreclosures inventory: 1.29%. 

Year: 2004; 
Mortgage foreclosures started: 0.46%; 
Mortgage foreclosures inventory: 1.15%. 

Year: 2005; 
Mortgage foreclosures started: 0.42%; 
Mortgage foreclosures inventory: 0.99%. 

Year: 2006; 
Mortgage foreclosures started: 0.57%; 
Mortgage foreclosures inventory: 1.19%. 

Year: 2007; 
Mortgage foreclosures started: 0.88%; 
Mortgage foreclosures inventory: 2.04%. 

Year: 2008; 
Mortgage foreclosures started: 1.08%; 
Mortgage foreclosures inventory: 3.3%. 

Year: 2009; 
Mortgage foreclosures started: 1.2%; 
Mortgage foreclosures inventory: 4.58%. 

Year: 2010; 
Mortgage foreclosures started: 1.27%; 
Mortgage foreclosures inventory: 4.63%. 

Source: GAO analysis of Mortgage Bankers Association National 
Delinquency Survey data. 

Note: The Mortgage Bankers Association's quarterly National 
Delinquency Survey covers about 80 percent of the mortgage market and 
presents default and foreclosure rates (i.e., the number of loans in 
default or foreclosure divided by the number of loans being serviced). 

[End of figure] 

Despite these initial delays, some regulatory officials as well as 
legal academics and industry officials we interviewed indicated that 
foreclosure documentation issues are correctable. Once servicers have 
revised their processes and corrected documentation errors, most 
delayed foreclosures in judicial states will likely proceed. For 
example, in cases where affidavits were signed by a person without the 
required personal knowledge of the case or were not signed in the 
presence of a notary, legal representatives and industry observers 
said that courts generally may allow the foreclosures to proceed once 
the affidavits are refiled with the appropriate signatures and 
notarization. In addition, some legal representatives told us that 
because almost all foreclosures involved borrowers who were seriously 
delinquent on their loans, most would likely proceed once the 
paperwork is corrected. Revising and refiling the required 
documentation will take time, however, as servicers may potentially 
have thousands of cases to review. For example, Fannie Mae 
representatives said that one of its servicers plans to file over 
100,000 revised affidavits and another plans to file 50,000 revised 
affidavits, even though not all of the documents were necessarily 
defective. 

Increased scrutiny of documents by servicers and courts may reduce 
inaccuracies, but the increased demand on judicial resources could 
contribute to further delays. Some legal academics and attorneys we 
spoke with told us that state courts previously assumed the accuracy 
of documents provided by servicers as part of foreclosure cases, but 
some courts are increasingly skeptical of foreclosure documentation 
and are now looking more closely at documents submitted in foreclosure 
cases. In certain circumstances, judges are insisting that servicers 
more rigorously adhere to foreclosure strictures, such as requirements 
that the original note be produced. Additionally, some courts have 
been imposing their own new requirements to help ensure the accuracy 
of filings; for example, in New York state and Cuyahoga County, Ohio, 
attorneys are required to sign statements affirming that the facts in 
affidavits are accurate. Although these requirements may be intended 
to help ensure the accuracy of information submitted to the court, 
some market observers have argued that these additional procedures are 
contributing to the delay in processing foreclosures. However, some 
banking industry representatives, attorneys, and government officials 
that we interviewed noted that cases with documentation problems 
should diminish with improved attention to accuracy on the part of 
servicers and courts. 

In nonjudicial states where production of foreclosure documentation in 
court generally may not be required, information on the prevalence and 
impact of foreclosure documentation problems is unavailable because 
documents, such as affidavits, that have been called into question in 
judicial states may not typically be required to complete 
foreclosures. Without judicial review of documentation supporting 
foreclosures or certification that foreclosures are justified, some 
academics and others indicated that errors may go unchecked unless 
borrowers contest foreclosures, an action that would prompt a judicial 
review. Further, those we spoke with noted that, unlike in judicial 
states, where a judge must approve foreclosures, in nonjudicial 
states, the borrowers must contest foreclosures, which can be 
expensive and difficult. 

Delays in the Foreclosure Process May Have Both Positive and Negative 
Effects on Homeowners, Communities, and the Mortgage Market: 

Legal academics and representatives of the mortgage industry reported 
mixed views on the implications of delays in the foreclosure process 
for borrowers. Borrowers whose mortgage loans are in default may 
benefit from the additional delays in the foreclosure process if the 
additional time allows them to obtain income that allows them to bring 
mortgage payments current or cure the default, or to work out other 
payment solutions, such as loan modifications. According to 
representatives of housing counseling and legal aid groups we spoke 
with, mortgage default and foreclosures are often caused by borrowers' 
inability to make mortgage payments because of unemployment. An 
extended period before a foreclosure is completed may allow borrowers 
to obtain employment and to begin making mortgage payments again. 
Additionally, as foreclosures stall, lenders and borrowers may have 
additional time and opportunity to work out loan modifications. 
However, according to legal services attorneys we interviewed, these 
delays also leave borrowers unsure about how long they may be able to 
remain in their homes. Even if a court dismisses a foreclosure based 
on faulty documentation, the borrower may still be subject to a new 
foreclosure proceeding if the bank assembles the necessary paperwork 
and resubmits the case. In addition, mortgage industry participants 
noted that fees such as taxes and insurance may continue to accrue on 
borrowers' loans during the delay, making it more difficult for them 
to catch up on payments. Even if a foreclosure action can be completed 
properly, weaknesses in servicers' foreclosure processes could 
otherwise adversely impact borrowers. For example, according to the 
banking regulators' report on their coordinated review, these 
weaknesses could result in inaccurate fees and charges assessed 
against a borrower. In addition, borrowers could find their loss 
mitigation options curtailed because of dual-track processes that 
result in foreclosure even when a borrower has been approved for a 
loan modification. 

Delayed foreclosures resulting from documentation problems could have 
negative impacts on communities as more properties may become vacant. 
When borrowers are unable to make mortgage payments and foreclosure 
appears imminent, they sometimes vacate properties to secure new 
housing. Our previous work has demonstrated that properties are more 
likely to become vacant once foreclosure is initiated.[Footnote 73] As 
such, properties may become vacant before foreclosure is completed. We 
have reported that neighborhood and community problems stemming from 
vacancy include heightened crime, blight, and declining property 
values.[Footnote 74] Additionally, such problems result in increased 
costs to local governments in policing and securing vacant homes. 
Delays in the foreclosure process, though temporary, could exacerbate 
the problems communities are facing from vacancy because of 
foreclosure. 

Various market observers and regulators also indicated that the delays 
caused by the foreclosure documentation problems could negatively 
affect the recovery of U.S. housing prices in the long term. According 
to one rating agency's analysis, the recovery of the housing market 
could be delayed as servicers work through the backlog of homes in 
foreclosure. In addition, according to the rating agency's analysis, 
the foreclosure documentation problems and resulting delays in 
foreclosures being completed were likely to reduce the number of home 
sales at the end of 2010, but not necessarily home prices during that 
period because fewer foreclosed homes--which typically sell for less 
than other homes--would be on the market. Once the issues are resolved 
and foreclosures are completed, however, the analysis projected that 
the backlog of foreclosed homes would delay the recovery of the 
housing market. The regulators' report on their coordinated review 
also notes that the deficiencies and weaknesses leading to delays in 
foreclosure processing have had an adverse impact on the functioning 
of the mortgage market. Regulators reported that such delays could be 
an impediment for communities working to stabilize local neighborhoods 
and housing markets. The regulators' report on their coordinated 
review states that these delays could lead to extended periods of 
depressed home prices. 

Impacts on Servicers, Trusts, and Investors because of Loan Transfer 
Documentation Problems Are Unclear: 

On the basis of servicers' disclosures of problems with foreclosure 
documentation and recent court decisions, some academics and others 
have argued that the way that mortgage loans were transferred in 
connection with some MBS issuances could affect servicers' ability to 
complete foreclosures and create financial liability for other 
entities, such as those involved in creating securities. As previously 
discussed, when a loan is originated, a lender can choose to hold the 
loan as an income-producing asset in its own portfolio or it can sell 
the loan to another institution that intends to pool it with other 
loans and create an MBS that can be sold to investors. In a typical 
MBS issuance, the documents that represent the loan--the promissory 
note and the mortgage deed that secures the property as the collateral 
for the loan--are required to be transferred to an entity known as a 
document custodian. The document custodian holds these loan documents 
on behalf of the trustee for the MBS trust, which is the legal owner 
of the loans in the pool. The trustee acts on behalf of the trust and 
receives the payments from the pooled loans underlying the MBS 
issuance and distributes them to the securities investors. Between 
loan origination and the time when a mortgage is placed in an MBS 
trust, both the note and mortgage may be sold and transferred several 
times between various entities that facilitate the creation of loan 
pools for MBS issuances before being physically delivered to the 
document custodian designated by the MBS trustee. 

Some cases decided in 2007 and 2008 found that servicers were not able 
to present sufficient evidence that they had the right to foreclose on 
properties owned by MBS trusts. For example, courts dismissed 
complaints to foreclose on the mortgages of 46 properties in two 
federal court cases in Ohio because the servicer (on behalf of the 
trust) failed to submit to the court a copy of the assignment of the 
note and mortgage evidencing its status (on behalf of the trust) as 
holder of the note for these loans.[Footnote 75] According to real 
estate attorneys who researched these issues, these cases led real 
estate lawyers and courts to reexamine the paperwork necessary to 
foreclose. Simultaneously, at least one legal academic began 
researching discrepancies in servicers' preparation and management of 
documentation as these issues arose in and related to bankruptcy 
proceedings involving foreclosure matters.[Footnote 76] Further, 
investors have made claims about servicer irregularities regarding 
securitized loans.[Footnote 77] As reports of other discrepancies in 
the preparation and notarization of foreclosure documentation surfaced 
in September 2010, questions about the documentation related to 
mortgage transfers similarly came to national attention. 

According to GSE officials, the potential problems related to 
transfers of loans as part of MBS issuances do not appear to affect 
the purchases and subsequent securitization of loans by housing GSEs. 
As shown in figure 5, most of the MBS issuances in 2008 were by the 
GSEs.[Footnote 78] According to staff from Fannie Mae and Freddie Mac, 
the GSEs' policies, procedures, and processes used to obtain the 
underlying supporting documents for the loans that these two GSEs 
purchase provide substantial assurance that they will have adequate 
proof of ownership of the loans and could provide required documents 
as needed for foreclosing on their loans. Representatives of Fannie 
Mae and Freddie Mac noted that they have strict note delivery 
requirements and oversight of document custodians. For example, Fannie 
Mae and Freddie Mac staff said that they require that notes be 
endorsed without designating a payee--as provided for in the Uniform 
Commercial Code (UCC) and known as endorsing in blank--so that when 
the GSEs purchase loans, take possession of the notes, and become the 
owner and holder, they can give temporary possession of the notes to 
their servicers, as necessary, so that the servicers can (1) be 
holders, (2) commence enforcement actions, and (3) readily provide a 
court with the note endorsed in blank as evidence of their status as 
holder if required. In addition, the GSEs stated that the document 
custodian is required to complete a prepurchase certification that it, 
among other things, has taken physical possession of the notes. 
Further, the staff either review the adequacy of the documentation of 
any previous transfers at the time of the purchase or rely on 
servicers' statements that they own the loans when they sell them 
under penalty of having to repurchase the loans if the ownership is 
not clear. The GSEs also require that either the servicer or MERS be 
listed as the mortgagee of record in local public land recording 
offices.[Footnote 79] Finally, the GSEs require that the notes and 
certain other documentation be held by approved document custodians, 
and Fannie Mae and Freddie Mac occasionally examine these custodians. 
Fannie Mae and Freddie Mac staff indicated that as a result of their 
documentation requirements, the potential problems related to 
transfers of loans have not been, nor are likely to be, a concern 
regarding mortgage-backed securities issued by Fannie Mae and Freddie 
Mac. 

