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.

B OF A CLAIMS INVESTORS LIMIT SERVICERS ABILITIES

In a statement released ahead of their official testimony before the Senate Banking Committee, Bank of America claimed that the bank is “constrained” in its role as a servicer. “Many investors limit Bank of America’s discretion to take certain actions” stated Barbara Desoer, President of Bank of America Home Loan. Bank of America “aim[s] to achieve an outcome that meets customer and investor interests, consistent with whatever contractual obligations we have to the investor,” Desoer said.

So, it appears that at least B of A, with its indigestion of Countrywide’s servicing portfolio, is claiming to be hog-tied by the Pooling and Servicing Agreements. What is interesting is that this was never a problem in the past. It is only now that there is this avalanche of bad loans that the issue of risk management and loss mitigation has now become a problem because of investors.

If you look at the standard language of a Pooling and Servicing Agreement, however, you can see that the servicer has fairly wide latitude in servicing a loan and working loss mitigation techniques. First and foremost is the REMIC provision that allows a servicer to modify either the rate or the term of the loan if the loan is in default “or in imminent danger of default” without jeopardizing the REMIC tax status. Next, Pooling Agreements usually have language to the effect that servicers are to service and administer the loans in accordance with “customary and usual standards of practice of prudent mortgage loan servicers.” Counter-balancing this provision is the subsequent provision in the Pooling and Servicing Agreements that state that servicers “shall not take any action that is inconsistent with or prejudices the interests of . . . the [Investor] in any Mortgage Loan . . .”

As far as foreclosing on a property, the Pooling and Servicing Agreements usually contain boiler-plate language similar to the following:

The Servicer shall use reasonable efforts to foreclose upon or otherwise comparably convert the ownership of properties securing such of the Mortgage Loans as come into and continue in default and as to which no satisfactory arrangements can be made for collection of delinquent payments. In connection with such foreclosure or other conversion, the Servicer shall follow such practices and procedures as it shall deem necessary or advisable and as shall be normal and usual in its general mortgage servicing activities; provided, however, that the Servicer shall not be required to expend its own funds in connection with any foreclosure or towards the restoration of any property unless it shall determine (i) that such restoration and/or foreclosure will increase the proceeds of liquidation of the Mortgage Loan after reimbursement to itself of such expenses and (ii) that such expenses will be recoverable to it through [such liquidation proceeds]

 Being as clear as mud and as directional as a compass on the North Pole, there are various other provisions in the Pooling and Servicing Agreements specific to that transaction or related to the specific servicer for that trust. But, generally speaking, the servicing provisions are usually pretty broad as to servicing functions, with any negotiated benefit going to the servicer, since investors were not part of the negotiations. So, how is a servicer constrained? Maybe it is whether or not such servicer needs to advance on a delinquent loan and wait for reimbursement for such advance? Depending on which tranche the investor is holding, it may or may not be a benefit to take a certain loss mitigation position. It all depends on where the investor is in the waterfall and realized loss allocation.

Well, I guess the servicer has to blame someone for the failure of the HAMP, HAFA and HARP. And clearly, the Investor has the most to gain on the sale of foreclosed properties at 40 to 50 cents on the dollar (after reimbursement for expenses and the like). At least at the end of “The Italian Job”, the ‘good bad guys’ got the ‘bad bad guy”. Its just getting harder to tell who are the good bad guys and the bad bad guys these days.

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.

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.

HOW MANY TOES CAN YOU STUB – LPS’ DOCX IS THE NEW MERS

As the foreclosure mess continues to ripen (like cheese), it appears that Lender Processing Services’ subsidiary may be the new piece in the puzzle. Following Florida Congressman Alan Grayson (D-Fla.) firing off remarks into certain practices of Docx, the company has announced that it terminated the practice in 2008 of having employees signing affidavits on behalf of an “authorized employee.”

Like the issue that the industry first faced where a MERS employee was authorized to execute assignments on behalf of a servicer/client (usually through a corporate resolution authorizing the MERS employee to be a “special” employee of the servicer) it appears that Docx took the same tack with respect to affidavits. In a statement released by the company, LPS stated that when they “performed this service, affidavits were prepared and provided by the lenders’ or servicers’ attorneys. These affidavits were then executed by LPS consistent with industry practice, under corporate resolution."

