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 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.

FHA “QUICKY” REFINANCE PROGRAM STARTS TODAY

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

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

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

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

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

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

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