Figure 5: Volume and Share of Enterprises and Private Label MBS 
Issuances, 1995 to 2010: 

[Refer to PDF for image: 2 multiple line graphs] 

Volume of residential MBS issuance: 

Year: 1995; 
Private label: $48.9 billion; 
Ginnie Mae/GSE: $269.1 billion. 

Year: 1996; 
Private label: $69.9 billion; 
Ginnie Mae/GSE: $370.4 billion. 

Year: 1997; 
Private label: $119.1 billion; 
Ginnie Mae/GSE: $367.7 billion. 

Year: 1998; 
Private label: $203.2 billion; 
Ginnie Mae/GSE: $726.0 billion. 

Year: 1999; 
Private label: $147.9 billion; 
Ginnie Mae/GSE: $685.1 billion. 

Year: 2000; 
Private label: $135.9 billion; 
Ginnie Mae/GSE: $479.1 billion. 

Year: 2001; 
Private label: $267.3 billion; 
Ginnie Mae/GSE: $1.09 trillion. 

Year: 2002; 
Private label: $413.9 billion; 
Ginnie Mae/GSE: $1.44 trillion. 

Year: 2003; 
Private label: $586.2 billion; 
Ginnie Mae/GSE: $2.13 trillion. 

Year: 2004; 
Private label: $864.2 billion; 
Ginnie Mae/GSE: $1.02 trillion. 

Year: 2005; 
Private label: $1.19 trillion; 
Ginnie Mae/GSE: $964.9 billion. 

Year: 2006; 
Private label: $1.15 trillion; 
Ginnie Mae/GSE: $899.1 billion. 

Year: 2007; 
Private label: $707.0 billion; 
Ginnie Mae/GSE: $1.16 trillion. 

Year: 2008; 
Private label: $58.0 billion; 
Ginnie Mae/GSE: $1.17 trillion. 

Year: 2009; 
Private label: $60.4 billion; 
Ginnie Mae/GSE: $1.72 trillion. 

Year: 2010; 
Private label: $59.9 billion; 
Ginnie Mae/GSE: $1.40 trillion. 

Share of residential MBS issuance: 

Year: 1995; 
Ginnie Mae/GSE: 84.62%; 
Private label: 15.38%. 

Year: 1996; 
Ginnie Mae/GSE: 84.13%; 
Private label: 15.87%. 

Year: 1997; 
Ginnie Mae/GSE: 75.53%; 
Private label: 24.47%. 

Year: 1998; 
Ginnie Mae/GSE: 78.13%; 
Private label: 21.87%. 

Year: 1999; 
Ginnie Mae/GSE: 82.25%; 
Private label: 17.75%. 

Year: 2000; 
Ginnie Mae/GSE: 77.89%; 
Private label: 22.11%. 

Year: 2001; 
Ginnie Mae/GSE: 80.27%; 
Private label: 19.73%. 

Year: 2002; 
Ginnie Mae/GSE: 77.7%; 
Private label: 22.3%. 

Year: 2003; 
Ginnie Mae/GSE: 78.42%; 
Private label: 21.58%. 

Year: 2004; 
Ginnie Mae/GSE: 54.05%; 
Private label: 45.95%. 

Year: 2005; 
Ginnie Mae/GSE: 44.75%; 
Private label: 55.25%. 

Year: 2006; 
Ginnie Mae/GSE: 43.97%; 
Private label: 56.03%. 

Year: 2007; 
Ginnie Mae/GSE: 62.08%; 
Private label: 37.92%. 

Year: 2008; 
Ginnie Mae/GSE: 95.27%; 
Private label: 4.73%. 

Year: 2009; 
Ginnie Mae/GSE: 96.62%; 
Private label: 3.38%. 

Year: 2010; 
Ginnie Mae/GSE: 95.6%; 
Private label: 4.1%. 

Source: GAO analysis of data from Inside Mortgage Finance, 2010 and 
2011 Mortgage Market Statistical Annual, Volume II. 

[End of figure] 

After other documentation problems and questions involving potential 
loan transfer problems surfaced, some legal academics began arguing 
that loans that were sold into pools and then securities issued 
primarily by non-GSE entities--known as private label MBS--may not 
have always been transferred properly. According to these academics, 
the contracts--known as pooling and servicing agreements--that govern 
loan transfers in private label securitization deals often called for 
the notes and mortgage deeds supporting the pooled loans to be 
transferred into the MBS trust by having each party in the 
securitization process endorse the note.[Footnote 80] They argue that 
a servicer may not be able to prove its right to foreclose on a 
property if the trust on whose behalf it is servicing the loan is not 
specifically named in the transfer documentation. In addition, one 
academic recently testified before Congress that a specific chain of 
transfers identifying the loan originator, securitization sponsor, 
depositor, and finally the MBS trust may be necessary to ensure that 
the loans placed in the trust will remain in the trust if one of the 
parties in the chain files for bankruptcy.[Footnote 81] Further, these 
legal academics argue that in order to provide such protections in the 
event of bankruptcy, pooling and servicing agreements also generally 
require documentation to be physically delivered to the trustee. 

According to some legal academics, if the transfer of the mortgages 
and notes into private label MBS trusts are found to be insufficient 
to prove that the trusts own the loans, then MBS investors, trusts, 
the servicers working on their behalf, and the institutions that 
originated these mortgage loans or created the MBS issuances could be 
subject to potentially serious consequences. For example, according to 
some academics, if loans were not properly transferred, then the 
trusts may not actually own the loans and they (and the servicers 
acting on their behalf) would not have the right to foreclose on the 
property of borrowers in default. Furthermore, if the MBS trusts did 
not properly obtain ownership of the loans underlying the securities 
in accordance with the terms of the pooling and servicing agreement, 
these academics argue that the tax-exempt structure of the MBS trust 
may be voided, and thus the trusts may owe taxes on the income to the 
trust. In addition, attorneys, a representative of investors, and 
other studies noted that if the investors in the MBS issuance may not 
have received what they were promised when they purchased the 
securities, they may press legal claims against the creators of the 
trusts or force them to reimburse the investors for some amount of 
improperly transferred loans. With almost $1.3 trillion of private 
label securities outstanding at the end of 2010, if these arguments 
are correct this liability could be significant. 

However, other market participants have an opposing view and argue 
that mortgages were pooled into securities using standard industry 
practices that were sufficient to create legal ownership on behalf of 
MBS trusts. According to these market participants, the practices that 
were typically used to transfer loans into MBS trusts comply with the 
Uniform Commercial Code, which generally has been adopted in every 
state. Among other things, provisions in the UCC govern the transfer 
of negotiable instruments, such as checks and mortgage promissory 
notes.[Footnote 82] As a result, according to their argument, if 
mortgage notes being transferred into MBS pools were endorsed in 
blank, then this would be sufficient under the UCC, and thus the 
transfers of loans to the private label securities' trusts would be 
legally sufficient to establish the trusts' ownership. According to 
these market participants, these practices were the customary means by 
which loans were transferred as part of creating private label MBS. 

Additional Court Decisions May Determine Ultimate Effect of MBS Loan 
Transfer Problems, and Regulators Have Not Assessed the Extent of This 
Risk: 

Although some courts may have addressed MBS loan transfer practices in 
certain contexts, the varying circumstances of these cases limit their 
use in determining whether such problems are widespread or what 
effects they may have on foreclosures or on market participants. For 
example, in a bankruptcy case recently decided in New Jersey, the 
judge concluded that the loan in question had not been properly 
endorsed and transferred to the trust of the particular private label 
MBS pool that had purchased the loan as required by both the UCC and 
the trust's own pooling and servicing agreement and disallowed the 
servicer's proof of claim against the borrower.[Footnote 83] Banking 
industry analysts told us that this ruling should not lead to 
permanent dismissals of foreclosures. For example, analysts from one 
rating agency told us that based on their review of several 
securitizations--including the security that included the loan 
involved in the New Jersey case--these problems might not be 
widespread. Specifically, the rating agency determined that out of 
9,233 loans in the security, only 180 had some discrepancies in the 
paperwork such as missing assignments of mortgage, notes, 
endorsements, deeds of trust, or powers of attorney.[Footnote 84] In a 
different case, the Supreme Judicial Court of Massachusetts found that 
the lower court did not err in concluding that the securitization 
documents submitted by the plaintiffs failed to demonstrate that they 
were the holders of the subject mortgages at the time of foreclosure. 
[Footnote 85] The court also stated, regarding an argument that 
assignments in blank evidenced and confirmed the assignments, that it 
does not "regard an assignment of land in blank as giving legal title 
in land to the bearer of the assignment" (which was a statement of 
Massachusetts law and not necessarily the law in other jurisdictions). 
Some attorneys representing mortgage servicers pointed out that the 
court's opinion seems to suggest that had the servicers been able to 
show sufficient supporting documentation listing these particular 
loans and properties, this would have supported proof of ownership 
despite the failure to properly endorse the loans when originally 
transferred to the MBS trusts. According to one rating agency, this 
Massachusetts case will not significantly prevent foreclosures from 
going forward because it does not invalidate the fundamental 
principles of loan transfers during securitization; rather, this 
decision upholds that MBS trusts can prove mortgage ownership in more 
than one way. Another attorney we spoke with who works on MBS 
issuances further noted that it was uncertain whether this ruling 
would have a broad impact in states outside of Massachusetts. 

