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.

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.