Bernanke Takes Blame for Delay in Foreclosure Reviews

WASHINGTON — Federal Reserve Board Chairman Ben Bernanke accepted responsibility on behalf of regulators Wednesday for a troubled independent foreclosure review process that has delayed payments to borrowers for nearly two years.

Testifying before the House Financial Services Committee in his second day of congressional appearances to deliver the Fed's semi-annual monetary policy report, Bernanke told lawmakers that regulators had made a mistake by requiring banks to hire consultants to review the largest servicers loan-by-loan.

"It was a very expensive cost per file evaluated," said Bernanke. "We take responsibility for this. We were on a track where the money going to the consultants would be some multiple of the money going to the borrowers."

Under the initial plan, banks were required by the Office of the Comptroller of the Currency and the Fed to retain independent consultants to review their foreclosures activities in 2009 and 2010 in order to help identify borrowers who may have suffered from financial injury as a result of errors, misrepresentations or other flaws in the foreclosure process.

But in January, regulators halted the independent foreclosure review after announcing a combined $9.3 billion settlement with the country's 14 largest banks to settle allegations they had mishandled foreclosures following the housing crisis.

As part of the deal, banks are expected to pay $3.75 billion directly to borrowers that banks had wrongly foreclosed upon.

The settlement put an end to reviews of foreclosures that involved verifying claims by borrowers and checking the files for errors and evidence of botched paperwork and other abuses by lenders. Private consultants had been hired to evaluate such files to determine how much damage was warranted — a process that turned costly and delayed retribution to injured borrowers.

Since then, Comptroller of the Currency Tom Curry has said scrapping the reviews and settling with the companies would allow consumers to receive compensation much faster, adding that payouts would start in March.

"Changing course was the right thing to do for borrowers, for servicers, for the federal banking system, and for the housing markets," said Curry, in a speech on Feb. 13. "Our new approach will get more money to more people much more quickly."

Bernanke reiterated that message on Wednesday, saying that injured borrowers would be receiving checks in the mail very soon.

"We've changed the process to a much quicker, more streamlined process, which is going to cut out the consultants, and which will have checks going out to borrowers very, very shortly within weeks," said Bernanke.

The new process, however, has raised concerns by lawmakers about how regulators will determine the size and payment distribution to borrowers without completing the independent review.

Rep. Maxine Waters, the ranking member of the committee, and other Democratic lawmakers have written letters to regulators requesting more information about the review process and the decision to settle. Separately, Waters has requested a hearing.

At the hearing, Rep. Caroline Maloney, D-N.Y. echoed those concerns, asking how regulators planned to compensate such borrowers.

"How did you make the determination of who should receive these checks, and where are they going, and what was the criteria?" Maloney asked.

Bernanke said regulators now have agreements with most of the servicers, which will be made public shortly. Part of the reason for the delay, he said, is that they are being incorporated into the individual bank's enforcement orders.

"We have about a $9 billion agreement, all of which will be reflected either in cash payments or in mortgage relief to borrowers, none going to consultants," said Bernanke. "That is very much under way."

The Fed chairman suggested the reasons payments hadn't yet occurred was because it has been "such a slow, ungainly process."

Separately, Bernanke said there were early signs of a housing recovery, with home prices rising over the last year and increases in housing starts and sales. Still, a drag on the recovery has been foreclosures, which remain high.

"We're still far from where we'd like to be, but the evidence is that the housing market is strengthening and that low mortgage rates are one reason for that strengthening," said Bernanke.

One concern held by lawmakers is how regulators will finalize a rule to craft "qualified residential mortgages," which would be exempt from a requirement that lenders hold at least a 5% stake in any loan they sell into the secondary market.

Rep. Gary Miller, R-Calif., noted that the proposed QRM requirements would have required a 20% downpayment from borrowers, which lawmakers from both political parties have said was too extreme.

"If QRM is too narrow, first-time homebuyers, I believe, will be driven out of the marketplace, which will cause another dip in the housing market," said Miller.

Bernanke said regulators are carefully considering comments from members of Congress as they finalize a rule.

He reiterated a point he raised at the Senate Banking Committee that regulators were considering a rule that closely resembled the Consumer Financial Protection Bureau's definition of "qualified mortgages," a class of ultra-safe loans with certain underwriting criteria.

"I would say that the idea that QRM should be as broad or nearly as broad as QM is very much on the table," said Bernanke. "And we appreciate the concerns of Congress that these criteria should not be so constraining as to prevent credit-worthy borrowers from obtaining a mortgage."