The impact of these problems likely will remain uncertain until 
definitive, controlling court decisions are issued, establishing 
whether typical processes for transferring loans into private label 
MBS were legally effective or how such problems can be resolved. 
Adding to this uncertainty may be differing views on court decisions 
on the appropriateness of foreclosures being initiated in the name of 
MERS.[Footnote 86] In the near term, industry observers noted that 
these cases could lead to increased litigation and servicing costs for 
servicers and more foreclosure delays. According to SEC filings and 
risk analyses and reporting by some servicers, some financial 
institutions have set aside funds or performed estimations of the 
potential risk and liability from lawsuits. Several large servicers' 
annual SEC filings that we reviewed noted the possibility of increased 
litigation and other costs resulting from regulatory reviews of 
servicing activities, but servicers did not provide estimates of the 
potential amounts because of the uncertainty in the number and types 
of cases they may be involved in. Another reason the impact of these 
problems remains uncertain is that investors face challenges in 
bringing claims against servicers. Representatives of investors noted 
that although investors may have viable claims against servicers for 
inappropriate documentation practices, it is difficult for investors 
to obtain the information needed to prove that documentation 
inaccuracies have occurred. In addition, investors may not want to 
pursue legal claims against servicers because of the impact large-
scale claims could have in the market, as new private label 
securitization issuances have recently declined. 

Although tasked with overseeing the financial safety and soundness of 
institutions under their jurisdiction, some banking regulators stated 
that they have not yet fully assessed the extent to which MBS loan 
transfer problems could financially affect their institutions. Federal 
Reserve staff said that the agency has conducted an assessment of the 
extent to which any of its institutions may be required to repurchase 
loans. The Federal Reserve also required the institutions it 
supervises that originated large numbers of mortgages or sponsored 
significant MBS to assess and provide for these risks as part of their 
overall capital planning process. Regarding the extent to which loan 
transfer problems can affect their institutions, banking regulatory 
staff at OCC, the Federal Reserve, and OTS told us that their servicer 
reviews generally did not uncover problems with servicers' authority 
to foreclose, although examiners noted instances where documentation 
in the foreclosure file alone may not have been sufficient to prove 
authority to foreclose without reference to additional information. 
However, according to staff at one of the agencies, while examiners 
reviewed files to determine whether the name of the entity on the 
foreclosure initiation paperwork matched the name on the mortgage note 
to confirm that the foreclosing entity was the owner of the note and 
had standing to foreclose, they did not always verify that loan files 
included accurate documentation of all previous note and mortgage 
transfers--leaving open the possibility that such transfer problems 
exist in the files they reviewed. According to the regulators' report 
on the coordinated review, servicers may bear legal costs related to 
disputes over note ownership or authority to foreclose and may be 
subject to claims by investors as a result of delays or other damages 
caused by weaknesses in foreclosure processes. The enforcement orders 
resulting from the coordinated review require servicers to retain an 
independent firm to assess risks such as these. In addition, the 
regulators' report states that the agencies will more frequently 
monitor the servicers involved in the reviews until they have 
corrected the identified weaknesses. For example, OCC staff said that 
as part of their assessment of servicers' compliance with the 
enforcement orders, examiners will review servicer processes to ensure 
that mortgages are assigned properly before initiating foreclosure. 
However, regulators have not definitively determined how mortgage 
transfer problems might financially affect other institutions they 
regulate, including if any of the institutions involved in the 
creation of private label MBS could face any financial repercussions. 
With almost $1.3 trillion in private label securities outstanding as 
of the end of 2010, the institutions and the overall financial system 
could face significant risks. Given the banking regulators' role in 
helping ensure the safety and soundness of regulated institutions in 
order to protect the deposit insurance fund, having affected 
institutions complete such assessments, analyzing their results, and 
requiring institutions to take any necessary steps to mitigate their 
risks could reduce the magnitude of any resulting problems. 

Conclusions: 

Until the problems regarding foreclosure documentation came to light, 
federal regulatory oversight of mortgage servicers had been limited, 
as such activities were viewed as low risk to safety and soundness. 
However, regulators' examinations since then have revealed that 
servicers had generally failed to properly prepare required 
documentation and lacked effective supervision and controls over their 
foreclosure processes. The resulting delays in completing foreclosures 
and increased exposure to litigation highlight how the failure to 
oversee whether institutions follow sound practices can heighten their 
risks and create problems for the communities in which these 
foreclosures are occurring. Banking regulators plan to follow up with 
servicers to better ensure that they implement agreed-upon corrective 
actions, and the new CFPB also plans to conduct oversight of mortgage 
servicing activities. However, the extent to which these regulators 
will conduct ongoing supervision of mortgage servicers in the future, 
as well as the goals for this supervision and the roles that each 
regulator will play, have not been definitively determined. Until such 
plans are developed, the potential for continued fragmentation and 
gaps in oversight remains. 

Recently, some regulators and market participants have begun working 
to develop national servicing standards that could provide consistent 
expectations for how servicers conduct many activities and interact 
with borrowers. Such standards could cover a wide range of servicer 
activities, including those at loan origination and throughout the 
ongoing life of a loan. However, the extent to which such standards 
will address the weaknesses and lack of consistency among servicers' 
foreclosure practices is not yet clear. If such standards are 
developed, ensuring that they also provide expectations for servicers 
to follow as part of the foreclosure process could be a way to improve 
uniformity in the servicers' practices. 

Finally, the extent to which foreclosures and the financial standing 
of some mortgage market participants will be affected by legal 
challenges to the way that loans were transferred as part of creating 
private label MBS is uncertain. Some observers argue that the typical 
practices could render some securitizations invalid, which could 
prevent justified foreclosures and create significant financial 
liabilities on the part of various institutions that created MBS 
issuances. In contrast, other market participants have indicated that 
loan transfer practices were acceptable. Until additional court 
decisions provide definitive guidance, the extent of the impact is 
unclear, as is the potential that regulated financial institutions 
will face losses arising from increased litigation or the need to 
repurchase loans from MBS trusts if improper transfers are discovered. 
Although such losses could be substantial, the affected financial 
institutions have not completed assessments of the possible impact on 
their firms, and banking regulators have not fully assessed the 
possible impact on the safety and soundness of these institutions if 
such problems are found to be legitimate. Such assessments could focus 
on institutions that sold significant numbers of loans to creators of 
private label securities, which appear to be at greater risk of loan 
transfer problems than those sold to GSEs. Completing the assessments 
of these potential risks and fully ensuring that regulated 
institutions are taking steps to proactively address them could reduce 
the potential threat to the soundness of these institutions, the 
deposit insurance fund, and the overall financial system. 

Recommendations for Executive Action: 

To help ensure strong and robust oversight of all mortgage servicers, 
we recommend that the Comptroller of the Currency, the Chairman of the 
Board of Governors of the Federal Reserve System, the Director of the 
Office of Thrift Supervision, the Chairman of the Federal Deposit 
Insurance Corporation, and the Bureau of Consumer Financial Protection 
take the following actions: 

* develop and coordinate plans to provide ongoing oversight and 
establish clear goals, roles, and timelines for overseeing mortgage 
servicers under their respective jurisdiction, and: 

* if national servicing standards are created, include standards for 
foreclosure practices. 

In addition, to reduce the likelihood that problems with mortgage 
transfer documentation problems could pose a risk to the financial 
system, we recommend that the Comptroller of the Currency, the 
Chairman of the Board of Governors of the Federal Reserve System, the 
Director of the Office of Thrift Supervision, and the Chairman of the 
Federal Deposit Insurance Corporation assess the risks of potential 
litigation or repurchases due to improper mortgage loan transfer 
documentation on institutions under their jurisdiction and require 
that the institutions take action to mitigate the risks, if warranted. 

Agency Comments and Our Evaluation: 

We requested comments on a draft of this report from CFPB, FDIC, FHFA, 
Federal Reserve, Federal Trade Commission, HUD, Justice, OCC, OTS, 
SEC, Treasury, Fannie Mae, and Freddie Mac. We received written 
comments from CFPB, FDIC, the Federal Reserve, OCC, and Treasury that 
are presented in appendixes II through VI. We also received technical 
comments from CFPB, FDIC, Federal Trade Commission, FHFA, Freddie Mac, 
HUD, OCC, Treasury, Federal Reserve, and Justice, which we 
incorporated where appropriate. Fannie Mae, OTS, and SEC did not have 
any comments on the draft report. 

The agencies generally agreed with our recommendation on developing 
and coordinating plans to provide ongoing oversight of mortgage 
servicers. The Associate Director for Research, Markets & Regulations 
at CFPB said in his letter that CFPB has already been engaged in 
discussions about mortgage servicing with various federal agencies as 
part of preparing to take on the authorities that will transfer to it 
in July 2011 and is committed to coordinating constructively with 
other federal and state agencies to ensure that oversight 
responsibilities are exercised in an efficient and effective manner. 
The Director of the Division of Risk Management Supervision at FDIC 
said in her letter that FDIC agrees with our recommendation and noted 
the importance of a thorough regulatory review of servicers' loss 
mitigation efforts given that the scope of the coordinated review was 
limited to the foreclosure process. The letter also states that FDIC 
will continue to monitor servicers under its jurisdiction for these 
issues and will work with the other regulators to ensure a more 
coordinated and comprehensive approach to the review of mortgage 
servicers going forward. The Director of the Division of Consumer and 
Community Affairs for the Board of Governors of the Federal Reserve 
System said in her letter that the Board agrees with the 
recommendation and noted that the recent enforcement actions require 
servicers to implement significant revisions to mortgage loan 
servicing and foreclosure processing practices. In his letter, the 
Acting Comptroller of the Currency stated that OCC agreed with our 
recommendations and noted that the agency will continue to oversee the 
mortgage servicers under its jurisdiction, and will emphasize in the 
near term ensuring that these entities are taking steps to remedy any 
deficiencies in their foreclosure processes. 

The agencies also generally agreed with our recommendation on 
including standards for foreclosure practices in any national 
servicing standards that are created. The Associate Director for 
Research, Markets & Regulations at CFPB noted in his letter that CFPB 
has effective authority to adopt national mortgage servicing rules for 
all mortgage servicers, including those for which CFPB does not have 
supervisory authority. The Director of the Division of Risk Management 
Supervision at FDIC agreed with this recommendation and noted that 
FDIC successfully proposed the inclusion of loan servicing standards 
in the proposed rules to implement the securitization risk-retention 
requirements of the Dodd-Frank Act that address several servicing 
issues. She also said that any servicing standards should ensure that 
appropriate loss mitigation activities are considered when borrowers 
are experiencing financial difficulties. The Director of the Division 
of Consumer and Community Affairs for the Board of Governors of the 
Federal Reserve System said in her letter that the intent of the 
interagency effort to develop national standards for mortgage 
servicing was to address the problems found in the servicing industry, 
including in foreclosure processing. She also noted that the agencies 
would coordinate their efforts. The Acting Comptroller of the Currency 
noted that efforts are under way to develop national servicing 
standards, and that these are intended to include provisions covering 
both foreclosure abeyance and foreclosure governance. The Under 
Secretary for Domestic Finance at Treasury said that the agency has 
been closely engaged with the interagency group reviewing errors in 
mortgage servicing and that it supports national servicing standards 
that align incentives and provide clarity and consistency to borrowers 
and investors regarding their treatment by servicers. In response to 
these comments we added a reference to the interagency efforts to 
develop national servicing standards in the body of the report. 