As one of the early issues following the collapse of the securitization field, the issue of ownership of the mortgage was called into question due to the structure of MERS and the lack of assignments in a county clerk’s office, as required by statute to allow for notice of ownership and lien of the mortgage. Courts, not familiar with this shortcut in the mortgage business, started to throw out foreclosure actions due to the fact that they did not appreciate the role of MERS in saving time and money by avoiding continuously registering the transfer of the mortgage as it worked its way into securitization structures and sales.

Now, it appears that the outside service provider Docx has been caught in a similar situation of not following regulations/procedures in preparing affidavits required for a foreclosure action. However, unlike the MERS issue, here it appears to be a blatant disregard for proper procedure, and not just a regulatory shortcut. And while Congressman Grayson may just be hopping on the foreclosure hay-wagon (is he up for mid-term election?) it once again goes to the question of the impact of volumize-ing servicing functions.

At between 25 to 50 bps for servicing fees, pressure is always on the management of the servicing organizations to squeeze every drop of revenue by reducing costs. It is why, during the turn-down of the mortgage origination market, people (like Wilbur Ross) started to look at servicing platforms as a good buy or a hedge against the loss of revenue in origination. Controlling the cash flow off of tens and hundreds of billions of dollars of mortgage loans, especially when you could game the system because of the complexities of the Pooling and Servicing Agreement and the distance between the servicer and any investor, looked like easy money. Most investors bought based upon the rating and assumed cash-flow, which is now completely out-of-whack.

Now, it appears to be a curse to be a servicer, rather than a blessing. Beyond being the new dog to kick on Capitol Hill, having to rewrite compliance policies and procedures and instituting serious auditing will increase costs, at a time when cash has become tight at the servicers. And, like the MERS issue, plaintiff attorneys now have a new claim in their delaying filings on behalf of clients. This slow down in the foreclosure process will squeeze servicers even more as they are delayed in receiving reimbursement out of securitization structures.

Once again the continuing mantra is “AND THE SECURITIZATION INVESTOR WILL TAKE IT ON THE CHIN.” At the end of the day, the delay in acquiring the property through foreclosure, to the reduction in the sale price of REO property, to the increased costs of the servicer that will take ahead in the liquidation waterfall all add up to less money to investors.

So, as we look down the barrel of this robo-foreclosure mess, you have to ask yourself one question . . .do you feel lucky . . . well, do you punk??

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.

AND THE HITS JUST KEEP ON COMING – NO TITLE INSURANCE FOR FORECLOSED HOMES

In an announcement on Friday, Old Republic National Title Insurance told its agents that it would not write policies on foreclosed properties by JPMorgan Chase “until the objectionable issued have been resolved,” as reported in the New York Times. This follows its decision to not write policies on Ally Financial (GMAC Mortgage) foreclosed properties subsequently sold as REO.

So, the title insurer is now questioning whether the title of a sold REO property following a foreclosure is clean. This appears to be an aggressive posture of whether the courts will look at whether the entire robo-foreclosure process invalidates the sale of property due to the improper court filed affidavit. As previously mentioned, it would be draconian for the courts to take such a position. Beyond using some type of argument of “bona fide purchaser for value” to be used by a purchaser of REO property, to unwind all of the REO sales done (HOPE NOW published statistics showing over 800,000 completed foreclosure sales between 3rd Q 2009 to 2nd Q 2010 reported by HOPE NOW servicers) would just destroy the recovery of the housing market.

The ripple effect of all this is starting to turn significantly substantial. As noted in the article, foreclosure prices would drop, as lenders would not be willing to loan against REO purchases without the title insurance. The court system would become even more log-jammed, at a time when budgets are already requiring States to make significant cut-backs. Plaintiff’s attorneys, now smelling the blood in the water, will look to feed off defaulted borrowers in ways the loan modification scams only dreamed of. Servicers, now without an ability to recover its costs from liquidation proceeds on the sale of the REO properties, will be “pressed” to find operating revenue. And, as the mantra for the industry, the securitization investor will be once again be forced to “eat it.” Cash-flows will be limited, the properties that should at least be held as REO, will be stuck in this foreclosure limbo, and any recoveries will be less money to pay off their investment. Losses will creep up the tranche structures.

