ANOTHER CHEF IN THE KITCHEN – N.Y. FED RESERVE TO WORK OUT KINK IN SECURITIZATION SYSTEM

In its desire to make corrections in the system with the hope of reinvigorating the secondary market for mortgage backed securities, it has been reported that the Federal Reserve Bank of New York is meeting with key players in the securitization market. This corresponds to the release of a paper last week authored by two members of the Federal Reserve of New York and two outside parties. The paper, titled “A Foreclosure Crisis”, simplistically highlights one of the current problems with the mortgage foreclosure process. While no specific remedies are discussed, the paper looks at the procedural requirements relating to the security interest (the mortgage) tied to the debt (the note) and the “chain of title” requirements when recording the mortgage.

The paper questions the state of the recording laws. The failure of these regulations to keep up with “modern financial practices and technological developments” is the crux of the paper. The authors also direct attention to the complexity of the securitization structures in order to meet the requirement of these more arcane regulations as well as the use of the Mortgage Electronic Registration System (MERS). As we all remember, the “MERS Issue” initially started the whole foreclosure problem, as plaintiffs’ lawyers tried that “razzle-dazzle” to confuse the judiciary as to the rights of servicers to foreclose on delinquent borrowers. The MERS issue also caught servicers not following the requirements of getting proper chain of title documents filed before instituting foreclosure actions.  

The paper heavily cites the congressional testimony of Mark Kaufman, Commissioner of the Maryland Office of Financial Regulation, before the House of Representative’s Committee on Oversight and Government Reform on March 8, 2011. In his testimony, Mr. Kaufman noted that the separation of the origination of a mortgage loan from its servicing “may have facilitated the flow of cheap capital, but [it] also fragmented roles, distorted market incentives, and severely complicated the task of modifying loans to avoid preventable foreclosures.”

Likewise, Mr. Kaufman’s testimony cited in the paper acknowledges that the economies of scale brought on by this securitization and the use of third party servicers drove the consolidation of the mortgage servicing business. This allowed the top five servicers to control almost 60% of the market today, nearly double that from 2000. Mr. Kaufman’s testimony also noted the importance of federal attention to this matter, since the largest servicers are federally supervised entities.

The paper concludes with the state of development for clarifying the current laws and current efforts to revise them. Two organizations, the Uniform Law Commission and the American Law Institute, through their joint Permanent Editorial Board of the UCC, issued a draft report explaining the application of the rules in both Articles 3 and Article 9 of the UCC to provide (i) guidance in identifying the person who is entitled to enforce the payment obligation of the maker of a mortgage note, and to whom the maker owes that obligation; and (ii) determining who owns the rights represented by the note and mortgage.

So, while the chain of title for the recording of mortgages may have gotten rusty from neglect and the individual links may have gotten bent from abuse, it appears that some people are now willing to take on the task of fixing the chain. For if this chain was to break, the 800 lb mortgage gorilla might truly get loose and cause more serious damage to the economy.

To read the paper ”A foreclosure Crisis” by Thomas Baxter, Stephanie Heller, Frederick Miller and Linda Rusch, go to http://www.newyorkfed.org/banking/consumerprotection/a_foreclosure_crisis.pdf

To read the testimony of Mark Kaufman, go to http://www.dllr.maryland.gov/finance/comm/speech-kaufman-03082011.doc.

DEAD CAT BOUNCE . . .AND BOUNCE . . .AND BOUNCE – DISTRESSED HOUSE SALES CONTINUE TO DEPRESS MARKET

In a report by Corelogics, the housing market’s statistical arm, year-over-year declines in housing prices are continuing. At heart to this decline is the ongoing depression of the housing market based on the discounting of homes sold as REO or otherwise from distress (short sales). This ties to the analysis by the National Association of Realtors (NAR) stating that up to 40 percent of existing-home sales in  March were REO and short sale properties. This is up from 39 percent in February and 35 percent in March 2010. This increase in the share of sales in the market is causing the median home price to continue to drop. NAR tags the discount of a distress home at about 20 percent.

This follows NAR’s chief economist, Lawrence Yun’s statement in April that “existing-home sales have risen in six of the past eight months, so we’re clearly on a recovery path." "With rising jobs and excellent affordability conditions, we project moderate improvements into 2012, but not every month will show a gain – primarily because some buyers are finding it too difficult to obtain a mortgage.

An interesting note is NAR’s finding that investors accounted for 21 percent of first quarter transactions, up from 18 percent a year ago. When balanced with the fact that first time home buyer percentage slipped 10 percent to 32 percent, the economics of the price slide take over. In its press release on April 20, the NAR also stated that the share of all-cash purchases rose to 35 percent in March, having grown from 33 percent in February and 27 percent in March 2010. So, it looks like investors are starting to get back in deeper as prices continue to slide.

