B OF A CLAIMS INVESTORS LIMIT SERVICERS ABILITIES

In a statement released ahead of their official testimony before the Senate Banking Committee, Bank of America claimed that the bank is “constrained” in its role as a servicer. “Many investors limit Bank of America’s discretion to take certain actions” stated Barbara Desoer, President of Bank of America Home Loan. Bank of America “aim[s] to achieve an outcome that meets customer and investor interests, consistent with whatever contractual obligations we have to the investor,” Desoer said.

So, it appears that at least B of A, with its indigestion of Countrywide’s servicing portfolio, is claiming to be hog-tied by the Pooling and Servicing Agreements. What is interesting is that this was never a problem in the past. It is only now that there is this avalanche of bad loans that the issue of risk management and loss mitigation has now become a problem because of investors.

If you look at the standard language of a Pooling and Servicing Agreement, however, you can see that the servicer has fairly wide latitude in servicing a loan and working loss mitigation techniques. First and foremost is the REMIC provision that allows a servicer to modify either the rate or the term of the loan if the loan is in default “or in imminent danger of default” without jeopardizing the REMIC tax status. Next, Pooling Agreements usually have language to the effect that servicers are to service and administer the loans in accordance with “customary and usual standards of practice of prudent mortgage loan servicers.” Counter-balancing this provision is the subsequent provision in the Pooling and Servicing Agreements that state that servicers “shall not take any action that is inconsistent with or prejudices the interests of . . . the [Investor] in any Mortgage Loan . . .”

As far as foreclosing on a property, the Pooling and Servicing Agreements usually contain boiler-plate language similar to the following:

The Servicer shall use reasonable efforts to foreclose upon or otherwise comparably convert the ownership of properties securing such of the Mortgage Loans as come into and continue in default and as to which no satisfactory arrangements can be made for collection of delinquent payments. In connection with such foreclosure or other conversion, the Servicer shall follow such practices and procedures as it shall deem necessary or advisable and as shall be normal and usual in its general mortgage servicing activities; provided, however, that the Servicer shall not be required to expend its own funds in connection with any foreclosure or towards the restoration of any property unless it shall determine (i) that such restoration and/or foreclosure will increase the proceeds of liquidation of the Mortgage Loan after reimbursement to itself of such expenses and (ii) that such expenses will be recoverable to it through [such liquidation proceeds]

 Being as clear as mud and as directional as a compass on the North Pole, there are various other provisions in the Pooling and Servicing Agreements specific to that transaction or related to the specific servicer for that trust. But, generally speaking, the servicing provisions are usually pretty broad as to servicing functions, with any negotiated benefit going to the servicer, since investors were not part of the negotiations. So, how is a servicer constrained? Maybe it is whether or not such servicer needs to advance on a delinquent loan and wait for reimbursement for such advance? Depending on which tranche the investor is holding, it may or may not be a benefit to take a certain loss mitigation position. It all depends on where the investor is in the waterfall and realized loss allocation.

Well, I guess the servicer has to blame someone for the failure of the HAMP, HAFA and HARP. And clearly, the Investor has the most to gain on the sale of foreclosed properties at 40 to 50 cents on the dollar (after reimbursement for expenses and the like). At least at the end of “The Italian Job”, the ‘good bad guys’ got the ‘bad bad guy”. Its just getting harder to tell who are the good bad guys and the bad bad guys these days.

ANOTHER HOLE IN THE FORECLOSURE DIKE – “SEWER” SERVICE OF PROCESS

In what appears to be another torpedo in the servicer’s hull, a Florida Circuit Court Judge who handles more than a thousand foreclosure cases a month is questioning whether borrowers ever received the court papers advising them that their home is going to foreclosure.

Judge Jennifer Bailer, a seasoned judge with more than 17 years on the bench, is in the center of trying to unravel the foreclosure mess that started in her state. Initially questioning whether service was properly done back in May 2009, Judge Bailer is now wondering if process servicing companies lied on affidavits filed in court that acknowledge that the process servicer appropriately served the defaulted borrower with foreclosure papers. The legal requirement is that foreclosure cases are subject to dismissal where homeowners haven’t been served within four months of the commencement of the action. Therefore, failure to properly serve a defaulted borrower of a pending foreclosure could lead to a title dispute following the sale of the property after foreclosure. This could be one reason that Old Republic National Title Insurance recently announced that it would stop issuing title insurance on foreclosure properties of JP Morgan Chase and Ally Financial (see http://securitizedassetsurveillanceanalysis.blogspot.com/2010/10/and-hits-just-keep-on-coming-no-title.html)

Therefore, once again, the slipshod method in which foreclosure actions have been handled is calling into question the entire foreclosure process. This continuing downward spiral of the manner in which the process is done appears to again be based on the emphasis to reduce costs while volumizing production. By attempting to keep the cost of the process down, corners get cut. However, when those actions lead to violations in legal requirements, the consequences can be dramatic. Unlike the prior highlighted issue of “robo-signing”, the due process issue of this “sewer” service is much more problematic. Not providing the borrower with notice of the foreclosure is a significant failure in the required legal process. While this will still not require the return of the property to the defaulted borrower, it continues the question of just how poorly executed are the processes and procedures of the servicer, including the auditing of their outside service providers.

Like in “The Gang That Couldn’t Shoot Straight,” servicers and their service providers in the foreclosure industry are finding themselves at odds with each other while bumbling through the foreclosure mess. Can’t wait to see how the lion gets used here to blackmail “clients.”

HOW LOW CAN WE GO – WELLS NOW CAUGHT IN THE ROBO-FORECLOSURE NET

While trying to keep a stiff upper lip in the foreclosure mess now facing the entire industry and claiming that their processes were appropriate, it has come to light through the deposition of a loan document officer for Wells Fargo that as a person responsible for signing affidavits, the only fact confirmed was that her name and title on the affidavit were correct. Her sworn testimony stated that she was not aware of any of the salient facts, like principal and interest owned, in the affidavit. This, in light of the fact that Ms. Moua was signing up to 500 foreclosure papers a day.

Where is this all going to lead. Well, it is unlikely that the courts are going to unwind foreclosure sales. First and foremost, it appears that there are going to be a substantial percentage of these foreclosure issues that relate to document deficiencies/improprieties. That is probably not going to be a sufficient reason to return a property to a defaulting borrower. At best, it is a due process violation that will require a penalty to the servicer or service provider (the agent hired by the servicer to perform the foreclosure procedures on the servicer’s behalf). In addition, if the REO was already sold to a third party, you have a “bona-fide purchaser for value” styled arguement by the new owner. Even if the problems of the foreclosure were to rise to a standard of theft of the property, the subsequent purchase of the property would be protected. Finally, as it should be pretty clear, the borrower was ultimately in default. Therefore, such borrower should be subject to foreclosure, absent the servicers' obligation to provide alternatives to foreclosure under HAMP, HAFA, HALA and HopeNow.

That is the major issue with regard to the robo-foreclosure mess. In their rush to foreclosure, did the servicers attempt to avoid their requirement to assist in providing these alternatives?

With regard to foreclosures, there is a dichotomy in the interest of the securitization investor. A fast foreclosure process allows for cash to come back to the investor. The higher up on the waterfall the investor is (depending on the tranche), the better for the investor. However, this is offset by several factors. There is a depressed return on the property due to the distressed sale, as well as the dumping of excessive amounts of REO property, an issue highlighted in the battle between Carrington and American Home Servicing. There is also the issue that the Liquidation Proceeds for the sale of the REO property are treated differently in most securitization structures, allowing for even less money to go to the investor. Finally, the protection afforded to investors in servicing advances is lost at some time prior to initiation of a foreclosure action, as compared to a modification or refinance.

There was an article today in a local Southern California paper where a person who previously lost his house to foreclosure broke back into the home to retake possession of his home, claiming that the foreclosure was improper. Naturally, the person was arrested for trespassing. The article stated that the person claimed that he was no longer was able to afford the home after the mortgage rate adjusted. So, once again, we are facing this “entitlement” posture by people that think they can avoid their contractual obligations and should be protected, now by self-help. Previously, they were just taking the toilets and countertops. Now the attitude is that they are taking the entire house back (I guess if it was a manufactured home and the wheels were still on, he could have just hooked it up and moved on). It is sad for all involved. And it boils down to the failure of a concept that drove the entire mortgage industry – JUST BECAUSE A PERSON COULD QUALIFY FOR A MORTGAGE LOAN SHOULD NOT HAVE MEANT THAT SUCH PERSON SHOULD HAVE OWNED A HOME, especially in light of the ever-loosening underwriting standards prevalent in the latter part of the decade.. The American dream is a nice concept, but it does not entitle everyone to live it.

Well, it is football season and Halloween is soon upon us. At least the defaulting borrower will be able to watch the games (since he is probably still paying his cable bill before his mortgage). Though it appears that there is a new spin on “Trick or Treat” these days. The question is who is doing the tricking and who is getting the treat.

