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.”
Thursday, October 28, 2010
Thursday, October 14, 2010
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.
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.
Tuesday, October 12, 2010
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.
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.
Sunday, October 10, 2010
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.
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.
Thursday, October 7, 2010
“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!
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!
Tuesday, October 5, 2010
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??
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??
Monday, October 4, 2010
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.
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.
Saturday, October 2, 2010
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).
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).
Friday, October 1, 2010
“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.
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.
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