“IT’S NOT SOMETHING THAT’S TOTALLY UNEXPECTED” – MOODY’S DOWNGRADES BofA SERVICING

In the continuing question of why anyone would want to manage the servicing of mortgage loans in this day and age, Moody’s took the step they had initially warned about in October of last year by downgrading the servicing rating of Bank of America on its prime, subprime and second lien mortgage loans as well as for its special servicer rating.
 

The rating, referred to as SQ or Servicer Quality ratings, has a high score of SQ1 and a bottom of SQ5. BofA’s servicer rating had been at the high category of SQ1. The recent downgrade puts BofA at SQ2. Moody’s SQ review covers at least nine areas of servicing functions, including management, staff experience/training/compensation, loan administration, arrears management, loss mitigation, IT systems/reporting, general quality and guidelines and financial stability. The weighting of these factors depends on whether the rating is for the Servicer as primary, special or master servicer. In the case of BofA, it was as primary servicer.

 

And BofA is not out of the woods yet. Moody’s has stated that BofA remains under review for further downgrade due to their foreclosure process.  Given the complete disarray of the loss mitigation systems, as well as claims that the staff of the servicing shops are overwhelmed and inadequately trained, it is not surprising that BofA expected this downgrade.

                                               

However, as one of the largest servicing portfolios with 13.3 million loans under management (excluding REOs), this little speed bump will not slow down the massive servicing structure. With new management recently put into place, as well as compliance with the recent Consent Order signed by BofA with the OCC and the Federal Reserve, things may start looking up for the servicing group. Whether or not they can make money at this side of the business is another question.  The trick is cost containment while the portfolio continues to be stressed by delinquencies, short sales, foreclosures and  aggressive plaintiff litigants who want homes for free. Infrastructure building, with clear policies and procedures, training and auditing is the only way to clear this up.

               

THE COST OF DOING (SERVICING) BUSINESS – LITTON ON THE ROPES

From a report today in HousingWire, Goldman Sachs acknowledged a $220M expense in the first quarter of 2011 relating mostly to its operations of its mortgage servicing arm, Litton Loan Services. Such a huge wallop to earnings means that the attempt by Goldman to manage cash-flow of securitization structures through the servicing of the loans has not played out as well as expected. Remember, Goldman got into servicing back in 2007 when it purchased Litton from C-BASS.

In the game of servicing, it is all about cost containment. Generally, servicers are allowed to make 25bps on each loan it services for the securitization trust, where a majority of the loans are actually owned. From this fee, servicers are expected to send statements, follow-up on lagging payments and manage the loss mitigation (modifications, short sales, deed-in-lieu, etc.), foreclosure and subsequent REO acquisition and sale. In certain situations, that fee can be extending to include up to 50 bps for “special servicing.”  But in either case, the ability to make money in the servicing game is solely based upon keeping the costs associated with these services to the securitization trust at a minimum. This is why the servicing shops ran into the problem with robo-signing, sewer service and pushing for the “rocket-docket” in Florida.

Now, the servicing shops are facing new, costly, regulatory compliance requirements. The OCC and OTS, with the backing of the Federal Reserve, have gotten the major mortgage servicers to executed Consent Orders this past week, requiring that they clean up their foreclosure practices. This will add another layer of cost to an already thinly stretched bottom line to servicers.  Fortunately for Goldman and Litton, they were not part of this regulatory round-up. However, there is still the 50 state Attorneys General action that has still yet to be flushed out, which will probably cover Litton’s practices.

Add to this the ever looming requirement that servicers advance delinquent payments of interest and principal to securitization investors and you can see why Goldman is looking to pull its chute and bail from the mortgage servicing business.

What is interesting to see is the players expressing interest in the Litton servicing portfolio. Ocwen Financial, which recently just digested HomEq Servicing, has expressed interest. Homeq was originally the servicing platform for The Money Store and started its independent life following the acquisition of The Money Store by First Union/Wachoiva. Wachovia subsequently sold HomEq to Barclays, which then sold it to Ocwen. The other player presumably expressing interest in the platform or its servicing rights is Carrington Mortgage Services, which is made up of mostly ex-Fremont Investment & Loan servicing employees, especially in senior management.

So, with Goldman looking to say “adieu” to residential mortgage servicing, clearly it is time to rethink what  is the benefit to collecting payments in an industry overwhelmed with problems. Because, as the preeminent negotiators on Wall Street, Goldman always does what is best for Goldman. All that otherwise can be said is  “Caveat Emptor”!

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.