HOW ROTTEN IS THIS APPLE? – ALLY’S DECISION TO REVIEW ALL 50 STATES

Ally Financial, one of the first of the residential mortgage servicers to fall ‘victim’ to the robo-foreclosure problem that has spread like a pandemic to the entire mortgage servicing industry, has expanded its review of its foreclosure procedures to cover all 50 states. This is following Bank of America’s immediate decision to halt and review its foreclosure procedures across the entire country. The remainder of the servicing shops, including the recently added PNC and Litton Loan Servicing (Goldman Sachs’ servicing arm) has limited their review and exposure at this point to only the 23 states that have judicial foreclosure processes.

All states handle the process of foreclosure slightly differently, but the major difference is whether the state follows a judicial or non-judicial process for foreclosure. In a judicial foreclosure state, the servicer, acting on behalf of the mortgage loan holder (usually a securitization trust), files paperwork in the county court in which the mortgaged property in default is located. Initial paperwork filed with the court includes a complaint and a Lis Pendens filed with the county land records office. Notice of the action is sent to the defaulting homeowner, usually by service of process. The county court will hear the case, including any issues raised by the defaulted borrower, and enter a judgment. A writ will be issued by the court and a sheriff’s sale will be held for the auctioning of the property.

In a non-judicial foreclosure state, the process works without the intervention of the courts, which means that the defaulting borrower has less of an opportunity for complaint or to question of the process. While non-judicial foreclosure states have an even greater patchwork of procedures that follow varying requirements, the basic pattern is that the servicer just sends a notice, either as a Notice of Default or as a Notice of Sale, to the defaulting borrower. After waiting a statutorily required period of time, the servicer initiates an auction for the property.

In either case, the proceeds from the sale of the property goes to the owner of the property, generally the securitization trust holding the property as REO, as “Liquidation Proceeds” as defined in the Pooling and Servicing Agreement. Cash from the sale of the REO property is paid out to the servicer, the trustee and ultimately the investors pursuant to specific provisions established in the Pooling and Servicing Agreement.

By announcing that it will expand its review – but not its suspension – of foreclosure practices to all 50 states can only mean that the procedures followed by Ally or its outside service providers went beyond improper execution of affidavits and use of notary stamps. Rather, it looks like the entire servicing industry, in their sub-contracting the foreclosure process to law firm foreclosure mills, may have found itself completely disregarding the legal requirements to foreclosure. In non-judicial foreclosure states, such actions could have been so egregious as to prohibit defaulted borrowers to have the ability to question the foreclosure. This is because generally, in non-judicial foreclosure states, the concept of due process (which would include things like improperly signed affidavits and notary stamps) is not a valid defense to a foreclosure. Therefore, to have to question the process of foreclosure in these states would signal an issue to the actual violation of law, and not just due process.

And now it appears that the infamous “coalition of Attorneys General”, last summoned to take down Ameriquest, is being formed again, lead again by Iowa Attorney General Tim Miller. With a players list that will probably include Andrew Cuomo from New York, Ray Cooper from North Carolina, and most of the AGs from the judicial foreclosure states (Florida, New York, Ohio, Illinois, Pennsylvania, New Jersey, Connecticut, Hawaii, Indiana, Iowa, Kansas, Kentucky, Louisiana, Maine, Nebraska, New Mexico, North Carolina, South Carolina, North Dakota, South Dakota, Oklahoma, Vermont, and Wisconsin), critical mass could be reached. But unlike actions in the past, this time the attorneys general will be fighting against the entire industry and not a lone rouge mortgage company. An interesting interplay that should be asked in this inquiry is that of the servicer’s actions, either directly or through agents, to foreclose and that servicer’s inability to modify loans under HAMP or their limited refinancing of loans under HARP, as well as their drive to push short sale under HAFA. That will be a telling sign as to their “motus operanti” or “mens rea”.

So, as the cavalry of Attorneys General form to bring their forces to bear against the various servicer Indians that have been accused of plundering the homesteads of defaulting borrowers, let us see if this turns out to be a replay of the “Battle of Little Big Horn.” Because this time, those Indians already own all of the casinos on Wall Street and have been smoking the peace pipe with several of the “White Man” in Washington for years.

FROM THE MOUTHS OF BABES – THE DEPOSITION OF A STERN’S PARALEGAL

In what appears to be ground zero in the robo-foreclosure mess, the September 23 deposition of Tannic Lou Kapusta, a senior paralegal with the Law Office of David Stern, enlightens us as to the tsunami now reaching the shore. The Law Firm of David Stern, for those of you not following this issue, is in the center of the foreclosure hurricane, having been under investigation in Florida for running one of the largest foreclosure mills in the country. Reports have this law firm having handled foreclosure actions for everyone from Fannie Mae and Freddie Mac to Aurora (Lehman), Citi, GMAC and most of the major servicer.

I have been referring to the issue as robo-foreclosure, and not robo-signing, as referenced in the media, because of an understanding that this issue dealt with more than the execution of the affidavit, but rather related to the entire process of the foreclosure. This deposition by the Office of the Attorney General for the State of Florida of a senior paralegal for one of the largest foreclosure mills in the country makes it clear the signing of affidavits is only one of lesser failures in the process. This is why servicers like BofA, now awakened after being caught sleeping at the switch, are putting on the brakes in a desperate move to prevent the oncoming train-wreck.

With a staff of approximately 1100, the David Stern Law firm was international, preparing the foreclosure paperwork in Guam and the Philippines. This senior paralegal, claiming personal responsibility for 1200 files including those of Fannie Mae and Freddie Mac, stated on the record that not only were the affidavits prepared in an automated process called CASEUM, but the automatons walking around the office did not know what they were doing, or that what they were doing was at least improper and more likely, illegal. The paralegal went on to state that in-house lawyers for the firm, as well as paralegal, were enslaved to the law firm and knew of the improprieties and illegalities but feared the loss of their job over the loss of their license to practice.
Examples of what was being done at this mega-paralegal shop included:
• Use of floating notary stamps by non-notaries


• Notarizations done not in the presence of an authorized notary


• Notarizations being done before the signature


• Execution of affidavits by employees of The Law Firm of David Stern under presumed powers of attorney for the servicer/mortgage holder


• Employees of The Law Firm of David Stern signing the signature of the person who presumably had a power of attorney to sign on behalf of the servicer/mortgage holder


• “Sewer service” by a captured process servicing group


• Preparation and execution of assignment of mortgage after filing of the lis pendent and even following the actual foreclosure


• Falsifying information, including Unpaid Principal Balance, on affidavits


• Fraudulently stating or changing dates on documents to make them comply with legal requirements


• Multiple improper charges for service of process billed to the servicers


• Questionable relationship with a the court in a certain county in Florida, with the court hearing 500 foreclosure cases in a day

If this is indicative of the level of impropriety within the foreclosure process, we are in for a nuclear winter. While it appeared initially that prior foreclosures would not be reversed, now it appears from this deposition that such may not be the case. If the level of absolute disregard to legal foreclosure requirements turns out to be true, servicers may be forced to return properties, or at a minimum, find money to pay damages to those foreclosed borrowers. Adn where is the servicer going to find that money?

All of this in the name of volume-izing the foreclosure piece of the servicing function. Clearly, there isn’t enough malpractice insurance covering Mr. Stern’s law firm to pay for the massive amount of damage that will be found as this case continues. Therefore, the next deep pocket that plaintiff attorneys will turn to is the servicers. As previously discussed in an earlier blog, negligence would be the standard. Audits of this and other law firms will be scrutinized to see if they should have seen the problems. Management will have to justify their pressing on foreclosures and the use of these mills to process foreclosures. Moreover, investors should question how monies are being spent to process foreclosures to see if they are being short-changed in distributions.

So, having finally awakened to the fact that the legal bridge was out, the servicer/engineers are now attempting to stop the foreclosure train from dropping into the economic pit below. With all the help they can muster, these servicer/engineers may just have to do what any of us would do in such a situation. . . pray. Pray that they don’t go over the edge.

“PICK-A PAY” = WELLS FARGO’S NEW PAIN

Following Wells Fargo’s claim that they were not part of the ‘dirty little foreclosure problem,’ it appears that they are now finding indigestion in their acquisition of Wachovia. Pursuant to an agreement reached with eight Attorneys General, Wells has agreed to pay $24M in damages and haircut by $400M the balance of those “Pick-A-Pay” loans originated by Golden West Financial, which was acquired by Wachovia back in 2006. In addition, Wells Fargo agreed to an additional $300M in interest rate reductions, term extensions and other benefits to the borrowers.

Pick-A-Pay loans (also referred to as Option ARMS), for those of you not familiar with this product, was the brainchild of Golden West. Like offering either spinach or candy to a child, these loans offered the borrower the option either to make fully amortizing payments each month or to make a negatively amortizing payment. A negatively amortizing payment means the borrower pays less that the accrued interest for that month, and the difference is then added to the then outstanding unpaid principal balance of the loan. Add to this the fact that the interest rate had an initial “teaser” rate and is tied to some index that adjusts and you have a recipe for disaster to the borrower. And guess which payment most borrowers chose, especially since this product was aimed right at the “best” sub-prime borrower?