Regarding our recommendation that the regulators assess the risks of 
potential litigation or repurchases due to improper mortgage loan 
transfer documentation on institutions under their jurisdiction, the 
Director of the Division of Risk Management Supervision at FDIC said 
that the agency strongly supports this recommendation and noted the 
agency's particular interest in assessing the potential litigation 
associated with servicing deficiencies to protect the interests of the 
deposit insurance fund. The Director of the Division of Consumer and 
Community Affairs for the Board of Governors of the Federal Reserve 
System said in her letter that the Federal Reserve has conducted a 
detailed evaluation of the risk of potential litigation or repurchases 
to the financial institutions it supervises. She also noted that the 
agency will continue to monitor the affected institutions' capital and 
reserves and take information from reviews servicers are required to 
complete as part of the enforcement orders into account when assessing 
this risk in the future, including reviewing the risks that servicers 
may suffer losses because of the lack of legally enforceable 
documentation of ownership. OCC and Treasury did not comment on this 
recommendation. 

As we agreed with your offices, unless you publicly announce the 
contents of this report earlier, we plan no further distribution of it 
until 30 days from the date of this report. At that time we will send 
copies of this report to interested congressional committees, CFPB, 
FDIC, FHFA, Federal Reserve, Federal Trade Commission, HUD, Justice, 
OCC, OTS, SEC, and Treasury. The report also is available at no charge 
on the GAO Web site at [hyperlink, http://www.gao.gov]. 

If you or your staff have any questions about this report, please 
contact me at (202) 512-5837 or clowersa@gao.gov. Contact points for 
our Offices of Congressional Relations and Public Affairs may be found 
on the last page of this report. Key contributors to this report are 
listed in appendix VII. 

Signed by: 

A. Nicole Clowers: 
Acting Director, Financial Markets and Community Investment: 

List of Requesters: 

The Honorable Robert Menendez:
Chairman:
Subcommittee on Housing, Transportation and Community Development:
Committee on Banking, Housing, and Urban Affairs:
United States Senate: 

The Honorable John Conyers, Jr.
Ranking Member:
Committee on the Judiciary:
House of Representatives: 

The Honorable Luis V. Gutierrez:
Ranking Member:
Subcommittee on Insurance, Housing and Community Opportunity:
Committee on Financial Services:
House of Representatives: 

The Honorable Michael Capuano:
Ranking Member:
Subcommittee on Oversight and Investigations:
Committee on Financial Services:
House of Representatives: 

The Honorable Al Franken:
United States Senate: 

[End of section] 

Appendix I: Objectives, Scope, and Methodology: 

This report focuses on various aspects of federal oversight of the 
mortgage foreclosure process. Specifically, this report addresses (1) 
the extent to which federal laws address mortgage servicers' 
foreclosure procedures and federal agencies' authority to oversee 
activities and the extent of past oversight; (2) federal agencies' 
current oversight activities and future oversight plans; and (3) the 
potential impact of foreclosure documentation issues on homeowners, 
servicers, regulators, and mortgage-backed securities investors. 

To determine the extent to which federal laws address foreclosure 
procedures, we reviewed relevant federal laws and our prior reports. 
We also conducted interviews with representatives of federal agencies 
and asked for their insight on relevant federal laws. The federal 
agencies we interviewed include the Department of Housing and Urban 
Development (HUD), Department of Justice (Justice), Department of the 
Treasury (Treasury), Federal Deposit Insurance Corporation (FDIC), 
Federal Housing Finance Agency (FHFA), Board of Governors of the 
Federal Reserve System (Federal Reserve), Office of the Comptroller of 
the Currency (OCC), Office of Thrift Supervision (OTS), and Securities 
and Exchange Commission (SEC). 

To determine federal agencies' oversight authority and extent of past 
oversight, we analyzed the relevant sections of agencies' authorizing 
laws and agency regulations and exam guidance. We also interviewed 
agency officials for their views on the extent to which their current 
authority allows the agency to oversee institutions conducting 
servicing and servicers' compliance with state foreclosure laws. In 
addition, we asked agency representatives about the extent and 
substance of their past oversight activities regarding mortgage 
servicers. We compared and contrasted the agencies' authorities to 
identify any gaps in their ability to oversee mortgage servicing and 
foreclosure activities and summarized their previous oversight 
actions. We also reviewed our past reports and other studies on 
federal oversight of the mortgage servicing industry. 

To determine what actions the federal banking regulators have taken to 
address deficiencies in foreclosure processes, we interviewed 
officials from the four federal banking regulatory agencies (Federal 
Reserve, FDIC, OCC, and OTS). To obtain additional information on the 
regulators' coordinated review and to further understand the scope of 
their efforts, we evaluated regulators' examination review worksheet 
and analyzed the supervisory letters and draft enforcement orders 
issued to servicers following the reviews. In addition, we interviewed 
officials from the federal housing agencies and the government- 
sponsored entities, Treasury, SEC, and Justice to report on other 
agencies' recent efforts to address foreclosure process deficiencies 
and to understand the extent of interagency coordination in addressing 
weaknesses in mortgage servicing practices. We also reviewed and 
analyzed relevant congressional testimonies and other publicly issued 
statements from agency officials. Further, we interviewed 
representatives of state attorneys general and state banking 
supervisors. To report on future oversight of mortgage servicers, we 
conducted follow-up interviews with OCC, OTS, and the Federal Reserve 
to discuss the findings of their coordinated reviews and to determine 
what changes, if any, regulators planned to make in future oversight 
based on these findings. Since the new Bureau of Consumer Financial 
Protection (CFPB) will accept responsibilities for overseeing mortgage 
servicing activity in the future, we contacted CFPB representatives to 
clarify the extent of CFPB's regulatory authority and to determine 
what role this new agency will play in future oversight of mortgage 
servicers. We also discussed the guidance and extent of oversight 
conducted by the two large housing government-sponsored enterprises, 
the Federal National Mortgage Association (Fannie Mae) and the Federal 
Home Loan Mortgage Corporation (Freddie Mac). 

To determine the potential impacts and implications of foreclosure 
documentation issues, we reviewed various studies from other agencies 
and organizations conducting similar work. We also searched for 
reported cases in the "Federal and State Cases combined" database of 
Lexis and Westlaw and limited the time frame to the last 5 years. Our 
search attempted to identify examples of relevant cases to estimate 
the prevalence of challenges to foreclosures or challenges to proof of 
claims submitted in bankruptcy matters related to foreclosures, which 
involved mortgage documentation and chain-of-title issues. We did 
identify some potentially relevant cases, but determined that not 
enough cases were found or materially on point to definitively 
indicate the prevalence. We also reviewed congressional testimonies, 
and other relevant publicly available documentation. In addition, we 
interviewed legal academics and attorneys representing both borrowers 
and servicers and representatives of rating agencies, the mortgage 
industry, investor groups, and consumer advocacy groups about the 
impacts of these issues on their constituencies. Because of servicers' 
involvement in ongoing litigation in various state courts, we did not 
directly interview servicers about these issues. Therefore, we 
obtained information about actions mortgage servicers are taking and 
the impacts of these issues on servicers from legal academics and 
representatives of industry associations, such as the Mortgage Bankers 
Association and Association of Mortgage Investors. In addition, we 
obtained the insight of staff from banking regulatory agencies who 
have directly examined mortgage servicers on these issues and from 
mortgage servicers' public statements and SEC filings. We categorized 
the information we gathered from these various sources to identify the 
most common types of impacts and implications of foreclosure 
documentation issues these sources attributed to different stakeholder 
groups. 

To provide context and additional support for our findings throughout 
the report, we gathered and analyzed data on financial market trends 
from two industry sources, Inside Mortgage Finance and Mortgage 
Bankers Association. We analyzed data on servicing volume and 
securitization issuances from Inside Mortgage Finance. We discussed 
the reliability of these data with an official from Inside Mortgage 
Finance. In addition, we have relied on data from Inside Mortgage 
Finance for past reports and determined that they are sufficiently 
reliable for the purpose of presenting and analyzing trends in 
financial markets.[Footnote 87] We analyzed data on foreclosure 
filings and foreclosure inventory from Mortgage Bankers Association 
National Delinquency Survey. In a previous report, we assessed the 
reliability of these data by reviewing existing information about the 
quality of the data, performing electronic testing to detect errors in 
completeness and reasonableness, and interviewing Mortgage Bankers 
Association officials knowledgeable about the data. To assess the 
reliability of the data for this report we reviewed prior assessments 
of the data and contacted an MBA official about any potential 
limitations to the use of the data or changes in data collection 
methods. We determined that the data were sufficiently reliable for 
purposes of the report. 

We conducted this performance audit from October 2010 through April 
2011 in accordance with generally accepted government auditing 
standards. Those standards require that we plan and perform the audit 
to obtain sufficient, appropriate evidence to provide a reasonable 
basis for our findings and conclusions based on our audit objectives. 
We believe that the evidence obtained provides a reasonable basis for 
our findings and conclusions based on our audit objectives. 

[End of section] 

Appendix II: Comments from the Bureau of Consumer Financial Protection: 

Department Of The Treasury: 
Washington, D.C. 20520: 

April 19, 2011: 

Ms. A. Nicole Clowers: 
Acting Director, Financial Markets and Community Investment: 
U.S. Government Accountability Office: 
441 G Street, N.W. 
Washington, D.C. 20548: 

Dear Ms. Clowers: 

Thank you for the opportunity to comment on the GAO's draft report 
titled Mortgage Foreclosures: Documentation Problems Reveal Need for 
Ongoing Regulator), Oversight. I want to note up front that the 
Consumer Financial Protection Bureau (CFPB) does not currently have 
authority with regard to the issues covered within the report. When 
CFPB receives its full authorities, however, it will have authority to 
set standards for mortgage servicing. 

The report sets forth an important analysis of the documentation 
problems that emerged last year in residential mortgage foreclosures. 
The report finds that past federal oversight of mortgage servicers' 
activities has been "limited and fragmented." In this regard, the 
report describes tack of comprehensive federal standards for mortgage 
servicers, the absence of any direct federal oversight of some 
servicers, and the fact that federal banking regulators did not 
consider mortgage servicing practices as presenting high risk to bank 
safety and soundness. 

While the report acknowledges that the CFPB will play a role with 
regard to oversight of mortgage servicing practices, we wish to 
emphasize the extent to which the Dodd-Frank Wall Street Reform and 
Consumer Protection Act (Dodd-Frank Act) addressed the problem of 
limited and fragmented federal oversight of mortgage servicers by 
vesting new jurisdiction and powers in the CFPB for consumer 
protection. 

In particular, Congress gave the CFPB effective authority to adopt 
national mortgage servicing rules for all mortgage servicers 
(including mortgage servicers for which CFPB does not have supervisory 
authority). This rulermaking power includes authorities under various 
federal laws to be transferred to the CFPB from other federal 
agencies — such as the Board of Governors of the Federal Reserve 
System, the Department of Housing and Urban Development, and the Federal
Trade Commission — as well as new rulemaking authorities conferred 
upon the CFPB in the Dodd-Frank Act. In addition, the CFPB will have 
exclusive supervisory authority and primary enforcement authority over 
any mortgage servicer that is a depository institution with total 
assets of over $10 billion, or an affiliate of such a depository 
institution, to ensure that it complies with the Federal consumer 
financial laws (including any rules in this area adopted by the CFPB). 
For the first time, moreover, the Dodd-Frank Act placed non-depository 
mortgage servicers under direct federal authority. The Act 
accomplished this by giving the CFPB supervisory as well as 
enforcement authority over non-depository servicers with respect to 
the Federal consumer financial laws. 

