Wednesday, November 17, 2010

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.

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SASA provides complete analysis of regulatory and contractual obligations of securitized assets. Originator, Depositor, Master Trustee/ Trustee and Servicer requirements "Mapped and Tracked." Go to http://www.assetback.net

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