The settlement covers only owner-occupied properties where a borrower is in financial distress. The initially reduction of a loan's balance will be to 150% LTV. Additional steps could include reducing the loan's interest rate, extending the term of the loan and other changes that reduce a borrower's monthly payment to no more than 31% of gross monthly income. Borrowers who make three years of timely payments could qualify for an additional principal reduction.

Which means that Wells Fargo is giving away ice in the wintertime. Servicers are authorized, and in this climate of HAMP, virtually required, to modify loans that are in distress with either rate or term modifications, as well as providing principal modifications under HAMP or HOPE NOW. The interesting part of the settlement is the 150% LTV haircut. Given that the settlement is with some of the big problem states (Florida and Nevada especially), the 150% LTV appears to be a line in the sand by Wells Fargo as to the market depreciation they are willing to recognize (on behalf of the securitization investors) for the Pick-A Pay loans.

The settlement, however, appears to be only the tip of Wells Fargo’s iceberg. The settlement, in which Wells naturally did not admit to any wrongdoing (least the plaintiffs’ bar gets a hold of this issue), was for improper/fraudulent marketing of the Pick-A-Pay loan. But it only was for eight states, which did not include California, Golden West’s home state. So, having issued over $109B in Pick-A-Pay loans from 2005 to 2008 (as reported by Inside Mortgage Finance), Wells may be seeing more Attorneys General come a-knocking. Like the shot gunning of Ameriquest back in 2005, it is when all those little Attorneys General gang up that they can really hurt a large financial institution. However, it appears that these Attorneys General may not have gotten the critical mass this time to do any real damage to Wells Fargo. At a cost of less than 1% of the originations spread over eight states, adding all of the remaining states impacted will not put a dent in Wells Fargo’s armor.

This is truly is a scene out of an action movie: the evil Wells Fargo has borrowers running on a conveyor belt that is going faster than the borrowers can run. The foreclosure meat grinder at the end of the conveyor is getting closer and closer. The movie heros (the Attorneys General), pull hard on the frozen lever to stop the  conveyor’s machinery. Are they in time . . can they stop the machine from turning the borrowers into foreclosure hamburger? Or will their efforts be too little, too late.


Tune in next week/month/year for the exciting conclusion!

HOW MANY TOES CAN YOU STUB – LPS’ DOCX IS THE NEW MERS

As the foreclosure mess continues to ripen (like cheese), it appears that Lender Processing Services’ subsidiary may be the new piece in the puzzle. Following Florida Congressman Alan Grayson (D-Fla.) firing off remarks into certain practices of Docx, the company has announced that it terminated the practice in 2008 of having employees signing affidavits on behalf of an “authorized employee.”

Like the issue that the industry first faced where a MERS employee was authorized to execute assignments on behalf of a servicer/client (usually through a corporate resolution authorizing the MERS employee to be a “special” employee of the servicer) it appears that Docx took the same tack with respect to affidavits. In a statement released by the company, LPS stated that when they “performed this service, affidavits were prepared and provided by the lenders’ or servicers’ attorneys. These affidavits were then executed by LPS consistent with industry practice, under corporate resolution."

As one of the early issues following the collapse of the securitization field, the issue of ownership of the mortgage was called into question due to the structure of MERS and the lack of assignments in a county clerk’s office, as required by statute to allow for notice of ownership and lien of the mortgage. Courts, not familiar with this shortcut in the mortgage business, started to throw out foreclosure actions due to the fact that they did not appreciate the role of MERS in saving time and money by avoiding continuously registering the transfer of the mortgage as it worked its way into securitization structures and sales.

Now, it appears that the outside service provider Docx has been caught in a similar situation of not following regulations/procedures in preparing affidavits required for a foreclosure action. However, unlike the MERS issue, here it appears to be a blatant disregard for proper procedure, and not just a regulatory shortcut. And while Congressman Grayson may just be hopping on the foreclosure hay-wagon (is he up for mid-term election?) it once again goes to the question of the impact of volumize-ing servicing functions.

At between 25 to 50 bps for servicing fees, pressure is always on the management of the servicing organizations to squeeze every drop of revenue by reducing costs. It is why, during the turn-down of the mortgage origination market, people (like Wilbur Ross) started to look at servicing platforms as a good buy or a hedge against the loss of revenue in origination. Controlling the cash flow off of tens and hundreds of billions of dollars of mortgage loans, especially when you could game the system because of the complexities of the Pooling and Servicing Agreement and the distance between the servicer and any investor, looked like easy money. Most investors bought based upon the rating and assumed cash-flow, which is now completely out-of-whack.

Now, it appears to be a curse to be a servicer, rather than a blessing. Beyond being the new dog to kick on Capitol Hill, having to rewrite compliance policies and procedures and instituting serious auditing will increase costs, at a time when cash has become tight at the servicers. And, like the MERS issue, plaintiff attorneys now have a new claim in their delaying filings on behalf of clients. This slow down in the foreclosure process will squeeze servicers even more as they are delayed in receiving reimbursement out of securitization structures.

Once again the continuing mantra is “AND THE SECURITIZATION INVESTOR WILL TAKE IT ON THE CHIN.” At the end of the day, the delay in acquiring the property through foreclosure, to the reduction in the sale price of REO property, to the increased costs of the servicer that will take ahead in the liquidation waterfall all add up to less money to investors.

So, as we look down the barrel of this robo-foreclosure mess, you have to ask yourself one question . . .do you feel lucky . . . well, do you punk??

WHAT? . . .NOT US!! – WELLS FARGO STANDS BEHIND ITS FORECLOSURE PRACTICES

From an article on Friday in HousingWire, Wells Fargo, the second largest servicer of mortgage loans in the United States (as well as one of the top Master Servicers on securitization deals) stated that it is not planning to review foreclosure affidavits in light of the robo-foreclosure issue now facing the rest of the servicing industry.

In an email to HousingWire, a Wells Fargo spokesman Jason Menke said, "Wells Fargo policies, procedures and practices satisfy us that the affidavits we sign are accurate. We audit, monitor and review our affidavits under controlled standards on a daily basis. We will stand by our affidavits and, if we find an error, we will take the appropriate corrective action."

Basically, they are saying that they are not going to stop foreclosures, like everyone else has done, but rather they are taking the stance that they will fix it if they catch it. Given the diligence Wells Fargo is known for, putting one’s head in the sand appears to be one way to face the issue. It is truly hard to believe that Wells Fargo broke with the servicing practices of every other servicing group. In a mortgage servicing operation as vast as Wells Fargo, it is inconceivable that the person executing the affidavit in a foreclosure had the requisite knowledge when swearing to the facts, and that each one of the affidavits was signed before a notary.

It may be the wording of the statement by Wells that needs to be examined. They claim that the affidavits are “accurate.” There has not been a claim that the robo-foreclosure affidavits were inaccurate. Ally and JPMorgan have stated on the record that the information in the affidavits was accurate. Rather, at issue is the question of whether they were done “properly” – that they were done procedurally as required by law. By saying that their policies, procedures and practices “satisfy them” that the affidavits were accurate does not cover the required procedure.

Therefore, this verbal slight-of-hand appears to be damage control for a company that swallowed Wachovia Bank at the end of 2008, which, as we all should remember, had in its portfolio that wonderful acquisition of Golden West/World Bank. For those of you that don’t remember, Golden West had the huge “pick-a-pay” mortgage business, giving the borrower the ability to choose a neg.-am. payment any time they wanted. I am sure that none of those mortgages have gone into foreclosure, given the stability of the borrower.

So, maybe pretending that it is a beautiful summer day during a Nor Easter is one way of getting through the storm. Let’s just hope Wells Fargo is like Forest Gump on his shrimping boat and not any of the characters on the boat in “A Perfect Storm.” Otherwise, we may be preparing for another funeral at sea.

AND THE HITS JUST KEEP ON COMING – NO TITLE INSURANCE FOR FORECLOSED HOMES

In an announcement on Friday, Old Republic National Title Insurance told its agents that it would not write policies on foreclosed properties by JPMorgan Chase “until the objectionable issued have been resolved,” as reported in the New York Times. This follows its decision to not write policies on Ally Financial (GMAC Mortgage) foreclosed properties subsequently sold as REO.

So, the title insurer is now questioning whether the title of a sold REO property following a foreclosure is clean. This appears to be an aggressive posture of whether the courts will look at whether the entire robo-foreclosure process invalidates the sale of property due to the improper court filed affidavit. As previously mentioned, it would be draconian for the courts to take such a position. Beyond using some type of argument of “bona fide purchaser for value” to be used by a purchaser of REO property, to unwind all of the REO sales done (HOPE NOW published statistics showing over 800,000 completed foreclosure sales between 3rd Q 2009 to 2nd Q 2010 reported by HOPE NOW servicers) would just destroy the recovery of the housing market.