While October is harvest month, it looks like the capital market fields are still only providing the smallest of yields. The HAMP, HAFA and HARP plantings appear to have been only marginal seeds. And now, it looks like we just got hit with an early foreclosure frost that may kill a good portion of the crop. And wait, we still have to face the ghosts, ghouls and goblins (including those on Capital Hill looking to frighten the securitization market with its new regulations) that will be coming out at the end of the month for their free candy (also known as year end bonuses at the Wall Street Banks).

“CHICKEN LITTLE AIN’T GOT NOTHING ON ME” – THE CONTINUING MORTGAGE FORECLOSURE MESS

Well, as predicted, the regulators are coming out of the woodwork over the robo-foreclosure issue. The OCC, the regulatory agency for banks, is ‘requesting’ that the big boy servicers (BofA, JPMorgan, Wells, Citigroup, HSBC, PNC and US Bank) review their foreclosure practices to see if the person signing the affidavits in foreclosure proceedings had the required knowledge of the facts stated in the affidavit.

To understand the issue at hand, in State’s that have judicial foreclosure, the law requires something like the following:

• The affidavit shall state the facts that establish that the obligor has defaulted in the obligation to make a payment under a specified provision of the mortgage or is otherwise deemed in uncured default under a specified provision of the mortgage.


• The affidavit shall also specify the amounts secured by the lien as of the date of the affidavit and a per diem amount to account for further accrual of the amounts secured by the lien.


• The affidavit shall also state that the appropriate amount of documentary stamp tax and intangible taxes has been paid upon recording of the mortgage, or otherwise paid to the state.


• The affidavit shall also state that the lienholder is the holder of the note and has complied with all preconditions in the note and mortgage to determine the amounts secured by the lien and to initiate the use of the trustee foreclosure procedure.

At issue, then, is what are the requirements of an affidavit. Anderson's Manual for Notaries Public Fifth Edition describes an Affidavit as a "declaration reduced to writing, signed by the affiant, and sworn to BEFORE an officer authorized by law to administer oaths." Blacks Law Dictionary describes an Affidavit as "a written, ex parte statement made or taken under oath BEFORE an officer of the court or a notary public or other person who has been duly authorized so to act."

In several States, notaries are subject to "petty offense" fines for misuse of office. If a notary is signing affidavits without witnessing a signature, the notary is subject to fines.

An affidavit can either be based upon the personal knowledge of the affiant or his or her information and belief. Personal knowledge is the recognition of particular facts by either direct observation or experience. Information and belief is what the affiant feels he or she can state as true, although not based on firsthand knowledge.

So, what does this mean to the servicers? Well, to start, did these servicers have policies and procedures in place that required this two step process, specifically (a) that the affidavit had either personal knowledge or information and belief of the facts in the affidavit, and (b) was the affidavit sworn to BEFORE a notary? Next, were these policies and procedures followed (probably not is what it appears). Lastly, what will be the penalty for failing to following these procedures?

So, it appears that one of the culprits of this new mortgage mess is the notaries working for the foreclosure mills. Like the appraisers of sub-prime mortgage originations past, these “low on the totem pole” service providers just processed without following their own rules. Now it is coming back to haunt the entire industry.

Another party to this trouble is the in-house foreclosure group heads at the servicing companies that signed the affidavits. Did they even have personal knowledge (doubtful) or a good faith information and belief of the facts stated in the affidavit? Again, it will be based upon the policies and procedures in place at these organizations. Whether there was “up-the-line” reporting from the person handling the foreclosure to the person signing the affidavit will be key.

So, as more of the servicers get taken behind the wood-shed, plaintiffs’ attorneys will have a field day with this and the regulators will continue to make political hay. Meanwhile, Joe Homeowner who is in default on his loan gets to watch TV rent free and the securitization investor will be flipping the bill for it all. Maybe hedge fund investors will start to see this . . .or maybe not. Maybe they need more write-offs.