What does that mean to the securitizations. Well, less money is still less money. So, securitization investors will continue to take the hair cuts on cashflow as sale prices for these properties continue to slide. Add to this the costs that servicers will now pass through as foreclosure practices are changed following the Consent Orders and soon to be decided Attorneys General actions, and the “flow” will start looking like a trickle.

On the upside, at least for servicers if investor appetite continues to grow, is the speed at which trusts can sell the REO property or get the short sale done. This should help the servicers recover their advances and costs faster. Given that carry costs on funds expended usually cannot be charged to the securitization trust, any increase in the speed for the return of capital helps the servicer. Whether or not this “velocity to sale” balances the expected slow-down in the foreclosure process due to the implementation of new policies and procedures, however, is yet to be seen.

Another benefit to servicers is through the continued depression of sale prices for these distressed sales. As sale prices continue to slide, servicers will then have more statistical ammunition when it comes to the determination of “non-recoverability”. Or stated another way, less money on the sale means less money being advanced prior to foreclosure.  

So, like those reality TV shows about people buying abandoned storage units, keen eyed (or just plain lucky) buyers can find gems. The storage company gets a least some of it money back. We just try not to think about the family that lost its stuff. That doesn’t make good TV.

THE PERSON WHO WOULDN’T BE KING – REPUBLICANS TO SHOOT DOWN ANY CFPB APPOINTEES

In classic “Hill” style, 44 Republican Senators issued their writ to President Obama, stating that changes to the director position of the Consumer Financial Protection Bureau (CFPB) need to be made before they will confirm any nominee for the position. At the heart of the Republicans’ position is the establishment of a board, rather than the appointment of an individual, to preside over the CFPB. In what may be the most powerful regulatory body to have been established in the past century, Congress is looking to make sure that power is not centered in the hands of a single individual.

The CFPB was established under the new Dodd-Frank Act to regulate any person or business that provides “a financial product or service”. This bureau would then have ultimate regulatory, supervisory, investigative and enforcement powers over the entire financial products industry, including the decimated mortgage industry. And the director of this bureau would have ultimate power over pretty much the entire financial landscape, including Wall Street.

Adding to the requirement that the CFPB be ruled by a board of directors and not a single individual, Republicans are also pushing for the bureau to be subject to the appropriations process. Rather than submitting financial reports twice a year to justify its prior year’s budget, the Senators want to see the CFPB be subject to the same purse string issues as the SEC. Regrettably, we have seen how that has played out in the past. 

So, Senate Republicans are looking to do a little horse trading for board positions. Add to this the requirement that the CFPB be kept on a tight leash for money. It looks like opening day for the CFPB may be delayed from its July 21 start date. Let’s hope it is not a complete failure to launch . . . or worse.  

“IT’S NOT SOMETHING THAT’S TOTALLY UNEXPECTED” – MOODY’S DOWNGRADES BofA SERVICING

In the continuing question of why anyone would want to manage the servicing of mortgage loans in this day and age, Moody’s took the step they had initially warned about in October of last year by downgrading the servicing rating of Bank of America on its prime, subprime and second lien mortgage loans as well as for its special servicer rating.
 

The rating, referred to as SQ or Servicer Quality ratings, has a high score of SQ1 and a bottom of SQ5. BofA’s servicer rating had been at the high category of SQ1. The recent downgrade puts BofA at SQ2. Moody’s SQ review covers at least nine areas of servicing functions, including management, staff experience/training/compensation, loan administration, arrears management, loss mitigation, IT systems/reporting, general quality and guidelines and financial stability. The weighting of these factors depends on whether the rating is for the Servicer as primary, special or master servicer. In the case of BofA, it was as primary servicer.

 

And BofA is not out of the woods yet. Moody’s has stated that BofA remains under review for further downgrade due to their foreclosure process.  Given the complete disarray of the loss mitigation systems, as well as claims that the staff of the servicing shops are overwhelmed and inadequately trained, it is not surprising that BofA expected this downgrade.

                                               

However, as one of the largest servicing portfolios with 13.3 million loans under management (excluding REOs), this little speed bump will not slow down the massive servicing structure. With new management recently put into place, as well as compliance with the recent Consent Order signed by BofA with the OCC and the Federal Reserve, things may start looking up for the servicing group. Whether or not they can make money at this side of the business is another question.  The trick is cost containment while the portfolio continues to be stressed by delinquencies, short sales, foreclosures and  aggressive plaintiff litigants who want homes for free. Infrastructure building, with clear policies and procedures, training and auditing is the only way to clear this up.