Friday, September 02, 2011

Banks Reach Deal with New York Regulators to End Controversial Mortgage Lending Practices

Economist: A Call to Arms
IMF: "Global Risks Are Rising, But There is a Path to Recovery;" Remarks at Jackson Hole
Miami Herald: Goldman to Stop Controversial Mortgage Practices
SEC: SEC Addressing Misconduct That Led To Or Arose From the Financial Crisis
WSJ: Banks, State Reach a Deal

Last week, IMF Managing Director Christine LaGarde issued a global call to action for a “broad rebalancing of fiscal priorities.” LaGarde specifically challenged the U.S. to take aggressive action to deal with the ongoing foreclosure crisis. New York regulators and three financial institutions, including Goldman Sachs, reached a deal this week that appears to be a timely response and offers far reaching regulatory implications.

Prior to LaGarde’s call, the U.S. had already implemented various measures at the state and federal levels to address the spiraling housing market and reduce the foreclosure rate. Such programs generally focused on lowering homeowner’s interest rates, reducing the overall amount homeowners owe on their mortgages, and extending payment options. So far, none of these measures have been successful in fixing the housing market’s troubles. The New York agreement is the latest attempt at finding a solution.

Major U.S. banks, including Goldman Sachs and the five largest U.S. mortgage banks (J.P. Morgan, Bank of America, Citigroup, Wells Fargo, and Ally Financial) are facing regulatory inquiries regarding allegedly improper mortgage procedures they used prior to and after the financial crisis. This week’s agreement with Wall Street powerhouse Goldman Sachs and two smaller mortgage banks sets an example for addressing these procedures. The deal requires the financial firms involved to reduce mortgage payments for some homeowners, put an end to the so-called “robo-signing” of mortgage documents (illegally signing documents without having a qualified employee review them first), and conduct internal reviews of all previously processed loans to identify additional instances of robo-signing. The banks will have to reinstate or compensate borrowers whose property the banks improperly foreclosed through robo-signing.

The agreement promises to have far reaching implications as New York regulators are responsible for supervising nearly two-thirds of all U.S. mortgage servicing firms--many of which face allegations similar to those lodged against Goldman Sachs. The clear message of the agreement is that regulators will hold banks accountable for their actions and do what is necessary to help those who suffered as a result of the illegal mortgage practices.

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