The Dodd-Frank Act is quite clear with respect to both the extent and 
the limits of the CFPB's jurisdiction over mortgage servicers. As a 
practical matter, the CFPB is still in the process of establishing its 
infrastructure, hiring staff, and making other preparations to take on 
the authorities that will transfer to it on the designated transfer 
date of July 21, 2011. We are fully committed to coordinating 
constructively with the prudential regulators to ensure that we 
exercise these responsibilities in an efficient and effective manner. 

Indeed, we have already been engaged in discussions about mortgage 
servicing with various federal agencies as part of our preparatory 
efforts. Given the complexity of the issues raised concerning servicer 
operations and the historical role that the states have played in 
regulating foreclosure activities, we also believe federal-state 
coordination will be critical to addressing the issues raised in the 
report. The CFPB stands ready to partner with the other agencies and 
the states to make significant progress in this area. 

Sincerely, 

Signed by: 

Rajeev Date: 
Associate Director: 
Research, Markets & Regulations: 
Consumer Financial Protection Bureau: 

[End of section] 

Appendix III: Comments from the Federal Deposit Insurance Corporation: 

FDI: 
Federal Deposit Insurance Corporation: 
Division of Risk Management Supervision: 
550 17th Street NW: 
Washington, D.C. 20429-9990:	 

April 28, 2011: 

Mr. Richard J. Hillman: 
Managing Director, Financial Markets and Community Investment:
United States Government Accountability Office:
411 G Street NW:
Washington, DC 20548: 

Dear Mr. Hillman: 

Thank you for the opportunity to comment on the GAO's draft report 
titled "Mortgage Foreclosures: Documentation Problems Reveal Need for 
Ongoing Regulatory Oversight" (GAO-11-433). We agree with the 
recommendations provided in the report and are committed to working to 
improve regulatory oversight of mortgage foreclosure practices. 

The report focused on the findings of the interagency review of the 14 
largest mortgage servicers. While we are not the primary federal 
regulator for any of the largest mortgage servicers, the Federal
Deposit Insurance Corporation (FDIC) participated in the interagency 
reviews at the invitation of the primary regulator, as the back-up 
regulator to protect the interests of the deposit insurance fund.
As noted in the report, the findings of the interagency review clearly 
show that the largest mortgage servicers had significant deficiencies 
in numerous aspects of their foreclosure processing. Accordingly, on 
April 13, 2011, the three primary federal regulators of the 14 largest 
servicers published final Consent Orders against these servicers based 
on the findings of this review. The FDIC was signatory to one of the 
Orders as the primary federal regulator of an insured depository whose 
loans were serviced by an affiliated servicer under the holding 
company. The effect of this Order is to require the bank to ensure 
that its affiliated servicer takes corrective measures to fully 
address deficiencies identified in the interagency review. 

We support GAO's recommendation that the federal banking agencies 
develop and coordinate plans to provide ongoing oversight and 
establish clear goats, roles, and timelines for overseeing mortgage 
servicers under their jurisdiction. The Orders incorporate 
requirements that, if fully implemented, will help prevent a 
recurrence of the most significant problems with foreclosure 
processing. It is essential that the implementation of the Orders 
incorporate specific, measurable actions of these servicers to address 
the deficiencies identified in the interagency review. 

It is also important to note that the interagency review was limited 
in scope. The horizontal review and resulting Consent Orders did not 
encompass issues beyond the foreclosure process. As a result, the 
review did not review allegations of improper servicing or loss 
mitigation, such as misapplied payments, unreasonable fees, 
inappropriate force-placing of insurance, failure to adequately 
consider a borrower for a loan modification, or requiring a borrower 
to be delinquent in order to qualify for a loan modification. The 
Orders require the servicers to undertake a comprehensive third party 
review of risk in servicing operations and to reimburse borrowers 
injured by servicer errors. Furthermore, investigations by State and 
Federal law enforcement agencies related to these allegations are on-
going. 

A thorough regulatory review of loss mitigation efforts is needed to 
ensure processes are sufficiently robust to prevent wrongful 
foreclosure actions and to ensure servicers have identified the extent 
to which individual homeowners are harmed. The FDIC will continue to 
use its full range of authorities to work with the primary federal 
regulators to promote these results. 

As noted in the report, the FDIC directly supervises only a limited 
portion of the mortgage servicing industry, which collectively service 
less than four percent of residential mortgages. The FDIC has issued 
guidelines for an institution's real estate lending policies and 
standards for safety and soundness, including guidance related to 
foreclosure timing, loss mitigation, enforceability of claims against 
borrowers, and loan administration procedures. FDIC examiners review 
selected loans and supporting loan documentation during examinations 
to ensure an institution is complying with such guidelines. 
Significant exceptions are commented upon in the reports of 
examination. 

When evidence of foreclosure documentation issues such as "robo-
signing" came to light in the fall of 2010, the FDIC commenced a 
review of FDIC-supervised banks engaged in mortgage servicing.
The review has not identified "robo-signing" or any other deficiencies 
that would warrant formal enforcement actions. The FDIC will continue 
to monitor these servicers, as well as the performance of institutions 
servicing loans through FDIC securitizations or resolution programs. 

We also support GAO's recommendation that, if national servicing 
standards are created, the federal banking agencies include standards 
for foreclosure practices. To that end, in developing the proposed 
rules to implement the securitization risk-retention requirements of 
the Dodd-Frank Wall Street Reform and Consumer Protection Act, the 
FDIC successfully proposed the inclusion of loan servicing standards 
in the Qualified Residential Mortgage (QRM) requirements. Long-term 
confidence in the securitization process can only be restored by 
including loan servicing standards that result in a proper alignment 
of servicing incentives with the interests of investors, and that are 
designed to achieve the best value for all investors, and not for any 
particular class or tranche. The servicing standards included as part 
of the QRM requirements address many of the most significant servicing 
issues.	In addition to aligning incentives between investors and 
servicers, the proposed standards also should promote greater fairness 
to borrowers by ensuring that appropriate loss mitigation activities, 
including loan modifications, are considered when borrowers are 
experiencing financial difficulties. 

Lastly, we strongly support GAO's final recommendation that the 
federal banking agencies assess the risks of potential litigation 
repurchases due to improper mortgage loan transfer documentation on 
institutions under their jurisdiction and require that the 
institutions take action to mitigate the risks, if warranted. To 
protect the interests of the deposit insurance fund, the FDIC has an 
especially keen interest in assessing the potential litigation 
associated with servicing deficiencies at the largest servicers.
In summary, although various federal agencies have authority to 
oversee most mortgage servicers, past oversight of their foreclosure 
activities has been limited. We fully support a more coordinated and 
comprehensive approach to the review of mortgage servicers going 
forward. 

Thank you again for the opportunity to review this report and submit 
comments. 

Sincerely, 

Signed by: 

Sandra L. Thompson: 
Director: 

[End of section] 

Appendix IV: Comments from the Board of Governors of the Federal 
Reserve: 

Board of Governors of The Federal Reserve System
Sandra P. Braunstein, Director: 
Division of Consumer And Community Affairs: 
Washington, D.C. 20551: 

April 20, 2011: 

A. Nicole Clowers: 
Acting Director: 
Financial Markets and Community Investment: 
U.S. Government Accountability Office: 
Washington, DC 20548: 

Dear Ms. Clowers: 

Thank you for the opportunity to comment on the draft report entitled 
"Mortgage Foreclosures: Documentation Problems Reveal Need for Ongoing 
Regulatory Oversight," GAO-11-433. The draft report finds that 
foreclosure documentation problems have slowed the pace of 
foreclosures across the United States; and while the delay may benefit 
borrowers by providing more time to modify loans as servicers correct 
and refile cases, it may also negatively impact communities as vacant 
properties in foreclosure remain unoccupied for longer periods.
Additionally, the draft report states that the potential financial 
impact resulting from investor allegations regarding the improper 
transfer of securities in mortgage-backed securitizations (MBS) remain 
uncertain until outstanding litigation is fully adjudicated. 

The draft report notes that the banking agencies coordinated reviews 
of large mortgage servicers and identified pervasive problems with 
documentation preparation and oversight of the foreclosure process. To 
begin to address those problems, on April 13, 2011 the Board of
Governors of the Federal Reserve System (the Board) announced formal 
enforcement actions requiring 10 banking organizations to address a 
pattern of misconduct and negligence related to deficient practices in 
residential mortgage loan servicing and foreclosure processing. 

The Board's actions also require each servicer to take a number of 
remedial steps, including making significant revisions to certain 
residential mortgage loan servicing and foreclosure processing 
practices. Each servicer must, among other things, submit plans 
acceptable to the Federal Reserve that: 

* Strengthen coordination of communications with borrowers by 
providing borrowers the name of the person at the servicer who is 
their primary point of contact; 

* Ensure that foreclosures are not pursued once a mortgage has been 
approved for modification, unless repayments under the modified loan 
are not made; 

* Establish robust controls and oversight over the activities of third-
party vendors that provide to the servicers various residential 
mortgage loan servicing, loss mitigation, or foreclosure-related 
support, including local counsel in foreclosure or bankruptcy 
proceedings; 

* Provide remediation to borrowers who suffered financial injury as a 
result of wrongful foreclosures or other deficiencies identified in a 
review of the foreclosure process; and; 

* Strengthen programs to ensure compliance with state and federal laws 
regarding servicing, generally, and foreclosures, in particular. 

The draft report recommends three actions that the Chairman of the 
Federal Reserve Board should take, two of which are to be taken with 
the Comptroller of the Currency, the Director of the Office of Thrift 
Supervision, the Chair of the Federal Deposit Insurance Corporation, 
and the Director of the Bureau of Consumer Financial Protection. These 
recommendations direct the agencies to: 

* Develop and coordinate plans to provide ongoing oversight and 
establish clear goals, roles, and timelines for overseeing mortgage 
servicers under their respective jurisdiction; and; 

* Include standards for foreclosure practices if national servicing 
standards are created. 

The Board agrees with these recommendations. Indeed, in December 2010, 
Governor Daniel Tarullo, in testimony on behalf of the Board before 
the Senate Banking Committee, called for the development of national 
mortgage servicing standards. Since that time, the Federal Reserve has 
initiated an interagency effort with the other financial regulators, 
including the Office of the Comptroller of the Currency, the Federal 
Deposit Insurance Corporation, the Federal Housing Finance Agency, and 
the Consumer Financial Protection Bureau, to develop a set of national 
standards for mortgage servicing for all consumer mortgage lenders and 
servicers. The intent of the proposed standards would be to address 
the problems that we have found in the servicing industry, including 
in foreclosure processing, and so coordinate the efforts of the 
multiple regulatory agencies to ensure that in the future consumers 
will be treated properly and consistently. Of note, the enforcement 
actions announced last week require servicers to implement significant 
revisions to mortgage loan servicing and foreclosure processing 
practices. 