The ripple effect of all this is starting to turn significantly substantial. As noted in the article, foreclosure prices would drop, as lenders would not be willing to loan against REO purchases without the title insurance. The court system would become even more log-jammed, at a time when budgets are already requiring States to make significant cut-backs. Plaintiff’s attorneys, now smelling the blood in the water, will look to feed off defaulted borrowers in ways the loan modification scams only dreamed of. Servicers, now without an ability to recover its costs from liquidation proceeds on the sale of the REO properties, will be “pressed” to find operating revenue. And, as the mantra for the industry, the securitization investor will be once again be forced to “eat it.” Cash-flows will be limited, the properties that should at least be held as REO, will be stuck in this foreclosure limbo, and any recoveries will be less money to pay off their investment. Losses will creep up the tranche structures.

While October is harvest month, it looks like the capital market fields are still only providing the smallest of yields. The HAMP, HAFA and HARP plantings appear to have been only marginal seeds. And now, it looks like we just got hit with an early foreclosure frost that may kill a good portion of the crop. And wait, we still have to face the ghosts, ghouls and goblins (including those on Capital Hill looking to frighten the securitization market with its new regulations) that will be coming out at the end of the month for their free candy (also known as year end bonuses at the Wall Street Banks).

“CHICKEN LITTLE AIN’T GOT NOTHING ON ME” – THE CONTINUING MORTGAGE FORECLOSURE MESS

Well, as predicted, the regulators are coming out of the woodwork over the robo-foreclosure issue. The OCC, the regulatory agency for banks, is ‘requesting’ that the big boy servicers (BofA, JPMorgan, Wells, Citigroup, HSBC, PNC and US Bank) review their foreclosure practices to see if the person signing the affidavits in foreclosure proceedings had the required knowledge of the facts stated in the affidavit.

To understand the issue at hand, in State’s that have judicial foreclosure, the law requires something like the following:

• The affidavit shall state the facts that establish that the obligor has defaulted in the obligation to make a payment under a specified provision of the mortgage or is otherwise deemed in uncured default under a specified provision of the mortgage.


• The affidavit shall also specify the amounts secured by the lien as of the date of the affidavit and a per diem amount to account for further accrual of the amounts secured by the lien.


• The affidavit shall also state that the appropriate amount of documentary stamp tax and intangible taxes has been paid upon recording of the mortgage, or otherwise paid to the state.


• The affidavit shall also state that the lienholder is the holder of the note and has complied with all preconditions in the note and mortgage to determine the amounts secured by the lien and to initiate the use of the trustee foreclosure procedure.

At issue, then, is what are the requirements of an affidavit. Anderson's Manual for Notaries Public Fifth Edition describes an Affidavit as a "declaration reduced to writing, signed by the affiant, and sworn to BEFORE an officer authorized by law to administer oaths." Blacks Law Dictionary describes an Affidavit as "a written, ex parte statement made or taken under oath BEFORE an officer of the court or a notary public or other person who has been duly authorized so to act."

In several States, notaries are subject to "petty offense" fines for misuse of office. If a notary is signing affidavits without witnessing a signature, the notary is subject to fines.

An affidavit can either be based upon the personal knowledge of the affiant or his or her information and belief. Personal knowledge is the recognition of particular facts by either direct observation or experience. Information and belief is what the affiant feels he or she can state as true, although not based on firsthand knowledge.

So, what does this mean to the servicers? Well, to start, did these servicers have policies and procedures in place that required this two step process, specifically (a) that the affidavit had either personal knowledge or information and belief of the facts in the affidavit, and (b) was the affidavit sworn to BEFORE a notary? Next, were these policies and procedures followed (probably not is what it appears). Lastly, what will be the penalty for failing to following these procedures?

So, it appears that one of the culprits of this new mortgage mess is the notaries working for the foreclosure mills. Like the appraisers of sub-prime mortgage originations past, these “low on the totem pole” service providers just processed without following their own rules. Now it is coming back to haunt the entire industry.

Another party to this trouble is the in-house foreclosure group heads at the servicing companies that signed the affidavits. Did they even have personal knowledge (doubtful) or a good faith information and belief of the facts stated in the affidavit? Again, it will be based upon the policies and procedures in place at these organizations. Whether there was “up-the-line” reporting from the person handling the foreclosure to the person signing the affidavit will be key.

So, as more of the servicers get taken behind the wood-shed, plaintiffs’ attorneys will have a field day with this and the regulators will continue to make political hay. Meanwhile, Joe Homeowner who is in default on his loan gets to watch TV rent free and the securitization investor will be flipping the bill for it all. Maybe hedge fund investors will start to see this . . .or maybe not. Maybe they need more write-offs.

ROBO-FORECLOSURES – A PANDEMIC IN THE MORTGAGE SERVICING INDUSTRY

JPMorgan Chase announced today that they too may have been part of the robotic foreclosure process that Ally Financial acknowledged is a major issue for them. In a memo distributed last night, JP alerted its attorneys that employees in its foreclosure operations may have signed affidavits without the required personal knowledge.

As the third largest servicer in the country, with over $1.3 trillion in its servicing portfolio, even a 0.1% impact would be huge. And that percentage is not out of the realm of financial impact to the company. Litigation exposure, on both the default borrower side as well as investor backlash, together with any regulator penalties, could cost the company millions. JP has taken the same “stiff upper lip” posture as Ally, claiming that the factual information given in the affidavits was accurate and was not affected by whether or not the signer knew the details. So, it will come down to the courts to decide what type of penalty to impose.

And like Ally, JP is now requesting that courts not enter judgments on pending foreclosures until they figure out what was done and how to fix it. Well, there goes securitization investor cash-flow some more as foreclosures get put on extended hold. This will also cost JP money, as it too now has to wait for its reimbursement of funds in the securitization cash-flow waterfall.

It seems that in their race to foreclosure, proper processes were laxed (kind of like the underwriting standards that got the industry into the mess to begin with). I guess it is just boils down to a question of when does “volume–izing” the mortgage industry (be it in origination or servicing) cause policies and procedures to get tossed out of the window.

Well with GMAC Mortgage and JP Morgan now on the hot seat, that just leaves Bank of America, Wells Fargo (that now includes anything from Wachovia), Litton (a/k/a Goldman Sachs), Saxon (a/k/a Morgan Stanley), and all the little fellas (Carrington, American Home, HomEq, etc.) to get put on the rack. And in a politically charged year, the politicians should have a field day with this (unless, of course, they had a “Friend of __________ Loan”). We have already seen California Attorney General Jerry Brown, now running for “Governor Moon Beam – Part Deux,” chime in yesterday.

FLORIDA – THE PLACE TO LIVE (FREE) BUT NOT TO INVEST

Following the announcement by Ally Financial (f/k/a GMAC Mortgage) that it will stop foreclosure proceedings as they sort out their issue of filing improper affidavits, the Florida top court is being ‘asked’ to halt around 80 percent of all foreclosures in the Sunshine State. At issue are the practices of three law firms that have been operating as “foreclosure mills” for servicers. At risk are thousands of final judgments that could be reopened.


U.S. Rep. Alan Grayson (D-Fla.) has asked that the Florida Supreme Court halt foreclosures being handled by the law offices of David J. Stern, Marshall C. Watson, and Shapiro & Fishman. These three major law firms are currently under investigation by the Florida Attorney General over questions about slipshod paperwork practices involving thousands of cases.


The effect of this on securitizations, which could be tied up in court for years, is the possible waterfall impact if the foreclosures are reversed. If the foreclosure is deemed invalid, and the subsequent liquidation of the property following conversion to REO is voided, query whether the trust can seek to have the money previously paid out “clawed back” from investors –say by an off-set to future payments. And what about the write-downs and write offs of mezzanine and sub-bonds that took the Realized Loss upon liquidation.


Given that this is such a mess, it is unlikely that the Court’s will unwind all effected foreclosures. The size of the issue, given that a significant portfolio of loans in the subprime world came out of Florida, would be too dramatic on an already weak financial market. More likely, the Courts will punish the culprits. However, since the three law firms will not be able to withstand the legal liability if found guilty, servicers may also be dragged in for not properly managing the outsourced relationships. Legal liability could attached to the servicers under a negligence standard. Servicers could also be hit with a double whammy if any reversal of a foreclosure could require that the servicer mayd also have to return any reimbursement moneys out of the REO sale proceeds. That would clearly hit their bottom line hard.


Liability insurance providers, specifically E&O issuers for the servicers, as well as the malpractice insurance providers for the three law firms, better start reserving against this exposure, if they can. Exposure could be in the hundreds of millions, if not billions.


And all of this, from the State that gave us the great “chad” issue. I guess doing something properly is not in the nature of some Floridians. Must be all that sunshine.

MORE CRACKS IN THE SYSTEM – ROBO-FORECLOSURES BY SERVICERS MEAN LESS $ TO INVESTORS

Moody’s, the now ever vigilant rating agency, has caught wind of the failure of servicers to properly follow legal procedures when foreclosing on properties. In an announcement this week, the rating agency has decided to review Ally Financial (f/k/a GMAC Mortgage) for downgrade following the servicer's acknowledgement that they may have not been properly preparing foreclosure documents.