ROBO-FORECLOSURES – A PANDEMIC IN THE MORTGAGE SERVICING INDUSTRY

JPMorgan Chase announced today that they too may have been part of the robotic foreclosure process that Ally Financial acknowledged is a major issue for them. In a memo distributed last night, JP alerted its attorneys that employees in its foreclosure operations may have signed affidavits without the required personal knowledge.

As the third largest servicer in the country, with over $1.3 trillion in its servicing portfolio, even a 0.1% impact would be huge. And that percentage is not out of the realm of financial impact to the company. Litigation exposure, on both the default borrower side as well as investor backlash, together with any regulator penalties, could cost the company millions. JP has taken the same “stiff upper lip” posture as Ally, claiming that the factual information given in the affidavits was accurate and was not affected by whether or not the signer knew the details. So, it will come down to the courts to decide what type of penalty to impose.

And like Ally, JP is now requesting that courts not enter judgments on pending foreclosures until they figure out what was done and how to fix it. Well, there goes securitization investor cash-flow some more as foreclosures get put on extended hold. This will also cost JP money, as it too now has to wait for its reimbursement of funds in the securitization cash-flow waterfall.

It seems that in their race to foreclosure, proper processes were laxed (kind of like the underwriting standards that got the industry into the mess to begin with). I guess it is just boils down to a question of when does “volume–izing” the mortgage industry (be it in origination or servicing) cause policies and procedures to get tossed out of the window.

Well with GMAC Mortgage and JP Morgan now on the hot seat, that just leaves Bank of America, Wells Fargo (that now includes anything from Wachovia), Litton (a/k/a Goldman Sachs), Saxon (a/k/a Morgan Stanley), and all the little fellas (Carrington, American Home, HomEq, etc.) to get put on the rack. And in a politically charged year, the politicians should have a field day with this (unless, of course, they had a “Friend of __________ Loan”). We have already seen California Attorney General Jerry Brown, now running for “Governor Moon Beam – Part Deux,” chime in yesterday.

FLORIDA – THE PLACE TO LIVE (FREE) BUT NOT TO INVEST

Following the announcement by Ally Financial (f/k/a GMAC Mortgage) that it will stop foreclosure proceedings as they sort out their issue of filing improper affidavits, the Florida top court is being ‘asked’ to halt around 80 percent of all foreclosures in the Sunshine State. At issue are the practices of three law firms that have been operating as “foreclosure mills” for servicers. At risk are thousands of final judgments that could be reopened.


U.S. Rep. Alan Grayson (D-Fla.) has asked that the Florida Supreme Court halt foreclosures being handled by the law offices of David J. Stern, Marshall C. Watson, and Shapiro & Fishman. These three major law firms are currently under investigation by the Florida Attorney General over questions about slipshod paperwork practices involving thousands of cases.


The effect of this on securitizations, which could be tied up in court for years, is the possible waterfall impact if the foreclosures are reversed. If the foreclosure is deemed invalid, and the subsequent liquidation of the property following conversion to REO is voided, query whether the trust can seek to have the money previously paid out “clawed back” from investors –say by an off-set to future payments. And what about the write-downs and write offs of mezzanine and sub-bonds that took the Realized Loss upon liquidation.


Given that this is such a mess, it is unlikely that the Court’s will unwind all effected foreclosures. The size of the issue, given that a significant portfolio of loans in the subprime world came out of Florida, would be too dramatic on an already weak financial market. More likely, the Courts will punish the culprits. However, since the three law firms will not be able to withstand the legal liability if found guilty, servicers may also be dragged in for not properly managing the outsourced relationships. Legal liability could attached to the servicers under a negligence standard. Servicers could also be hit with a double whammy if any reversal of a foreclosure could require that the servicer mayd also have to return any reimbursement moneys out of the REO sale proceeds. That would clearly hit their bottom line hard.


Liability insurance providers, specifically E&O issuers for the servicers, as well as the malpractice insurance providers for the three law firms, better start reserving against this exposure, if they can. Exposure could be in the hundreds of millions, if not billions.


And all of this, from the State that gave us the great “chad” issue. I guess doing something properly is not in the nature of some Floridians. Must be all that sunshine.