The third recommendation is that the Board, in conjunction with the 
Comptroller of the Currency, the Director of the Office of Thrift 
Supervision, and the Chair of the Federal Deposit Insurance 
Corporation, assess the risks to institutions under their jurisdiction 
of potential litigation or repurchases due to improper mortgage loan 
transfer documentation and require that the institutions take action 
to mitigate the risks, if warranted. The Federal Reserve has
conducted a detailed evaluation of this risk, the so-called "put-hack" 
risk, to financial institutions supervised by the Federal Reserve. We 
have also required institutions we supervise that originated large 
numbers of mortgages or sponsored significant MBS to assess and	for
provide these risks as part of their overall capital planning process. 
This exercise was included in the recently completed Comprehensive 
Capital Analysis and Review (CCAR), which involved 19 bank holding 
companies. In addition, as part of the recently announced foreclosure 
orders, the servicers will be required to conduct a review of 
foreclosures conducted from January 2009 through December 2010. The 
Federal Reserve will also take that information into account in 
assessing put-back risk to the institutions we supervise. 

This will include a review of risks that servicers may suffer losses 
because of the lack of legally enforceable documentation of ownership. 

The ultimate financial loss for any originator or securitizer subject 
to put-back risk is dependent upon a wide range of factors that can be 
firm or transaction specific, such as the quality of initial 
underwriting, the incidence of fraud, the performance of sold 
mortgages, whether the mortgages were sold to Fannie Mae and Freddie 
Mac or as private label securitizations, the relative strength of 
representations and warranties for a transaction, the willingness of 
investors to pursue certain claims, and the outcome of pending 
litigation. The Federal Reserve will continue to follow closely 
developments in this market, and will continue to monitor affected 
firms to ensure they maintain appropriate capital and reserves to 
protect against future mortgage put-back losses. 

We will continue to monitor all of these issues and instruct our 
supervised institutions accordingly. We appreciate the professionalism 
of the GAO's review team in conducting this study. 

Sincerely, 

Signed by: 

Sandra P. Braunstein: 

[End of section] 

Appendix V: Comments from the Comptroller of the Currency: 

Comptroller of the Currency: 
Administrator of National Banks: 
Washington, DC 20219: 

April 15, 2011: 

Ms. A. Nicole Clowers: 
Acting Director, Financial Markets and Community Investment: 
United States Government Accountability Office: 
Washington, DC 20548: 

Dear Ms. Clowers: 

We have received and reviewed your draft report titled "Mortgage 
Foreclosures: Documentation Problems Reveal Need for Ongoing 
Regulatory Oversight." Your report responds to Congressional requests 
for information concerning various aspects of federal oversight of the 
residential mortgage foreclosure process. 

You found that: (1) federal laws do not specifically address the 
foreclosure process and past federal oversight of foreclosure 
activities has been limited and fragmented; (2) federal regulators 
have conducted reviews in response to foreclosure documentation 
problems, but the extent and roles in future oversight are unclear; 
and (3) documentation problems will likely result in delays in the 
foreclosure process, but the impact on financial institutions and 
others is less clear. 

You recommend that the federal banking regulators and the Consumer 
Financial Protection Bureau (CFPB) develop plans for overseeing 
mortgage servicers and include foreclosure practices in any servicing 
standards that are developed. You also recommend that regulators 
assess the risks that documentation problems pose for their 
institutions. 

We agree and are pleased to report that development of servicing 
standards is well underway on an interagency basis. While still a work 
in progress, the standards, as currently drafted, include provisions 
covering both foreclosure abeyance and foreclosure governance. The 
former emphasizes communication with the borrower and the latter 
emphasizes compliance with legal requirements, documentation, vendor 
management and other controls. 

The OCC will continue to oversee the mortgage servicers under our 
jurisdiction through regular onsite review and monitoring. In the near 
term, emphasis will be on assessing compliance with enforcement 
actions to be sure that those unsafe or unsound practices and other 
deficiencies in the banks' servicing and foreclosure processes are 
remedied. 

Consistent with the OCC's model of supervision by risk, the servicers 
are being required by the enforcement actions to assess the risks 
present in their servicing operations. In turn, these assessments will 
be evaluated by our examiners together with the banks' plans to 
mitigate and manage those risks. 

We appreciate the opportunity to comment on the draft report. 

Sincerely, 

Signed by: 

John Walsh: 
Acting Comptroller of the Currency: 

[End of section] 

Appendix VI: Comments from the Department of the Treasury: 

Department Of The Treasury: 
Under Secretary: 
Washington: 

April 19, 2011: 

A. Nicole Clowers: 
Acting Director: 
Financial Markets and Community Investment: 
U.S. Government Accountability Office: 
441 G Street, NW: 
Washington, DC 20548: 

Dear Ms. Clowers: 

Thank you for providing the Department of the Treasury ("Treasury") an 
opportunity to review and comment on your draft report on problems in 
the mortgage foreclosure process, entitled Mortgage Foreclosures: 
Documentation Problems Reveal Need for Ongoing Regulatory Oversight 
("Draft Report"). 

The Draft Report provides a detailed description of the mortgage 
servicing and foreclosure processes, including investigations by 
federal and state agencies into errors made by certain financial 
institutions in those processes. 

Although Treasury does not have regulatory authority over servicers 
and the recommendations in the Draft Report are not directed at 
Treasury, we have been closely engaged with the interagency task force 
seeking to address errors in mortgage servicing and foreclosure 
processing. As we have said before, servicers that acted improperly 
must be held accountable and the system must be reformed to prevent 
these problems from occurring again. To that end, we support a set of 
national servicing standards to align incentives and provide clarity 
and consistency to borrowers and investors regarding their treatment 
by servicers, especially in the event of delinquency. 

Thank you again for your work on this important issue. 

Sincerely, 

Signed by: 

Jeffrey A. Goldstein: 
Under Secretary for Domestic Finance: 

[End of section] 

Appendix VII GAO Contact and Staff Acknowledgments: 

GAO Contact: 

A. Nicole Clowers (202) 512-5837 or clowersa@gao.gov: 

Staff Acknowledgments: 

In addition to the contact named above, Cody Goebel (Assistant 
Director), Simon Galed, Beth Garcia, Marc Molino, Jill Naamane, Linda 
Rego, and James Vitarello made key contributions to this report. 

[End of section] 

Footnotes: 

[1] A home mortgage is an instrument by which the borrower (mortgagor) 
gives the lender (mortgagee) a lien on residential property as 
security for the repayment of a loan. A first-lien mortgage creates a 
primary lien against real property and has priority over subsequent 
mortgages, which are generally known as junior, or second, mortgages. 
First liens are the first to be paid when the property is sold. 

[2] These challenges question whether the paperwork documenting 
transfers of loans into securities adequately proves that the trust 
seeking to foreclose is the actual mortgage holder with the authority 
to foreclose. 

[3] A "holder" "is a person who has legal possession of a negotiable 
instrument and is entitled to receive payment on it." Black's Law 
Dictionary (9th ed., 2009). 

[4] We have previously reported that the servicing fee is usually 
based on the outstanding unpaid principal balance of the loan and is 
generally between 25 and 50 basis points. See GAO, Mortgage 
Foreclosures: Additional Mortgage Servicer Actions Could Help Reduce 
the Frequency and Impact of Abandoned Foreclosures, [hyperlink, 
http://www.gao.gov/products/GAO-11-93] (Washington D.C.: Nov. 15, 
2010). 

[5] Fannie Mae and Freddie Mac share a primary mission that has been 
to stabilize and assist the U.S. secondary mortgage market and 
facilitate the flow of mortgage credit. To accomplish this goal, the 
enterprises purchase mortgages from primary mortgage lenders. They 
hold some of the mortgages they purchase in their portfolios, but they 
package the majority into MBS and sell them to investors in the 
secondary mortgage market. The enterprises guarantee these investors 
the timely payment of principal and interest. Fannie Mae and Freddie 
Mac each have issued servicing guidelines that must be followed by 
entities servicing loans on behalf of the enterprises. Both 
enterprises are currently in conservatorship. 

[6] "Beneficial interest" refers to the right to occupy or receive 
rents or other profits from a property or estate, as distinct from the 
interest of a nonfiduciary legal owner of the entire estate. 

[7] Home retention workouts are employed when the borrower has a 
desire to keep the home and the capacity to carry payments under the 
workout plan. Home retention workouts can take the following forms: 
(1) repayment plans, which involve a contracted plan to make up past 
due amounts; (2) forbearance, which includes a defined period when no 
or only partial payments are required followed by a repayment plan to 
make up the arrearage; and (3) loan modifications, which involve a 
permanent altering of one or more of the loan terms. Other foreclosure 
alternatives include two types of voluntary home-loss workout, which 
avoid foreclosure but require the borrower to give up the home. These 
two types are deed-in-lieu transfers, in which the borrower 
essentially gives the investor the keys to the property and executes a 
deed to transfer title to the investor, after the investor agrees to 
release the debtor from any liability on the outstanding mortgage 
balance, and short sales, in which the lender agrees to accept 
proceeds from the sale of the home to a third party even though the 
sale price is less than the sum of the principal, accrued interest, 
and other expenses owed. 

[8] An "'affidavit' is [a] voluntary declaration of facts written down 
and sworn to by the declarant before an officer authorized to 
administer oaths." Black's Law Dictionary (9th ed., 2009). 

[9] According to HUD, as of July 2008, 25 states used a nonjudicial 
process as their normal method of foreclosure, 19 states used a 
judicial process, and 6 states used both. 

[10] "Standing" refers to "[a] party's right to make a legal claim or 
seek judicial enforcement of a duty or right." Black's Law Dictionary 
(9th ed., 2009). 

[11] 12 U.S.C. § 1813(q). 

[12] OCC will assume oversight responsibility of federal savings 
associations from OTS in July 2011. Concurrently, FDIC will assume 
oversight responsibility of state-chartered savings associations from 
OTS and the Federal Reserve will assume oversight responsibility of 
savings and loan holding companies and lenders owned by a savings and 
loan holding company from OTS, according to OTS officials. 

[13] The Dodd-Frank Wall Street Reform and Consumer Protection Act 
(Dodd-Frank Act), enacted on July 21, 2010, established CFPB as an 
independent bureau within the Federal Reserve System. Section 1066 of 
the Dodd-Frank Act authorized the Secretary of the Treasury to provide 
administrative services necessary to support the CFPB before the 
transfer date and to exercise certain of its powers until the 
appointment of a CFPB Director. 12 U.S.C. § 5586. "Federal consumer 
financial law" is a defined term in the Dodd-Frank Act that includes 
over a dozen existing federal consumer protection laws, including the 
Truth in Lending Act, the Real Estate Settlement Procedures Act, and 
the Equal Credit Opportunity Act, as well as title X of the Dodd-Frank 
Act itself. 12 U.S.C. § 5481(12), (14). 