In what is commonly referred to as “Robo-foreclosures,” Ally Financial appears to have been filing foreclosure affidavits in court that were not signed by persons with actual knowledge of the facts required for such paperwork. In addition, affidavits were not notarized in the presence of the notary. In its response, a spokesman for Ally was quoted in an article for HousingWire as saying that the substantive content of the foreclosure paperwork, such as loan balance, delinquency and note and mortgage information, did not appear to have been misstated or inaccurate and that Ally believes “that the substantive content of the affidavits in question were factually accurate.” Naturally, it is Ally’s interpretation of what is ‘accurate substantive content’ and what was just ‘procedural errors’ – like due process. And hey, that notary thing – really – it’s like the corporate seal – does anyone really think it’s important these days? And what is it now, a buck? I remember when it was $0.25!

In an attempt to rectify the situation, Ally has suspended evictions on foreclosures where a faulty affidavit was detected. Whether they are closing the barn door after the horse got out is pretty clear. More important is the impact this will have on the securitization structures. With approximately $380 billion under servicing management as of July 31, such a hick-up in foreclosures will mean less money coming back to investors as this mess is fixed. And with plaintiff attorneys more than happy to run cases like this into court and tie up liquidation of the REO property, it looks like everyone, other than the delinquent borrower who will be getting a continuing free ride due to Ally’s slip-up, will be taking it in the shorts. Even Ally, as first in line to receive reimbursements from liquidation proceeds, will have to now wait for their money as these foreclosures are cleaned up. Moody’s will be looking at any rating impact based, at least in part, on this new timeline for foreclosures and REO liquidations and its legal and financial impact to Ally. Should be interesting to see what Ally's policies and procedures said about this.

Maybe GMAC can get some additional TARP money to help out. They still have a few more days before TARP goes away.

FANNIE PUSHING HOMEPATH REO’S SALES

In a press release issued today, Fannie Mae announced that it is incentivizing the market participants to buy their swelling portfolio of REO properties by the end of the year. Selling agents of REO properties purchased from FNMA’s HomePath will receive a $1,500 bonus per sale. This is over and above the 3.5% refund of the final sale price that the homebuyer receives. The push, however, is that the home purchase must be completed by the end of the year to be eligible for these incentives.

So, it looks like Fannie is FIFOing REO inventory. From previous announcements, Fannie has been pushing servicers recently to foreclosure on properties where the borrower occupant has not been working to either modify their loan or transfer title in a deed in lieu - in a July speech, Edward DeMarco, acting director of the Federal Housing Finance Agency, told loss mitigation servicers that, "if you have an abandoned property or a borrower not willing to discuss or work with anything, then get going [and foreclose]”. Now, in order to clean up the books before the end of the year, Fannie is looking to pay their sell brokers an extra vig to move product.

Back in February, Fannie began the 3.5% incentive to buyers of its HomePath properties. HomePath, Fannie’s in-house manager of its foreclosures, also allows for special financing, which could allow buyers to purchase these properties with 3% down.

So, this could spell a bit of a bubble in cash-flow to securitizations which hold the Fannie Mae REO assets. However, with the glut of REO inventory on every servicers books, and HomePath prices not being anything special, it is unclear whether a $1,500 kicker will really help move product. But then again, in this market, any little thing may help.

“SEND THEM TO SCHOOL” – TREASURY'S NEW PROGRAM FOR THE MORBIDLY DEBT LADEN AMERICANS

In his remarks today at the CFED Asset Learning Conference, Assistant Secretary for Financial Institutions Michael Barr announced the Treasury Department’s newest attempt at rectifying the past mistakes of the financial consumer. In conjunction with the Financial Literacy and Education Commission, the Treasury has drafted a concept of core financial competencies for individuals. This ‘baseline’ of knowledge appears to be a way that the Treasury believes will bring financial consumers to a better understanding of what they are getting into.

While knowledge and education are a lofty goal, there has to be some understanding of the ability (or inability) of the financial consumer to be receptive to the program. The mistake of the past was that while a consumer was able to qualify for a loosely underwritten mortgage loan did not mean that such consumer should have been a homeowner. Pressure from the then current administration on down to the consumer’s desire to own a home, together with all the intermediaries (mortgage broker, appraiser, home builder, realtor, Wall Street banker/lawyer, etc.) drove the market into the wall with one huge “SPLAT.” Now, the Treasury believes that showing the consumer what he needs to know will somehow avoid this problem in the future.

One flaw with this concept is the fact that Wall Street, specifically the sub-prime mortgage market for which we have to thank as a significant contributor to the current financial hole we are in, will never want an educated consumer. It is the theory of “Caveat Emptor” or "Let the buyer beware" that fueled the current crisis and allowed those in the game to make vast amounts of money. Feeding these consumers easy credit allowed all involved to run this vast financial machine. Educating the consumer will not bring profits. To show the consumer what was being done would be like showing a person what it actually takes to turn a cow into a hamburger. And how many people really want to know what was in their McLoan or how it was made. Most of these lower income financial consumers (the sub-prime borrower) want something that is easy to swallow, tastes good and is cheap. Unfortunately, they are now experiencing the indigestion that comes from consuming so much “Fast Finance.”

Yet, Mr. Barr believes that Treasury, with the establishment of the Consumer Financial Protection Bureau, can become the home economics trainer of the debt overweight consumer. By putting the unbanked and underbanked consumer (again, the sub-prime borrower) on a “dollar watchers diet” and educating them on how to fiscally shape-up, Mr. Barr stated that this will empower American families and create a level playing field for all providers of consumer financial products and services. “We need to empower consumers to make good choices for themselves and their families. We need to recognize that inertia is a powerful part of human decision. Anything that we can do to create an automated aspect to savings decisions has a lasting impact. How choices are framed and ordered can also have big impacts, which requires us to be intentional about the architecture of choice; defaults are ubiquitous and powerful, so choose the default wisely, and people view gain and loss differently, so an assurance of safety can be an attractive draw to save. These are just a few of the lessons that behavioral economics has taught us about human behavior. These and other lessons should be considered wisely to access and asset building efforts.”

But like a gym membership, it only has an effect on those people that commit to the program for a consistent period of time. However, the financial consumers discussed by Mr. Barr were not the type to educate themselves before entering into significant financial arrangements. They just wanted their McLoan - supersized. Now, they are looking for the magic pill (HAMP) to get them “debt thin” again. But like the promises of so many of those diet pills, loan modifications or debt settlements appear to only work for a limited few. So, while this new education program may work to help a few of the morbidly financial obese that commit to the program, it probably will be like the treadmill in the corner of the basement and will not get most of these borrowers off the couch and stop them from eating “credit Cheetos”, once the shelves are restocked.

TARP – WE HATE TO SEE YOU GO

On September 16, the Congressional Oversight Panel (COP) released its “September Oversight Report Assessing the TARP on the Eve of Its Expiration.” In the report, much is made of public perception and “stigma” of the TARP programs following a failure to meet its lofty goals.

Initially established under the Emergency Economic Stabilization Act of 2008 (EESA) to provide up to $700 billion in financial commitments, TARP was designed to purchase toxic assets of financial institutions. But soon after its roll-out, the TARP checkbook was used to plug any leak, or potential leak, in the financial dike. Banks, even relatively healthy ones, were forced to eat TARP money. AIG got more than its share of TARP cash (that then went circuitously to Goldman Sachs) as did two of the domestic auto makers. Then, in December 2009, under the authority to extend TARP, the Treasury recommitted to focus on the three areas it was initially established for: (i) mortgage foreclosure relief; (ii) small business lending, including funding to small and community banks; and (iii) support for securitization markets through TALF, the Term Asset-Backed Securities Loan Facility. But time is running out for the government program that couldn’t, with a drop dead date of October 3, 2010.

One problem stated in the report is that the wolves guarding the hen-house, namely Treasury and other government agencies, have either failed to issue any meaningful empirical studies to support any analytical assessment of the program or are unable to quantify the effects of TARP because of so much “noise” in the data necessary to analyze its effect. COP noted that due to the nature of the various financial rescue programs implemented by different agencies that were designed to interact with each other, it is difficult to isolating the effects of TARP. Lastly, the large amounts of data needed to conduct the research of the impact of TARP was either not publicly available or not even collected by the Treasury, making any analysis difficult.

While the report cites the various economists that COP consulted with regard to its report, with as many different views as a group of rabbinical students discussing a single point in the Torah, of interest is the general consensus by these economists that while TARP was necessary to stabilize the financial system at its time of crisis, it was mismanaged in its execution. This mismanagement, together with ineffective communication of actions taken, raised public confusion and undermined public trust in the programs rolled out under TARP. In summing up its effectiveness, COP stated that “although the TARP provided critical government support when the financial system was in a severe crisis, its effectiveness at pursuing its broader statutory goals has been far more limited.” And anyone that watches the market knows, it is public perception that makes the Bulls Run and the Bears Attack.

Another point of contention in the report addresses the legacy that the program will leave after expiration, namely Treasury holding billions of private-company securities and the government’s guarantee of “to-big-to-fail” financial institutions, which the commission acknowledges that even after the provisions in the Dodd-Frank Act, will be difficult to unwind.

