THE HARDEST HIT FUND – TAXPAYER CASH FOR PRINCIPAL WRITE-DOWNS

In its efforts to stop the proverbial plane from nose-diving into the ocean, the Obama administration back in February of last year put forth the Hardest Hit Fund (“HHF”), a $1.5 billion taxpayer backed initiative to allow state housing authorities to come up with “innovative measures” to help homeowners in the most hardest hit states. First in line were California, Florida, Arizona, Michigan and Nevada.

 Now it appears that Wells Fargo is looking to help out Arizona underwater homeowners by using some of the HHF money to provide for principal reductions. In an announcement that it is in talks with the Arizona Department of Housing to join a program of principal reduction, Wells Fargo now joins the ranks of Bank of America in providing principal reductions to delinquent homeowners in Arizona.

This is good news for investors! Simply put, if it is structured in a way that allows the HHF money to off-set the principal reduction, the investor is made whole for the write-down. HOWEVER, if the servicer looks to capture some of that money for expenses and deferred costs, the investors will be getting less than their full reimbursement. It is up to the state housing authorities to hold the line for investors, and not the servicers.



At stake as well is the reimbursement for advances that the servicers most probably will attempt to recoup from the HHF moneys. Now, while the servicers should be entitled to any reimbursement of advances that are specifically tied to principal advances, it is questionable if reimbursement of interest advances should be permitted. The counter-argument, however, is that any interest advances not reimbursed would then most likely be added to principal (either as a straight addition or as a deferred balloon payment) and would then constitute principal as well. Either way, the servicer would be left out in the cold for a while as it attempts to get back its advances.

 So, as the property values in Arizona remain as stagnant as the hot summer air in the desert, let’s hope that this program provides a bit of cooling to the burn that homeowners have been suffering. And although this may be more of a spray of water than a jump into a pool, for those of us that have been in Scottsdale in August know, even the mist makes a difference when you are otherwise baking in that Arizona sun.

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.

“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!

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.