MORE CRACKS IN THE SYSTEM – ROBO-FORECLOSURES BY SERVICERS MEAN LESS $ TO INVESTORS

Moody’s, the now ever vigilant rating agency, has caught wind of the failure of servicers to properly follow legal procedures when foreclosing on properties. In an announcement this week, the rating agency has decided to review Ally Financial (f/k/a GMAC Mortgage) for downgrade following the servicer's acknowledgement that they may have not been properly preparing foreclosure documents.

In what is commonly referred to as “Robo-foreclosures,” Ally Financial appears to have been filing foreclosure affidavits in court that were not signed by persons with actual knowledge of the facts required for such paperwork. In addition, affidavits were not notarized in the presence of the notary. In its response, a spokesman for Ally was quoted in an article for HousingWire as saying that the substantive content of the foreclosure paperwork, such as loan balance, delinquency and note and mortgage information, did not appear to have been misstated or inaccurate and that Ally believes “that the substantive content of the affidavits in question were factually accurate.” Naturally, it is Ally’s interpretation of what is ‘accurate substantive content’ and what was just ‘procedural errors’ – like due process. And hey, that notary thing – really – it’s like the corporate seal – does anyone really think it’s important these days? And what is it now, a buck? I remember when it was $0.25!

In an attempt to rectify the situation, Ally has suspended evictions on foreclosures where a faulty affidavit was detected. Whether they are closing the barn door after the horse got out is pretty clear. More important is the impact this will have on the securitization structures. With approximately $380 billion under servicing management as of July 31, such a hick-up in foreclosures will mean less money coming back to investors as this mess is fixed. And with plaintiff attorneys more than happy to run cases like this into court and tie up liquidation of the REO property, it looks like everyone, other than the delinquent borrower who will be getting a continuing free ride due to Ally’s slip-up, will be taking it in the shorts. Even Ally, as first in line to receive reimbursements from liquidation proceeds, will have to now wait for their money as these foreclosures are cleaned up. Moody’s will be looking at any rating impact based, at least in part, on this new timeline for foreclosures and REO liquidations and its legal and financial impact to Ally. Should be interesting to see what Ally's policies and procedures said about this.

Maybe GMAC can get some additional TARP money to help out. They still have a few more days before TARP goes away.

Foreclosures and State Attorney Generals

The recent 5-to-4 Supreme Court decision in June which allows states to exercise their own rights against banks and their actions with respect to foreclosures has changed the landscape with respect to the enforcement of rights by the securitization trusts to foreclose on defaulted loans and the pressures now be put on banks by various state attorney generals.

If you remember back, it was the state attorney generals in the early 2000s that took down the behemoth mortgage company Ameriquest. While individually one state attorney general could do little against such a massive enterprise, once they ganged together, even the company that Roland built could not withstand the pressure, paying upwards of $350M to settle the cases.

Now, with this new federal decision as support, the New York Times reported today that frustration by the attorney generals of several states has resulted in a movement towards litigation against the banks. From that article in the New York Times, the Arizona Attorney General Terry Goddard stated "We tried to use the tool to be persuasive with the banks . . . But their waterfall of excuses, the abysmal numbers of modifications, tells us persuasion is not working."

It appears that the State attorney generals will consider using the theory that the banks perpetrated a massive fraud on consumers by offering exotic loans that the borrower could not understand nor could repay. In a prior related matter, Fremont Reorganizing Corporation, formerly Fremont Investment & Loan, settled its case brought by Massachusetts Attorney General Martha Coakley, which claimed, in so many words, predatory lending practices. (See COMMONWEALTH OF MASSACHUSETTS, Plaintiff vs. FREMONT INVESTMENT & LOAN, and FREMONT GENERAL CORPORATION, Defendants).This followed a settlement with Goldman Sachs for its role in securitizing subprime loans, including subprime loans originated by Fremont and a preliminary injunction against Option One and its parent H&R Block.

These actions will probably be a road map for further litigation to be brought against the mortgage companies, banks and investment banks that offered these loans.

The one question that these Attorney Generals need to ask in order to help in these litigations is "why" . . . why would the banks be more willing to foreclosure on a loan rather than modify the loan?