What will be interesting to see are the last minute, race to the finish line, programs that Treasury will pump out before TARP expires. Its enacting legislation, specifically section 106(e) of EESA, provides that Treasury can continue to fund its commitments after October 3, so long as those commitments were made prior to such date. Of all the programs instituted under TARP, the ever so questionably effective HAMP (Homeowners Assistance Modification Program) is the largest commitment. While certain aspects of HAMP will be limited following October 3, including cutting off any new servicers to HAMP, Treasury has indicated that it will be changing the purchase price calculation under HAMP from a fixed dollar amount to a formula. Expect that to be established before October 3. Other than re-giggering HAMP, the COP report states that while less than $5 billion has been disbursed on housing programs, Treasury has the ability to disburse up to $45.6 billion that are not intended to be recovered under HAMP or the other housing programs.

To conclude, while there will be a number of readings of the COP’s report, and the depth of the impact of TARP will be felt for years forward, the following are some of the more salient statements made by the Panel in the report:

• Thus, the greatest consequence of the TARP may be that the government has lost some of its ability to respond to financial crises.

• The fact that the government chose not to impose such stringent costs upon TARP recipients [putting distressed banks into liquidation or receivership] meant that the program’s moral hazard costs were much greater than necessary.

• Treasury did not monitor lending at the individual TARP recipient level, however, nor require CPP [Capital Purchase Program for Banks] recipients to report on their use of funds, so these results can not be independently verified.

• HAMP remains the cornerstone of Treasury’s foreclosure mitigation efforts. . . Unfortunately, despite Treasury’s efforts to collect meaningful data in this area, there remains important questions about why such a large number of trial modifications have failed to convert to permanent modifications.

• These differences [between the assistance given to the financial sector and the auto industry] have raised questions about whether the government inappropriately blurred the line between its role as a policy-maker and its role as an investor.

• Treasury therefore used the TARP’s extension more to extend the government’s implicit guarantee of the financial system than to address the specific economic problems that the Secretary cited as justification for the extension.

I guess, in the end, it will just be interesting to see where the players behind TARP in Washington end up after October (or November 2012). Let’s see, Goldman Sachs' inside man Henry Paulson is now at the Paul H. Nitze School of Advanced International Studies at Johns Hopkins University, and his trusty side-kick, Neel Kashkari, is now at PIMCO.

FORECLOSURE DROPS HOUSE VALUE GREATEST

In a soon to be released research publication by economists from MIT and Harvard, foreclosures appear to have the greatest negative impact on the value of a home, as compared to other forced sales. The article, entitled “Forced Sales and House Prices” is to be published in the American Economic Review and was written by MIT researcher Parag Pathak and Harvard researchers John Cambell and Stefano Giglio.

Based on data of 1.8 million home sales in Massachusetts from 1987 to 2009, the research found that the value of a home dropped by 27 percent when sold in foreclosure, as compared to 5 to 7 percent when sold due to death of the owner and 3 percent when sold due to bankruptcy of the owner. In addition, the research found that sellers of non-distressed occupied properties took a hit in their price if sold in a neighborhood that had a foreclosed home on the market. It was found that the value of a home dropped by 1 percent, on average, if it was within approximately 250 feet of a foreclosed home. And I would assume that in certain areas, like Detroit, the “blight” factor increases that percentage significantly.

So, what does this mean to the securitization investor. That once again, foreclosure is not in the best interest of the investor. Not only is the investor put in the back of the line for cash on the liquidation of the loan, with the trustee and servicer placed ahead of the investor for reimbursement of fees, expenses and advances, but the amount to be collected will be significantly discounted. Therefore, a modification would serve the investor better. However, the servicer does not have the economic interest in having the modification work. Based upon the rate of re-default, cost of modification, necessity to advance and the servicers general inability to act as a mortgage underwriter, servicers would rather hand over the loan to a foreclosure attorney for a fast turn of the underlying property.

More proof that the investor is the once taking the hit. And they don’t even know it.

THE BOND INSURERS WEIGH IN ON REPURCHASES

From a September 13 Bloomberg article by Hugh Son, it appears that the Association of Financial Guaranty Insurers (made up of Ambac, Assured Guaranty and several of the other large insurers) fired a letter off to Bank of America’s Chief Executive Officer Brian T. Moynihan claiming that more than half of the soured home-equity credit lines and residential mortgages created from 2005 through 2007 that insurers examined should be bought back.

Clearly, the insurers feel that they should not be on the hook for these problem mortgages and the payments they have made or will have to make for the failure of the underlying MBS securities which they insured. And even more clearly is their attempt to jump on the bandwagon of “who’s to blame and who is to pay.”

With most of the mortgage companies gone (can’t really go after Ameriquest, New Century, Fremont, etc. . . .etc. . .etc), the only guy in the room with some cash is BofA, having to pay for their stepping into Angelo Mozilo’s shoes at Countrywide. What is interesting is that the repurchase number being thrown around is between $10 and $20 billion, which is only about 2.5% to 5% of Countrywide’s reported production of $400 billion for 2007. It appears that somewhere the numbers don’t seem right.

As was noted in the article, the battle for repurchases is tedious, with the legal fights having to be done literally hand-to-hand (loan by loan basis). To “back of the envelope this, on a $20 billion portfolio of repurchase loans with an average loan balance of say $200,000, we are talking about 100,000 loans. In court, the party demanding repurchase has to show why a specific loan has to be repurchased. It’s not that the loan is in default, but rather that the loan violated a specific representation or warranty set forth in the pooling and servicing agreement, usually at the time of origination of the loan. And each of the 100,000 loans has to be individually shown by the party requesting repurchase to have breached a specific representation. I have seen this in practice at Fremont. It’s as if the repurchase requesting party is trying to storm a castle, one arrow at a time. All BofA has to do is stand at the wall and wait for this war of attrition to fade away.

Generally, there were more than 50 representations and warranties relating to the mortgage loans in the pooling and servicing agreements, of which maybe a dozen or so could be substantive to a repurchase request. Therefore, the man-hours needed to develop the repurchase request for 100,000 loans would be difficult, at best. And who pays for the cost of developing the repurchase request? The pooling and servicing agreements generally provide for servicer and trustee reimbursement of costs, but it is unclear if other third parties would have an ability to recoup costs. That makes enforcement of repurchases somewhat challenging.

So, with BofA being one of the only players left, why not pile it on. “Buck Buck Number 9 coming in”

The Bloomberg article can be seen at http://www.bloomberg.com/news/2010-09-13/bofa-may-owe-20-billion-in-mortgage-buybacks-insurers-say.html.

FHA “QUICKY” REFINANCE PROGRAM STARTS TODAY

September 7, the day after Labor Day this year, and the mortgage market returns from a weekend of hotdogs and back-yard football games to a new “let’s hope this works” program of the FHA.

Back in August, HUD secretary Shaun Donovan talked about the launch of a new "FHA Short Refinance" program. Initially unveiled to the public on August 3 while speaking at the National Association of Real Estate Brokers Conference in Fort Worth, Texas, the plan outlined would provide a new form of refinancing option to underwater homeowners. Eligibility for the new loan would require that the homeowner (i) be underwater but still current on the mortgage and (ii) have a credit score of 500 or better. In addition, once refinanced and insured by the FHA, the new refinanced first lien loan must have a loan-to-value ratio of no more than 97.75% and the borrower’s combined loan-to-value ratio be no more than 115%. Since the new FHA mortgage can only be used to refinance the unpaid principal balance on the first lien, any second lien has to be written down to meet the CLTV requirement.

The biggest hurdle to the program, however, appears to be the requirement that the existing first-lien holder (the securitization trust in most cases) must agree to write down at least 10% of the unpaid principal balance, and it must bring the borrower's combined loan-to-value ratio on that first mortgage to no more than 115%. Servicers will have to look at the “imminent default” provision of the Pooling and Servicing Agreements to allow them to “write down” this principal without fear of investor litigation.

Questions abound as to the practicality of this program. How a borrower that is current, as required by the program, could be deemed to be in imminent default? Since the CLTV requirement is 115%, isn’t it possible that there may be situations that the first lien holder would have to take the 10% write down while the second would not be impacted? What is the value to be used for the LTV and CLTV calculations? Would the new appraisal/value also have to capture any advances that were previously made by the servicer on the loan in order to keep the calculation in balance? How is this write-down deemed allowable in the securitization structure, since it is not technically a “write-down” of the balance of the current loan, but rather a substitution of a new loan with an LTV of 97.75% and probably different terms? Don’t the Pooling and Servicing Agreements limit subsititutions?

The Treasury Department has committed $14 billion in TARP funds for this program. Together with the FHA insurance, these new refinanced loans will have a government guarantee for up to 97.75% of the new home value. It appears at this point, however, that this “quicky” program only applied to non-GSE loans, probably based upon some circular nature if it had. So, not only can the first lien loan to be refinanced not be an FHA loan, it appears that the Treasury has not cleared the GSEs to write-down underwater loans.

