FROM THE MOUTHS OF BABES – THE DEPOSITION OF A STERN’S PARALEGAL

In what appears to be ground zero in the robo-foreclosure mess, the September 23 deposition of Tannic Lou Kapusta, a senior paralegal with the Law Office of David Stern, enlightens us as to the tsunami now reaching the shore. The Law Firm of David Stern, for those of you not following this issue, is in the center of the foreclosure hurricane, having been under investigation in Florida for running one of the largest foreclosure mills in the country. Reports have this law firm having handled foreclosure actions for everyone from Fannie Mae and Freddie Mac to Aurora (Lehman), Citi, GMAC and most of the major servicer.

I have been referring to the issue as robo-foreclosure, and not robo-signing, as referenced in the media, because of an understanding that this issue dealt with more than the execution of the affidavit, but rather related to the entire process of the foreclosure. This deposition by the Office of the Attorney General for the State of Florida of a senior paralegal for one of the largest foreclosure mills in the country makes it clear the signing of affidavits is only one of lesser failures in the process. This is why servicers like BofA, now awakened after being caught sleeping at the switch, are putting on the brakes in a desperate move to prevent the oncoming train-wreck.

With a staff of approximately 1100, the David Stern Law firm was international, preparing the foreclosure paperwork in Guam and the Philippines. This senior paralegal, claiming personal responsibility for 1200 files including those of Fannie Mae and Freddie Mac, stated on the record that not only were the affidavits prepared in an automated process called CASEUM, but the automatons walking around the office did not know what they were doing, or that what they were doing was at least improper and more likely, illegal. The paralegal went on to state that in-house lawyers for the firm, as well as paralegal, were enslaved to the law firm and knew of the improprieties and illegalities but feared the loss of their job over the loss of their license to practice.
Examples of what was being done at this mega-paralegal shop included:
• Use of floating notary stamps by non-notaries


• Notarizations done not in the presence of an authorized notary


• Notarizations being done before the signature


• Execution of affidavits by employees of The Law Firm of David Stern under presumed powers of attorney for the servicer/mortgage holder


• Employees of The Law Firm of David Stern signing the signature of the person who presumably had a power of attorney to sign on behalf of the servicer/mortgage holder


• “Sewer service” by a captured process servicing group


• Preparation and execution of assignment of mortgage after filing of the lis pendent and even following the actual foreclosure


• Falsifying information, including Unpaid Principal Balance, on affidavits


• Fraudulently stating or changing dates on documents to make them comply with legal requirements


• Multiple improper charges for service of process billed to the servicers


• Questionable relationship with a the court in a certain county in Florida, with the court hearing 500 foreclosure cases in a day

If this is indicative of the level of impropriety within the foreclosure process, we are in for a nuclear winter. While it appeared initially that prior foreclosures would not be reversed, now it appears from this deposition that such may not be the case. If the level of absolute disregard to legal foreclosure requirements turns out to be true, servicers may be forced to return properties, or at a minimum, find money to pay damages to those foreclosed borrowers. Adn where is the servicer going to find that money?

All of this in the name of volume-izing the foreclosure piece of the servicing function. Clearly, there isn’t enough malpractice insurance covering Mr. Stern’s law firm to pay for the massive amount of damage that will be found as this case continues. Therefore, the next deep pocket that plaintiff attorneys will turn to is the servicers. As previously discussed in an earlier blog, negligence would be the standard. Audits of this and other law firms will be scrutinized to see if they should have seen the problems. Management will have to justify their pressing on foreclosures and the use of these mills to process foreclosures. Moreover, investors should question how monies are being spent to process foreclosures to see if they are being short-changed in distributions.

So, having finally awakened to the fact that the legal bridge was out, the servicer/engineers are now attempting to stop the foreclosure train from dropping into the economic pit below. With all the help they can muster, these servicer/engineers may just have to do what any of us would do in such a situation. . . pray. Pray that they don’t go over the edge.