[14] The seven agencies are the Federal Reserve, FDIC, Federal Trade 
Commission, National Credit Union Administration, OCC, OTS, and HUD. 

[15] 12 U.S.C. § 5515. 

[16] CFPB's nondepository supervision authorities specifically extend 
to any covered person that "offers or provides origination, brokerage 
or servicing of loans secured by real estate for use by consumers 
primarily for personal, family or household purposes, or loan 
modification or foreclosure relief services in connection with such 
loans." 12 U.S.C. § 5514(a)(1)(A). 

[17] 12 U.S.C. § 5512. The Federal Trade Commission will retain its 
current enforcement authority. 

[18] On September 6, 2008, FHFA placed Fannie Mae and Freddie Mac in 
conservatorship out of concern that their deteriorating financial 
condition and potential default on $5.4 trillion in outstanding 
financial obligations threatened the stability of financial markets. 

[19] The Home Affordable Modification Program is a program designed to 
help borrowers avoid foreclosure and stay in their homes by providing 
incentives for servicers to perform loan modifications. 

[20] Congressional Research Service, Memorandum, "Robo-signing" and 
Related Mortgage Documentation Problems. (Washington, D.C.: November 
15, 2010). 

[21] Fair Housing Act, 42 U.S.C. §§ 3601-3619; Equal Credit 
Opportunity Act, 15 U.S.C. §§ 1691-1691f; Truth in Lending Act, 15 
U.S.C. §§ 1601-1667f; Real Estate Settlement Procedures Act of 1974, 
12 U.S.C. §§ 2601-2617; Fair Credit Reporting Act, 15 U.S.C. §§ 1681-
1681x; SAFE Act, 12 U.S.C. §§ 5101-5116. 

[22] Pub. L. No. 111-203, title XIV, §§ 1418, 1420, 124 Stat. 1376, 
2154 (2010) (Dodd-Frank Act). Section 1420 also requires that monthly 
statements be provided to borrowers. 

[23] Regulation Z implements TILA. See 12 C.F.R. § 226.36(c)(ii); 73 
Fed. Reg. 44522 (July 30, 2008). The regulations also require prompt 
crediting of mortgage loan payments and the provision of payoff 
statements within a reasonable time; those requirements were later 
essentially codified by section 1464 of the Dodd-Frank Act. 

[24] 12 U.S.C. § 2605. A "federally related mortgage loan" generally 
with certain exceptions includes any loan, that is (1) secured by a 
lien on single family, or up to four-family, residential real property 
if the proceeds of the loan are used to either purchase the property 
or to prepay or pay off an existing loan secured by the same property; 
and (2) is made in whole or in part by any lender the deposits or 
accounts of which are federally insured, or is made by any federally 
regulated lender; or (3) is made, or insured, guaranteed, 
supplemented, or assisted in any way, by the federal government or in 
connection with a housing or urban development program administered by 
the federal government; or (4) is intended to be sold by the 
originating lender to the Federal National Mortgage Association, the 
Government National Mortgage Association, the Federal Home Loan 
Mortgage Corporation, or a financial institution from which it is to 
be purchased by the Federal Home Loan Mortgage Corporation; or (5) is 
made by certain creditors who make or invest in residential real 
estate loans aggregating more than $1,000,000 per year. 12 U.S.C. § 
2602(1). 

[25] 12 U.S.C. §§ 2607, 2609. Section 1463 of the Dodd-Frank Act has 
expanded some of these requirements and created new requirements. For 
example, it decreased the timelines applicable to servicer responses 
to written requests from borrowers and required servicers to respond 
within 10 days to borrower requests for the identity of the owner of 
their loan. It also created new restrictions on the force-placement of 
hazard insurance, requires prompt refund of escrow accounts after loan 
payoff, and requires timely action by servicers to correct errors. 

[26] 12 U.S.C. §§ 5201 note, 5220 note (expires December 31, 2014). 50 
App. U.S.C. §§ 501-597b. 

[27] 12 U.S.C. § 1831o. 

[28] 12 U.S.C. § 1818. 

[29] Section 304 of the Federal Deposit Insurance Corporation 
Improvement Act of 1991 requires the federal banking agencies to 
prescribe uniform real estate lending standards. 12 U.S.C. § 1828(o). 
The standards established by the federal banking regulators require 
every depository institution to establish and maintain comprehensive, 
written real estate lending policies that are consistent with safe and 
sound banking practices and appropriate to the size of the institution 
and nature and scope of its operations. The lending policies must 
establish loan portfolio diversification standards; prudent 
underwriting standards; loan administration procedures for the bank's 
real estate portfolio; and documentation, approval, and reporting 
requirements to monitor compliance with the bank's real estate lending 
policies. OCC (12 C.F.R. part 34, subpart D), Federal Reserve System 
(12 C.F.R. part 208, subpart E), FDIC (12 C.F.R. part 365), OTS (12 
C.F.R. § 560.100 and 560.101). 

[30] For example, see 12 C.F.R. part 364, App. A(II)(C). 

[31] Staff at one of the banking agencies acknowledged that servicers 
could be subject to significant losses on loans that they are managing 
that are held in their own portfolios or in the portfolios of their 
affiliates. 

[32] GAO, Troubled Asset Relief Program: One Year Later, Actions Are 
Needed to Address Remaining Transparency and Accountability 
Challenges, [hyperlink, http://www.gao.gov/products/GAO-10-16] 
(Washington, D.C.: Oct. 8, 2009). 

[33] 12 U.S.C. § 1813(q). OTS also has jurisdiction over savings and 
loan holding companies and their subsidiaries. 12 U.S.C. § 1467a. 

[34] 12 U.S.C. § 1844(c)(2). "Functional regulation" refers to the 
premise that risks within a diversified organization can be managed 
properly through supervision focused on the individual subsidiaries 
within the firm. That is, securities activities are supervised by 
securities regulators, banking activities by banking regulators, and 
insurance activities by insurance regulators. 

[35] GAO, Consumer Protection: Federal and State Agencies Face 
Challenges in Combating Predatory Lending, [hyperlink, 
http://www.gao.gov/products/GAO-04-280] (Washington, D.C.: Jan. 30, 
2004). See also GAO, Alternative Mortgage Products: Impact on Defaults 
Remains Unclear, but Disclosure of Risks to Borrowers Could Be 
Improved, [hyperlink, http://www.gao.gov/products/GAO-06-1021] 
(Washington, D.C.: Sept. 19, 2006), and Information on Recent Default 
and Foreclosure Trends for Home Mortgages and Associated Economic and 
Market Developments, [hyperlink, 
http://www.gao.gov/products/GAO-08-78R] (Washington, D.C.: Oct. 16, 
2007). 

[36] Statement by Daniel K. Tarullo, Member Board of Governors of the 
Federal Reserve System before the Committee on Banking, Housing and 
Urban Affairs, United States Senate, Washington, D.C.: December 1, 
2010. 

[37] Section 113 of the Dodd-Frank Act provides the Financial 
Stability Oversight Council the authority to require that a nonbank 
financial company be supervised by the Board of Governors of the 
Federal Reserve System and be subject to prudential standards in 
accordance with title I of the Dodd-Frank Act if the council 
determines that material financial distress at such a firm, or the 
nature, scope, size, scale, concentration, interconnectedness, or mix 
of the activities of the firm, could pose a threat to the financial 
stability of the United States. 12 U.S.C. § 5323(a). The Council has 
issued a notice of proposed rulemaking regarding the designation 
criteria in section 113. 76 Fed. Reg. 7731 (Feb. 11, 2011). 

[38] GAO, Alternative Mortgage Products: Impact on Defaults Remains 
Unclear, but Disclosure of Risks to Borrowers Could Be Improved, 
[hyperlink, http://www.gao.gov/products/GAO-06-1021] (Washington, 
D.C.: Sept. 19, 2006). 

[39] GAO, Financial Regulation: A Framework for Crafting and Assessing 
Proposals to Modernize the Outdated U.S. Financial Regulatory System, 
[hyperlink, http://www.gao.gov/products/GAO-09-216] (Washington, D.C.: 
Jan. 8, 2009). 

[40] 24 C.F.R. part 203, subparts B, C. 

[41] See, for example, 24 C.F.R. 203.366, concerning conveying 
marketable title. 

[42] 12 U.S.C. § 4513. FHFA oversees the government-sponsored 
enterprises Fannie Mae, Freddie Mac, and the Federal Home Loan Bank 
System. The Federal Home Loan Bank System was created by the Federal 
Home Loan Bank Act as a government-sponsored enterprise to support 
mortgage lending and related community investment by making loans, 
called advances, to its member institutions, which in turn lend to 
home buyers for mortgages. Advances are secured by home mortgage loans 
and other collateral. 12 U.S.C. §§ 1421-1449. We did not review the 
Federal Home Loan Bank System for this report. 

[43] According to SEC staff, section 943(2) of the Dodd-Frank Act 
requires new securitization issuances to keep filing certain reports 
after the first year. See 15 U.S.C. § 78o-7 note; 76 Fed. Reg. 4489 
(Jan. 26, 2011). 

[44] Under federal securities laws, individuals could be liable for 
fraud if they made material misstatements or omissions in their SEC 
filing with intent to deceive or defraud. Criminal penalties may be 
imposed for willful violations of the federal securities laws or for 
willfully committing fraud. See, for example, 15 U.S.C. § 77x. 

[45] See FTC v. Countrywide Home Loans, Inc., No. CV10-4193 (C.D. Cal. 
filed June 7, 2010); FTC v. EMC Mortgage Corp., Civil No. 4:08-cv-338 
(E.D. Tex. filed Sept. 9, 2008); U.S. v. Fairbanks Capital Corp., 
Civil No. 03-12219-DPW (D. Mass. filed Nov. 12, 2003). The defendants 
in each of these cases did not admit to any of the allegations of 
wrongdoing set forth in the Federal Trade Commission's complaints but 
agreed to settle to resolve the matters. 

[46] According to Justice staff, the primary governing statutes that 
relate to mortgage servicing for civil and criminal enforcement are 
the False Claims Act, 31 U.S.C. § 3729, which addresses fraud against 
the government; Title 18 of the U.S. Code, 18 U.S.C. §§ 1341, 1343, 
and 1344; and the Financial Institutions Reform, Recovery, and 
Enforcement Act (FIRREA), 12 U.S.C. 1833a, which provides for civil 
penalties for bank fraud, mail and wire fraud, illegal participation, 
embezzlement and other bank fraud-related offenses. 