According to HUD, it appears that the TARP funds are a way for the servicers of these non-GSE securitization products to support write-downs and write-offs of mortgages and to provide coverage for a share of potential losses on these new loans. Therefore, this program is really a way that the government means to incentivize the servicers to make these refinancings.

So, it looks like we have another “Quick Snap Hail Mary” pass from the quarterbacks in Washington. And while this one looks like it will end up thrown out of bounds, with no receivers in site, it appears that the only “short(s)” in this refinance program are the ones the investors are going to take it in . . .

THE PLAY ON ALT-A SECURITIZATIONS – LET THE GAMES BEGIN (AGAIN)

In an article today in the Wall Street Journal by Prabha Natarajan, it looks like there is a renewed interest and demand for previously issued Alt-A securitization paper. While unclear, it appears these non-agency bonds include the sub-prime variety (there is some distinction between Alt-A and true sub-prime, which appears to have been lost in the recent financial hurricane).

As reported, in was stated by Jesse Litbvak, head of non-agency trading and Jefferies & Co in Stanford, CT (an MBS trading powerhouse?) that these trades are occurring because investors believe that the credit risk of continuing defaults are already priced into the bonds. That, together with the prospect of early redemption, as noted in the article by Matt Toms, head of U.S. public fixed income investment at ING Investment Management, means that the bonds have up-side potential.

Well, as we have seen from our recent past, that is anything but a sure thing. Of significance to this analysis of the value of the bonds is the redemption of the bonds before their maturity date. Currently, due to the refinance boom (or really, bubble), the bonds can be redeemed at their face value due to the early payment of the underlying mortgages. Where in the past, early redemption was something to be avoided (when the investor was paying 105 for the bond), now at the discount of 60-80, a redemption at face would be a good thing. And since in most securitizations, early payments are covered in the cash flow waterfall as a payment to the most senior bonds first, the AAA stand in line to get theirs before the rest.

Right now, with interest rates at historic lows, there has been an increasing portfolio of mortgages being paid off in the refinance market. However, this is still just a limited and decreasing pool of applicants. Beyond the fact that there are only a decreasing percentage of homeowners that will qualify for a refinancing over time, there is also the issue of whether the underlying mortgages are still tied to those ugly prepayment penalties that were the rage in the latter part of the Alt-A and sub-prime boom. And the only way to know that fact is to have loan level detail of the pool. So, while redemptions may be occurring today, do not expect this trend to continue strongly into the future.

The article discusses the fact that the play now is on the AAA bonds off the securitizations – yes those same AAA bonds that now everyone is questioning how the rating agencies reached that rating. More problematic will be the coming tsunami of realized losses on the securitization pools due to short sales and foreclosures that are then liquidated. With the failure of HAMP, HAFA, HALA and all the other programs to stem the tide, foreclosure still seems to be the outcome for a significant number of borrowers. Even Fannie is starting to put pressure on servicers to quicken the pace of foreclosures, as discussed in an article today entitled “Excessively Delaying Fannie Mae Foreclosures Will Now Cost Servicers” by Jacob Gaffney in HousingWire. And once the property is thereafter sold (at a loss to the unpaid principal balance of the loan plus costs and reimbursed advances), these “Realized Losses”, as defined in the securitization trust agreements, could press the losses beyond the mezzanine tranches and into the AAA bonds.

So, while the yields on these bonds may be double that of corporate paper and triple that of Treasurys, it looks like Wall Street is selling investors on stepping up to the tables and laying down money to roll the dice again. Let’s hope we don’t crap out (again).

FANNIE MAE - PUMPING UP THE VOLUME

And the beat goes on. Fannie Mae has reported issuing $42.7 billion in MBS in July, showing an increase of 6.4% from June production. In comparison, Fannie’s kissing cousin, Freddie Mac, is showing a month-to-month decline.


While Fannie does not break out purchases of refinanced loans in its monthly reports, its monthly report shows MBS issuance slowly rising from May, clearly based on the recent surge in refinancing applications. As reported by the Mortgage Bankers Association, by the end of July, refinancing applications hit a 13-month high. Since these applications would then show up in MBS issuances in August and September GSE reports, we can assume that more good news is around the corner as this trend continues for the short term.

And where is this product going? Well, the ice cold grip of the MBS investor may be starting to thaw. MBS, especially those paying higher rates of interest than comparable Treasurys (currently at about 150 basis points over), are being looked at by the MBS investor needing to invest cash and take advantage of the higher yields. Given the cleaner underwriting standards for the underlying product, together with prepayment speeds reportedly being somewhat flat, investors may be willing to put more than a toe in the market pool. And though roughly 25% of all outstanding mortgages are reported to be under water with a national delinquency rate of just under 10%, it appears from industry figures that mortgagors are continuing to pay their loans even though they are under water. This is in spite of the fact that these borrowers may not be able to refinance because they have no equity, or cannot qualify for a modification.

So, it appears that the two porch dogs that people have been liking to kick these days appear to be doing what they are suppose to do. Which is to watch out for the old homestead.

JUST WHAT WE NEED – AN FDIC FOR THE ASSET-BACK WORLD

From an article published Monday by Donna Borak for the American Banker, there appears to be a soon to-be-published paper written by two Federal Reserve Board economists — Wayne Passmore and Diana Hancock - proposing the establishment of an FDIC-like entity to explicitly price an insurance fund created to cover catastrophic risks on a wide range of asset classes, including mortgages, credit cards and auto loans. As reported by Ms. Borak, these economists believe that this explicit form of “backstop” could ensure the stability of the system in future financial crises and help eliminate the concept of "too big to fail" institutions. This seems to follow the discussions reported from the Treasury Department conference last week, where there appears to be some discussion of the creation of an insurance fund for MBS.


The paper envisions a GSE agency (a re-jiggered Fannie, Freddie, or a combination of the two) taking on the responsibility for running the insurance fund. This newly designed GSE, however, could not sell its own unsecured debt or build a mortgage portfolio. Rather, it would just collect the guarantee fee. But rather than using those fees for profit, as they have in the past, this GSE would simply build up a fund, like the Deposit Insurance Fund, to absorb losses in a crisis.

It appears that the proposal would get rid of the implicit guarantee of the Federal Government since the GSEs would no longer be able to sell debt or hold portfolios. Instead, the guarantee would be explicit for specified asset types that the government could define. By doing so, the proposal believes that these GSEs could restrict the guarantee to relatively safe loans with certain underwriting standards.

Where to start? While it is a valiant effort to put the GSE into the role of the private asset backed insurers, wasn’t the whole point of Fannie and Freddie to have the implicit guarantee of the U.S. government to allow for better pricing on the more risky loans. And so this proposal just pulls this business out of the private sector – for cost efficiencies?? Because the government can do a better job of this than the private sector?

And how do you structure the “club” function of the FDIC for the ABS world – the infamous “bank take-over” function that the FDIC has been using in record application for the last two years. To take over the securitization structure? From the Trustee (who structurally is brain dead already and has no real functional responsibilities)? From the servicer? Because this new agency will be better positioned to service multi-billion dollar pools? That is what Fannie and Freddie are trying to manage in the current melt-down. The FDIC has the ability to take on a failed bank to manage the turn-around and protect its insurance fund - which it has been doing pretty successfully, given the size of the financial crisis it has been managing to date.

I guess we will have to wait and see the full read of this mystery paper to better understand what is being proposed and how it may help avoid the next asset-back melt-down.

To read the full article by Ms. Borak, see:

http://www.americanbanker.com/issues/175_161/backstop-for-abs-markets-1024428-1.html

YIELD SPREAD PREMIUM – GONE BUT NOT FORGOTTEN

YIELD SPREAD PREMIUM: YSP, that little understood compensation provision that provided the ultimate incentive to mortgage brokers to put consumers into higher priced mortgage loans. Brokers argued that it was frequently done for the borrower, especially a low-income buyer, to pay a higher interest rate in exchange for lower closing costs (needing less cash to closing). Did we really need more gas on the fire??


NOT A PREDATORY LENDING PRACTICE: The California Court of Appeals found that the payment of YSP was not a predatory lending practice in Wolski vs. Fremont Investment & Loan (where I was Deputy General Counsel). In its determination, the court found that a covered loan under the California Covered Loan Law had to have total points and fees payable by the consumer at or before closing in exceed 6 percent of the total loan amount. The court explained that Yield Spread Premium (i) was a bonus paid by a lender to a broker for delivering a loan with an interest higher than minimum otherwise approved by the lender, and (ii) that the payment was not made at or before the closing. The appellate court reasoned that the meaning of the phrase "at or before closing" was unambiguous and "does not include payments made after closing and over the life of the loan, such as interest." So, the court reasoned that the added interest over the life of the loan to be paid by the borrower to the lender was to be used by the lender to pay the mortgage broker a bonus at the time of the closing of the loan.