FANNIE PUSHING HOMEPATH REO’S SALES

In a press release issued today, Fannie Mae announced that it is incentivizing the market participants to buy their swelling portfolio of REO properties by the end of the year. Selling agents of REO properties purchased from FNMA’s HomePath will receive a $1,500 bonus per sale. This is over and above the 3.5% refund of the final sale price that the homebuyer receives. The push, however, is that the home purchase must be completed by the end of the year to be eligible for these incentives.

So, it looks like Fannie is FIFOing REO inventory. From previous announcements, Fannie has been pushing servicers recently to foreclosure on properties where the borrower occupant has not been working to either modify their loan or transfer title in a deed in lieu - in a July speech, Edward DeMarco, acting director of the Federal Housing Finance Agency, told loss mitigation servicers that, "if you have an abandoned property or a borrower not willing to discuss or work with anything, then get going [and foreclose]”. Now, in order to clean up the books before the end of the year, Fannie is looking to pay their sell brokers an extra vig to move product.

Back in February, Fannie began the 3.5% incentive to buyers of its HomePath properties. HomePath, Fannie’s in-house manager of its foreclosures, also allows for special financing, which could allow buyers to purchase these properties with 3% down.

So, this could spell a bit of a bubble in cash-flow to securitizations which hold the Fannie Mae REO assets. However, with the glut of REO inventory on every servicers books, and HomePath prices not being anything special, it is unclear whether a $1,500 kicker will really help move product. But then again, in this market, any little thing may help.

FANNIE MAE - PUMPING UP THE VOLUME

And the beat goes on. Fannie Mae has reported issuing $42.7 billion in MBS in July, showing an increase of 6.4% from June production. In comparison, Fannie’s kissing cousin, Freddie Mac, is showing a month-to-month decline.


While Fannie does not break out purchases of refinanced loans in its monthly reports, its monthly report shows MBS issuance slowly rising from May, clearly based on the recent surge in refinancing applications. As reported by the Mortgage Bankers Association, by the end of July, refinancing applications hit a 13-month high. Since these applications would then show up in MBS issuances in August and September GSE reports, we can assume that more good news is around the corner as this trend continues for the short term.

And where is this product going? Well, the ice cold grip of the MBS investor may be starting to thaw. MBS, especially those paying higher rates of interest than comparable Treasurys (currently at about 150 basis points over), are being looked at by the MBS investor needing to invest cash and take advantage of the higher yields. Given the cleaner underwriting standards for the underlying product, together with prepayment speeds reportedly being somewhat flat, investors may be willing to put more than a toe in the market pool. And though roughly 25% of all outstanding mortgages are reported to be under water with a national delinquency rate of just under 10%, it appears from industry figures that mortgagors are continuing to pay their loans even though they are under water. This is in spite of the fact that these borrowers may not be able to refinance because they have no equity, or cannot qualify for a modification.

So, it appears that the two porch dogs that people have been liking to kick these days appear to be doing what they are suppose to do. Which is to watch out for the old homestead.

JUST WHAT WE NEED – AN FDIC FOR THE ASSET-BACK WORLD

From an article published Monday by Donna Borak for the American Banker, there appears to be a soon to-be-published paper written by two Federal Reserve Board economists — Wayne Passmore and Diana Hancock - proposing the establishment of an FDIC-like entity to explicitly price an insurance fund created to cover catastrophic risks on a wide range of asset classes, including mortgages, credit cards and auto loans. As reported by Ms. Borak, these economists believe that this explicit form of “backstop” could ensure the stability of the system in future financial crises and help eliminate the concept of "too big to fail" institutions. This seems to follow the discussions reported from the Treasury Department conference last week, where there appears to be some discussion of the creation of an insurance fund for MBS.


The paper envisions a GSE agency (a re-jiggered Fannie, Freddie, or a combination of the two) taking on the responsibility for running the insurance fund. This newly designed GSE, however, could not sell its own unsecured debt or build a mortgage portfolio. Rather, it would just collect the guarantee fee. But rather than using those fees for profit, as they have in the past, this GSE would simply build up a fund, like the Deposit Insurance Fund, to absorb losses in a crisis.