[47] See US ex rel. Hastings v. Countrywide Home Loans, Inc., Case No. 
2:07-cv-03897-JFW-PLA (C.D. Ca. filed Oct. 8, 2008); US ex rel. Pace 
v. Bank of America NA, Case No. 2:09-cv-07157-SVW-SS (C.D. Ca. filed 
Oct. 1, 2010); and US ex rel. Conrad v. Countrywide Home Loans, Inc., 
Case No. 1:04-cv-01863-RGL (D.D.C. filed Oct. 27, 2004). 

[48] OCC led reviews of eight servicers, the Federal Reserve led two 
reviews, and OTS led the remaining four reviews; FDIC participated in 
the reviews in a backup role. 

[49] See also Office of the Comptroller of the Currency and Office of 
Thrift Supervision, OCC and OTS Mortgage Metrics Report, Disclosure of 
National Bank and Federal Thrift Mortgage Loan Data, Fourth Quarter 
2010 (Washington, D.C.: March 2011). 

[50] MERS was created in 1995 to streamline the mortgage process and 
to reduce costs as lenders can buy and sell loans without having to 
record and pay a fee for each assignment. According to its Web site, 
MERS serves as the nominal mortgagee of record. LPS, through two 
subsidiaries, provided document execution activities related to 
foreclosures. According to regulators, those subsidiaries discontinued 
their document execution and signing activities in early 2010. 

[51] These actions were taken under the agencies' authority in 7(d) of 
the Bank Service Company Act, 12 U.S.C. § 1867(d), and section 8(b) of 
the Federal Deposit Insurance Act, 12 U.S.C. § 1818(b). 

[52] However, Federal Reserve staff said that examiners checked for 
evidence that servicers were in contact with borrowers and had 
considered alternative loss mitigation efforts, including loan 
modifications. 

[53] Regulators noted that they did not review a sufficient number of 
foreclosure files to reliably estimate the total number of 
foreclosures that should not have proceeded. 

[54] 50 App. U.S.C. §§ 501-597b. 

[55] Potential problems arising from loan transfer practices are 
discussed later in this report. 

[56] These actions were taken under the agencies' authority in section 
8(b) of the Federal Deposit Insurance Act, 12 U.S.C. § 1818(b). 

[57] In addition to the actions against the servicers, the Federal 
Reserve and OTS have issued formal enforcement actions against 12 
parent holding companies to require that they enhance on a 
consolidated basis their oversight of mortgage servicing activities, 
including compliance, risk management, and audit. Those actions also 
were taken under authority of section 8(b) of the Federal Deposit 
Insurance Act, 12 U.S.C. § 1818(b). 

[58] Federal Reserve System, Office of the Comptroller of the 
Currency, and Office of Thrift Supervision, Interagency Review of 
Foreclosure Policies and Practices, (Washington, D.C.: April 2011). 

[59] As OTS will dissolve in July 2011, OTS officials told us that the 
agency will not effect long-term change as a stand-alone institution 
but will continue to work with its sister agencies to implement 
enforcement actions. 

[60] See, for example, 12 U.S.C. § 5365. 

[61] Testimony of John Walsh, Acting Comptroller of the Currency, 
Office of the Comptroller of the Currency, before the Committee on 
Banking, Housing, and Urban Affairs, United States Senate, Washington, 
D.C.: February 17, 2011. 

[62] [hyperlink, http://www.gao.gov/products/GAO-09-216]. 

[63] Statement by Daniel K. Tarullo, Member, Board of Governors of the 
Federal Reserve System, before the Committee on Banking, Housing and 
Urban Affairs, United States Senate, Washington, D.C.: December 1, 
2010. 

[64] Speech delivered by FDIC Chairman Sheila Bair at Mortgage Bankers 
Association's Summit on Residential Mortgage Servicing for the 21st 
Century, January 19, 2011. For example, Chairman Bair has suggested 
that servicers provide borrowers a single point of contact to assist 
them throughout the loss mitigation and foreclosure process who is 
authorized to put a hold on any foreclosure proceeding while loss 
mitigation efforts remain ongoing. 

[65] [hyperlink, http://www.gao.gov/products/GAO-09-216]. 

[66] FHA is reviewing foreclosure processes as part of a broader 
examination that includes evaluation of payment processing and 
document handling. 

[67] Federal Housing Finance Agency, FHFA Announces Joint Initiative 
to Consider Alternatives for a New Mortgage Servicing Compensation 
Structure, (Washington, D.C.: January 18, 2011). 

[68] According to a GSE representative, the GSEs are required to 
establish appropriate incentives to encourage and support servicer 
contact with borrowers in the early stages of delinquency, consistent 
timelines and requirements for communications with borrowers, 
incentive structures for early engagement, and updated foreclosure 
process timelines. The representative also noted that the work will 
include consideration of appropriate penalties to encourage efficient 
resolution and liquidation of properties in cases where foreclosure is 
necessary. 

[69] MHA is a federal program overseen by Treasury that provides 
opportunities for struggling homeowners to modify or refinance their 
mortgages or otherwise avoid foreclosure through a short sale or deed- 
in-lieu of foreclosure. 

[70] MHA-Compliance is a separate division of Freddie Mac contracted 
to perform compliance activities and to ensure that servicers satisfy 
obligations under MHA requirements. 

[71] OCC and OTS Mortgage Metrics Report, Disclosure of National Bank 
and Federal Thrift Mortgage Loan Data, Fourth Quarter 2010 
(Washington, D.C.: March 2011). This report provides performance data 
through December 31, 2010, on first-lien residential mortgages 
serviced by selected national banks and federally regulated thrifts 
comprising 63 percent of all mortgages outstanding in the United 
States. 

[72] GAO, Troubled Asset Relief Program: Treasury's Framework for 
Deciding to Extend TARP Was Sufficient, but Could Be Strengthened for 
Future Decisions, [hyperlink, http://www.gao.gov/products/GAO-10-531] 
(Washington, D.C.: June 30, 2010). While the foreclosure start rate 
grew 36 percent from the last quarter of 2007 to the last quarter of 
2009, the rate for delinquencies of 90 days or more grew by 222 
percent over the same period. From the fourth quarter of 2009 to the 
first quarter of 2010, delinquencies have fallen somewhat, while the 
foreclosure starts have remained fairly constant. 

[73] [hyperlink, http://www.gao.gov/products/GAO-11-93]. 

[74] [hyperlink, http://www.gao.gov/products/GAO-11-93]. 

[75] In re Foreclosure Cases, 2007 WL 3232430 (N.D. Ohio 2007) 
(dismissed without prejudice for failing to file executed assignment 
demonstrating that the plaintiff seeking foreclosure was the holder 
and owner of the note and mortgage as of the date the complaint was 
filed), and In re Foreclosure Actions, 2007 WL 4034554 (N.D. Ohio 
2007) (case was dismissed without prejudice for failing to produce 
documentation demonstrating that the plaintiff was the owner and 
holder of the note and mortgage). See also In re Foreclosure Cases, 
521 F. Supp. 2d 650 (S.D. Ohio 2007); DLJ Mtge. Capital, Inc. v. 
Parsons, 2008 WL 697400 (Ohio Ct. App. 2008) (reversing summary 
judgment for lack of evidence that the party seeking foreclosure was 
the owner of the note and mortgage at the time of summary judgment). 

[76] See Katherine Porter, Misbehavior and Mistake in Bankruptcy 
Mortgage Claims, 87 Tex. L. Rev. 121 (2008). 

[77] See, for example, Footbridge Limited Trust v. Countrywide 
Financial Corp., Case No. 1:10-cv-00367-PKC, 95-97 (S.D. N.Y. Jan. 15, 
2010) (complaint filed). 

[78] These data include Fannie Mae, Freddie Mac, and the Government 
National Mortgage Association (Ginnie Mae). Ginnie Mae is a wholly 
owned government corporation that guarantees the timely payment of 
principal and interest on securities issued by private institutions 
and backed by pools of federally insured or guaranteed mortgage loans. 
Securities guaranteed by Ginnie Mae finance the vast majority of loans 
backed by the Federal Housing Administration and Department of 
Veterans Affairs, among other federal agencies. 

[79] As will be discussed later, the use of MERS as a foreclosing 
entity has been challenged in some court cases. According to FHFA, 
both Fannie Mae and Freddie Mac have eliminated the option for 
servicers to foreclose in the name of MERS. 

[80] According to one academic, the following language is a common 
provision in Section 2.01 of many pooling and servicing agreements: 
"the original Mortgage Note bearing all intervening endorsements 
showing a complete chain of endorsement from the originator to the 
last endorsee, endorsed 'Pay to the order of _____________, without 
recourse' and signed (which may be by facsimile signature) in the name 
of the last endorsee by an authorized officer." 

[81] Statement by Adam J. Levitin, Associate Professor of Law, 
Georgetown University Law Center, before the Committee on Financial 
Services, Subcommittee on Insurance, Housing, and Community 
Opportunity, House of Representatives, Washington, D.C.: November 18, 
2010. 

[82] The residential mortgage notes in common usage typically are 
negotiable instruments, similar to a check. As a general matter, under 
the UCC, a negotiable mortgage note can be transferred from one party 
to another through an endorsement of the mortgage note and the 
transfer of possession of the note to the new party or an agent in its 
behalf. This process is similar to endorsing a check by signing the 
back and depositing it in a bank. An assignment of the related 
mortgage is also typically delivered to the transferee or its agent. 
Such assignments generally are in recordable form, but may not be 
required to be recorded in local land record offices. 

[83] Kemp v. Countrywide Home Loans, Inc., 440 B.R. 624 (Bankr. D. 
N.J. 2010). 

[84] Moody's Investors Service, Moody's Weekly Credit Outlook: 
"Interviews Show Countrywide's Mortgage Processing Did Not 
Systematically Fail," (New York, NY: January 10, 2011). 

[85] U.S. Bank National Ass'n v. Ibanez, 941 N.E. 2d 40 (Mass. 2011). 

[86] In a recent testimony, a MERS official cited a number of cases 
where, according to MERS, courts found that MERS had the authority to 
initiate foreclosure proceedings. Statement by R. K. Arnold, President 
and CEO of MERSCORP, Inc., before the Committee on Banking, Housing 
and Urban Affairs, United States Senate, Washington, D.C.: November 
16, 2010. However, academics and industry participants have cited 
cases that seem to come to different conclusions. On March 8, 2011, 
MERS proposed changes to its procedures that would require an 
execution of assignment of the mortgage from MERS to the servicer or 
to another party designated by the beneficial owner of such mortgage 
loan before initiating foreclosure proceedings. 

[87] GAO, Troubled Asset Relief Program: One Year Later, Actions Are 
Needed to Address Remaining Transparency and Accountability 
Challenges, [hyperlink, http://www.gao.gov/products/GAO-10-16] 
(Washington, D.C.: Oct. 8, 2009). 

[88] GAO, Troubled Asset Relief Program: Status of Efforts to Address 
Defaults and Foreclosures on Home Mortgages, [hyperlink, 
http://www.gao.gov/products/GAO-09-231T] (Washington, D.C.: Dec. 4, 
2008). 

[End of section] 

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