THE NEW RULE: Now, the Federal Reserve has stepped in to end this practice as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Reform Act”) by adopting new rules banning yield spread premiums. Provisions of the Reform Act amend the Truth in Lending Act (“TILA”) by imposing restrictions on loan originator compensation and on steering by loan originators. The final rules issued by the Fed on Monday prohibit payments to loan originators, which includes mortgage brokers and loan officers, based on the terms or conditions of the transaction other than the amount of credit extended. The final rules further prohibit any person other than the consumer from paying compensation to a loan originator in a transaction where the consumer pays the loan originator directly. The finalized rules also prohibit loan originators from steering consumers to consummate a loan not in their interest based on the fact that the loan originator will receive greater compensation for such loan.

START DATE: The final rules apply to closed-end transactions secured by a dwelling where the creditor receives a loan application on or after April 1, 2011. This allows for a bit of continuation of the YSP practice as the economy works through this “refi” bubble now going on. There is also a record retention requirement of two years for all mortgage transactions consummated following the April 2011 start date.

WHO IS COVERED: The final rule applies to loan originators, which are defined to include mortgage brokers, including mortgage broker companies that close loans in their own names in table-funded transactions, and employees of creditors that originate loans (e.g., loan officers). Therefore, only parties who arrange, negotiate, or obtain an extension of mortgage credit for a consumer in return for compensation or other monetary gain are covered by the new rules. Creditors are excluded from the definition of a loan originator when they do not use table funding, whether they are a depository institution or a non-depository mortgage company. However, employees of such entities are loan originators.

As a little caveat, the final rule only applies to extensions of consumer credit and does not cover servicer modifications on an existing loans on behalf of the current owner of the loan. This final rule does not apply if a modification of an existing obligation’s terms does not constitute a refinancing. A question though outstanding is, while HAMP may not be covered, is HARP covered by these new rules?

THE KEY PROVISION OF THE ANTI-STEERING RULE:

(e) . . .
(3) . . .
(i) The loan originator must obtain loan options from a significant number of the creditors with which the originator regularly does business and, for each type of transaction in which the consumer expressed an interest, must present the consumer with loan options that include:
(A) The loan with the lowest interest rate;
(B) The loan with the lowest interest rate without negative amortization, a prepayment penalty, interest-only payments, a balloon payment in the first 7 years of the life of the loan, a demand feature, shared equity, or shared appreciation; or, in the case of a reverse mortgage, a loan without a prepayment penalty, or shared equity or shared appreciation; and
(C) The loan with the lowest total dollar amount for origination points or fees and discount points.
(ii) The loan originator must have a good faith belief that the options presented to the consumer pursuant to paragraph (e)(3)(i) of this section are loans for which the consumer likely qualifies.

THE FUTURE: There are still some holes in the Reg. Z that need to be patched, as acknowledged by the Fed. One of the more significant is the ability of brokers to be compensated based upon volume. Naturally, this could lead to the “flight to quantity over quality” that was seen in the past. Also, since the allowable compensation will be based upon the amount of credit extended, given the underwater equity positions, if and when underwriting requirements start to loosen, returning to a 125 LTV product (or its successor) may challenge the new rules once again. And while “tier compensation” has been addressed in the new rules, under the final rule, a consumer may finance upfront costs, such as third-party settlement costs, by increasing or “buying up” the interest rate regardless of whether the consumer pays the loan originator directly or the creditor pays the loan originator’s compensation. Thus, the final rule does not prohibit creditors or loan originators from using the interest rate to cover upfront closing costs, as long as any creditor-paid compensation retained by the originator does not vary based on the transaction’s terms or conditions. This could also lead to abuses.

So, in the end, the Fed has created another level of regulatory hoops in the mortgage business. And like with all of these new regulations, it is going to be the enforcement that will actually bring about change. So, will Congress let this dog to hunt by giving government enforcement teeth? Or will it just turn out to be posturing for another four years of administrative quagmire?

FANNIE’S “DEED FOR LEASE™” PROGRAM - THE RIGHT STEP IN THE RIGHT DIRECTION

One of the lesser known programs in the Fannie Mae arsenal of borrower help programs is the Deed for Lease™ program initially announced in November 2009. The program allows borrowers facing foreclosure and eviction to stay in their homes while providing continuing cash flow on the asset after it is returned to the investor.


The program was designed for borrowers who do not qualify for or have not been able to sustain other loan-workout solutions, such as a modification. Under the Deed for Lease™, borrowers transfer their property to the lender by completing a deed in lieu of foreclosure, and then lease back the house at current market rate. To participate in the program, borrowers must live in the home as their primary residence and must be released from any subordinate liens on the property. As part of the program, borrowers must be able to document that the new market rental rate is no more than 31% of their gross income. Leases under the program may be up to 12 months, with the possibility of term renewal or month-to-month extensions after that period. As with Fannie’s program for tenant occupied properties that are foreclosed, the Deed for Lease™ property that is subsequently sold includes an assignment of the lease to the buyer.

This appears to be a true “win-win” situation for all involved, including the servicer and the investor. First and foremost, it keeps the borrower/tenant in the home. The displacement factor has never been properly addressed in those situations where a permanent modification or refinancing (HAMP or HARP) are not involved. HALA, and the new Fannie Mae’s version that goes into effect August 1, at best provides a “cash for keys” provision in certain circumstances. That sometimes leads to the “missing toilets and countertop” syndrome as borrowers leave the property.

Next, unlike the HAMP or HARP, the servicer no longer has to worry about advancing on the mortgage loan. Since the start of HAMP, there has always been an issue of borrowers who initially qualify for the modification and then fall back into default. Since the servicer is required in most cases to advance on the mortgage, a modification and then subsequent default would put the servicer back (technically) in the position of having to advance again. Since the loan has been discharged as part of the deed in lieu, servicers are not required to continue to advance. Therefore, the cash flow of the servicer improves. Now, it is just a matter of the servicer selling the property, which came at the reduced cost as compared to foreclosure. And since it can be marketed as an investment property with a tenant already in place, sales should be easier.

And finally, the investor under this program should be getting some form of current cash flow from the rental income off the property, though probably not as much as the mortgage payment. But then again, the borrower was already in default and the servicer was probably not making any payments on the loan, so the investor was probably getting bubkis anyhow.

On the social side of the issue, it is clear that the significant problem that brought about the entire meltdown of the mortgage (and financial) markets was the concept that not every person that qualified for a mortgage should have been a home-owner. No matter which side of the aisle you sit on, the general consensus has always been that the market drive to put people into homes, especially the sub-prime borrower, was not the best founded concept. By readjusting those people caught, by their own errors or by a frenzied market, into a better situation with a minimal of personal trauma, is a good thing for the market.

So, Fannie Mae’s Deed For Lease™ is a program that, if properly executed by servicers, could bring about a dramatic turn in the continuing problems faced in the market today. Let’s hope they catch on.

FNMA THROWS THE UNDERWATER BORROWERS A LIFE SAVER

        Think about it - if you're underwater, what is a life saver going to do but float above you out of your reach . . it is not going to help you stay afloat. That is what FNMA is proposing with its bulletin to lenders on April 14 providing that borrowers that take a short sale in following with Obama administration's Home Affordable Foreclosure Alternatives program (HAFA) could be eligible for a new FNMA loan in two years, rather than the four years currently in place.
         By relaxing the rules that would otherwise prevented loan applicants who have participated in short sales or deeds in lieu of foreclosure from obtaining a new mortgage for four years (five if the home actually goes to foreclosure), FNMA thinks that this will entice troubled borrowers to work out solutions that avoid the heavy costs of foreclosure.
         But that qualification is with strings attached. Beyond the issue of not being able to qualify because of damaged credit from a short sale or deed in lieu, which will be on the borrower's credit well beyond two years (foreclosures and short sales generally have the same effect on a borrower's credit), the two year qualification provides that the "resurrected" borrower be able to put down 20% for the new loan - unless there are "extenuating" circumstances.
         Now, we are dealing with people that cannot make current monthly mortgage payments, yet FNMA thinks that in two years, there people will somehow be able to make a 20% down-payment, after they lost any equity they had in the home they just lost. From where???? 
         Actually, the only benefit I see is that these people that can make the 20% down will be able to do so by re-adjusting their finances to purchasing a house that they actually can afford. But something tells me most of these people will not be able to make this adjustment, or the required down payment.
         Now, there is the "extenuating" circumstances provision that allows for only a 10% down payment if the borrower entered into the short sale or deed in lieu because of a significant financial occurance like a lost job, medical expenses or divorce. But just how large is that population of borrowers, and it still doesn't get past the credit damage issue (which would probably be worse in these situations anyhow). And again, these borrwers have suffered some major financial occurance, yet FNMA thinks that they will be able to pull together a 10% down payment in two years??? Bless them if they can.
          So, who wins? Well, the servicers (and their parent organizations), not the borrower. By getting a borrower to agree to a deed in lieu, the servicer gets the borrower out of the home quickly, allowing for fast turnaround for a sale of the property. It also directs a borrower away from a possible loan modification (even a temporary one) with a promise that the borrower MAY be able to qualify for a new home loan in two years. This means no more advancing on the loan by the servicer. And the servicer avoids those costly foreclosure expenses (and any litigation that arises from it).
         Well, lets hope that this life saver is wintery mint and not cinnamon, so the borrower's breath won't stink when he screams.