It appears that the proposal would get rid of the implicit guarantee of the Federal Government since the GSEs would no longer be able to sell debt or hold portfolios. Instead, the guarantee would be explicit for specified asset types that the government could define. By doing so, the proposal believes that these GSEs could restrict the guarantee to relatively safe loans with certain underwriting standards.

Where to start? While it is a valiant effort to put the GSE into the role of the private asset backed insurers, wasn’t the whole point of Fannie and Freddie to have the implicit guarantee of the U.S. government to allow for better pricing on the more risky loans. And so this proposal just pulls this business out of the private sector – for cost efficiencies?? Because the government can do a better job of this than the private sector?

And how do you structure the “club” function of the FDIC for the ABS world – the infamous “bank take-over” function that the FDIC has been using in record application for the last two years. To take over the securitization structure? From the Trustee (who structurally is brain dead already and has no real functional responsibilities)? From the servicer? Because this new agency will be better positioned to service multi-billion dollar pools? That is what Fannie and Freddie are trying to manage in the current melt-down. The FDIC has the ability to take on a failed bank to manage the turn-around and protect its insurance fund - which it has been doing pretty successfully, given the size of the financial crisis it has been managing to date.

I guess we will have to wait and see the full read of this mystery paper to better understand what is being proposed and how it may help avoid the next asset-back melt-down.

To read the full article by Ms. Borak, see:

http://www.americanbanker.com/issues/175_161/backstop-for-abs-markets-1024428-1.html

FNMA THROWS THE UNDERWATER BORROWERS A LIFE SAVER

        Think about it - if you're underwater, what is a life saver going to do but float above you out of your reach . . it is not going to help you stay afloat. That is what FNMA is proposing with its bulletin to lenders on April 14 providing that borrowers that take a short sale in following with Obama administration's Home Affordable Foreclosure Alternatives program (HAFA) could be eligible for a new FNMA loan in two years, rather than the four years currently in place.
         By relaxing the rules that would otherwise prevented loan applicants who have participated in short sales or deeds in lieu of foreclosure from obtaining a new mortgage for four years (five if the home actually goes to foreclosure), FNMA thinks that this will entice troubled borrowers to work out solutions that avoid the heavy costs of foreclosure.
         But that qualification is with strings attached. Beyond the issue of not being able to qualify because of damaged credit from a short sale or deed in lieu, which will be on the borrower's credit well beyond two years (foreclosures and short sales generally have the same effect on a borrower's credit), the two year qualification provides that the "resurrected" borrower be able to put down 20% for the new loan - unless there are "extenuating" circumstances.
         Now, we are dealing with people that cannot make current monthly mortgage payments, yet FNMA thinks that in two years, there people will somehow be able to make a 20% down-payment, after they lost any equity they had in the home they just lost. From where???? 
         Actually, the only benefit I see is that these people that can make the 20% down will be able to do so by re-adjusting their finances to purchasing a house that they actually can afford. But something tells me most of these people will not be able to make this adjustment, or the required down payment.
         Now, there is the "extenuating" circumstances provision that allows for only a 10% down payment if the borrower entered into the short sale or deed in lieu because of a significant financial occurance like a lost job, medical expenses or divorce. But just how large is that population of borrowers, and it still doesn't get past the credit damage issue (which would probably be worse in these situations anyhow). And again, these borrwers have suffered some major financial occurance, yet FNMA thinks that they will be able to pull together a 10% down payment in two years??? Bless them if they can.
          So, who wins? Well, the servicers (and their parent organizations), not the borrower. By getting a borrower to agree to a deed in lieu, the servicer gets the borrower out of the home quickly, allowing for fast turnaround for a sale of the property. It also directs a borrower away from a possible loan modification (even a temporary one) with a promise that the borrower MAY be able to qualify for a new home loan in two years. This means no more advancing on the loan by the servicer. And the servicer avoids those costly foreclosure expenses (and any litigation that arises from it).
         Well, lets hope that this life saver is wintery mint and not cinnamon, so the borrower's breath won't stink when he screams.