Banking regulators oversee most entities that conduct mortgage servicing,  but their oversight of foreclosure activities generally has been limited. However, the extent to which regulators have reviewed 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 safety and soundness. Generally, these examinations  revealed severe deficiencies in the preparation of foreclosure  documentation and with the oversight of internal foreclosure processes  and the activities of external third-party vendors. Examiners generally  found in the files they reviewed that borrowers were seriously delinquent  on the payments on their loans and that the servicers had the documents  necessary to demonstrate their authority to foreclose. As a result of these reviews, the regulators issued enforcement actions  requiring servicers to improve foreclosure practices. As we stated in our report, fragmentation among the various entities  responsible for overseeing mortgage servicers heightens the importance of  coordinating plans for future oversight. In our report, we recommend that the regulators and CFPB develop and  coordinate plans for ongoing oversight and establish clear goals, roles, and  timelines for overseeing mortgage servicers under their respective  jurisdiction. In written comments on the report, the agencies generally  agreed with our recommendation and said that they would continue to  oversee servicers’ foreclosure processes. As part of addressing the problems associated with mortgage servicing,  including those relating to customer service, loan modifications, and other  issues, various market participants and federal agencies 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. While Documentation Problems Likely Will Result in Delays in the Foreclosure Process, the Impact on Financial Institutions and Others Is Less Clear

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 proceed. Impacts on servicers, trusts, and investors because of loan transfer  documentation problems were unclear. To reduce the likelihood that problems with transfer documentation could  pose a risk to the financial system, we recommended that the banking  regulators 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 act to mitigate the risks,  if warranted. In written comments on a  draft of our report, the regulators generally agreed with or did not  comment on this recommendation.
Why GAO Did This Study

This testimony discusses our work on mortgage servicing issues. With record numbers of borrowers in default and delinquent on their loans, mortgage servicers--entities that manage home mortgage loans--are initiating large numbers of foreclosures throughout the country. As of December 2010, an estimated 4.6 percent of the about 50 million first-lien mortgages outstanding were in foreclosure--an increase of more than 370 percent since the first quarter of 2006, when 1 percent were in foreclosure. 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 resumed some foreclosure actions after reviewing their processes and procedures. However, following these allegations, some homeowners challenged the validity of foreclosure proceedings against them. Questions about whether documents for loans that were sold and packaged into mortgage-backed securities were properly handled prompted additional challenges. This statement focuses on (1) the extent to which federal laws address mortgage servicers' foreclosure procedures and federal agencies' authority to oversee servicers' 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 investors in mortgage-backed securities. It is based on the report we issued on May 2, 2011, on foreclosure documentation problems that Congress requested.

What GAO Found

In summary, until the problems with foreclosure documentation came to light, federal regulatory oversight of mortgage servicers had been limited, because regulators regarded servicers' activities as low risk for banking safety and soundness. However, regulators' recent examinations revealed that servicers generally failed to prepare required documentation properly and lacked effective supervision and controls over foreclosure processes. Moreover, the resulting delays in completing foreclosures and increased exposure to litigation highlight how the failure to oversee whether institutions follow sound practices can heighten the risks these entities present to the financial system and create problems for the communities in which foreclosures occur. As a result, we recommended in our report that the financial regulators take various actions, including (1) developing and coordinating plans for ongoing oversight of servicers, (2) including foreclosure practices as part of any national servicing standards that are created, and (3) assessing the risks of improper documentation for mortgage loan transfers. The regulators generally agreed with or did not comment on our recommendations, and some are taking actions to address them.