AND THE FEDERAL GOVERNMENT STEPS UP TO THE PLATE WITH THE BIG BAT FOR SERVICERS

The Office of Comptroller of the Currency and the Federal Reserve got the largest of residential mortgage servicer to sign “Stipulation and Consent to Issuance of a Consent Order” today, forcing the servicers to take a look at their prior practices that allowed for robo-signing and improper foreclosure practices and to make changes to those processes in pretty quick order.

Of those servicers hit with the Order include Bank of America, JPMorgan Chase, Wells Fargo, Citigroup, Ally Financial, HSBC North America Holdings, PNC Financial Services, U.S. Bancorp, MetLife  and SunTrust Banks.

The Order appears to basically address the “robo-signing” issues that have plagued the servicing industry since last year. Claims by the OCC were that the servicers:

·         Filed affidavits in state and federal court in which the affiant represented that the assertions in the affidavit were made based on personal knowledge or based on a review by the affiant of the relevant books and records, when, in many cases, they were not based on such personal knowledge or review of the relevant books and records ;

·         Filed numerous affidavits or other mortgage-related documents that were not properly notarized, specifically that were not signed or affirmed in the presence of a notary;

·         Litigated foreclosure and bankruptcy proceedings and initiated non-judicial foreclosure proceedings without always ensuring that the promissory note and mortgage document were properly endorsed or assigned and, if necessary, in the possession of the appropriate party at the appropriate time;

·         Failed to devote sufficient financial, staffing and managerial resources to ensure proper administration of its foreclosure processes;

·         Failed to devote to its foreclosure processes adequate oversight, internal controls, policies, and procedures, compliance risk management, internal audit, third party management, and training; and

·         Failed sufficiently to oversee outside counsel and other third-party providers handling foreclosure-related services.

In light of these findings, servicers are now being required to:

·         Develop Oversight Committees within 5 days to monitor and coordinate compliance with the Order;

·         Provide the Board of Directors of the Servicer with a Compliance Tracking Report within 90 days (and every 30 days thereafter), showing the progress in complying with the Order, for which the Board will then, within 10 days, have to enter such report and their findings into the corporate records.

·         Build appropriate Compliance Programs within 60 days to ensure that all servicing and foreclosure actions company with all applicable legal requirements. This Compliance Program will then need to be implemented within 120 days.

·         Provide the Regional Director of the OCC within 60 days

o   an acceptable plan (the “Action Plan”) to achieve full compliance with the Order.

§  to include effective mortgage servicing, foreclosure and loss mitigation actions, as well as associated risk management, compliance, quality control, audit, training and staffing.

o   policies and procedures for outsourcing foreclosure and related functions, with implementation with 120 days;

o   a plan to ensure appropriate controls and oversight with respect to MERS and its rules;

o   a management information system for foreclosure and loss mitigation;

o   an acceptable plan, along with a timeline, for ensuring effective coordination of communications with borrowers, both oral and written, related to Loss Mitigation or loan modification and foreclosure activities;

·         Provide within 45 days for an OCC approved independent consultant to conduct reviews of foreclosure actions

o   The OCC shall review the terms and methodology to be used by the independent consultant.  

What does all this mean? Well, in the first place, the cost to service loans will now become much more expensive, as these policies and procedures will require significant more man-hours. Anytime you build more policies and procedures with specific reporting requirements, costs go up. At 25 bps, servicers are going to be squeezed, at least in the short term, until efficiencies can be found to comply with these new requirements. This will be similar to the implementation for SOX, except that the servicers have limited revenue generation, which is now going to be scrutinized by the government.

Secondly, this can turn out to be another boon-doggle for the plaintiffs’ bar, like the first round of MERS litigation. Until the courts get their heads around what is going on, slick plaintiff’s attorneys will use these new requirements to forestall the foreclosure of their delinquent borrower clients even more. Which also mean higher costs to servicers and slower repayment of servicing advances as servicers are dragged into slower foreclosures.

Lastly, investors will be left waiting for their money even longer, if they get any at all, as the time to foreclosure and resell the home, as well as the cost of foreclosure (which may now include the policies and procedure costs), will be passed along into the securitization trusts. More government intervention always means less money to the investor.

So, while there was clearly a need to fix the broken foreclosure process following the over-greased skids that were in place, the OCC’s efforts to right the ship may have sent the boat over the other way. Let us hope that if that is the case, like in the last “Pirates of the Caribbean” movie, turning the ship upside-down actually gets us out of this “Davy Jones’ locker” of mortgage servicing. But then again, that was Hollywood and Disney.

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.