Following Wells Fargo’s claim that they were not part of the ‘dirty little foreclosure problem,’ it appears that they are now finding indigestion in their acquisition of Wachovia. Pursuant to an agreement reached with eight Attorneys General, Wells has agreed to pay $24M in damages and haircut by $400M the balance of those “Pick-A-Pay” loans originated by Golden West Financial, which was acquired by Wachovia back in 2006. In addition, Wells Fargo agreed to an additional $300M in interest rate reductions, term extensions and other benefits to the borrowers.
Pick-A-Pay loans (also referred to as Option ARMS), for those of you not familiar with this product, was the brainchild of Golden West. Like offering either spinach or candy to a child, these loans offered the borrower the option either to make fully amortizing payments each month or to make a negatively amortizing payment. A negatively amortizing payment means the borrower pays less that the accrued interest for that month, and the difference is then added to the then outstanding unpaid principal balance of the loan. Add to this the fact that the interest rate had an initial “teaser” rate and is tied to some index that adjusts and you have a recipe for disaster to the borrower. And guess which payment most borrowers chose, especially since this product was aimed right at the “best” sub-prime borrower?
The settlement covers only owner-occupied properties where a borrower is in financial distress. The initially reduction of a loan's balance will be to 150% LTV. Additional steps could include reducing the loan's interest rate, extending the term of the loan and other changes that reduce a borrower's monthly payment to no more than 31% of gross monthly income. Borrowers who make three years of timely payments could qualify for an additional principal reduction.
Which means that Wells Fargo is giving away ice in the wintertime. Servicers are authorized, and in this climate of HAMP, virtually required, to modify loans that are in distress with either rate or term modifications, as well as providing principal modifications under HAMP or HOPE NOW. The interesting part of the settlement is the 150% LTV haircut. Given that the settlement is with some of the big problem states (Florida and Nevada especially), the 150% LTV appears to be a line in the sand by Wells Fargo as to the market depreciation they are willing to recognize (on behalf of the securitization investors) for the Pick-A Pay loans.
The settlement, however, appears to be only the tip of Wells Fargo’s iceberg. The settlement, in which Wells naturally did not admit to any wrongdoing (least the plaintiffs’ bar gets a hold of this issue), was for improper/fraudulent marketing of the Pick-A-Pay loan. But it only was for eight states, which did not include California, Golden West’s home state. So, having issued over $109B in Pick-A-Pay loans from 2005 to 2008 (as reported by Inside Mortgage Finance), Wells may be seeing more Attorneys General come a-knocking. Like the shot gunning of Ameriquest back in 2005, it is when all those little Attorneys General gang up that they can really hurt a large financial institution. However, it appears that these Attorneys General may not have gotten the critical mass this time to do any real damage to Wells Fargo. At a cost of less than 1% of the originations spread over eight states, adding all of the remaining states impacted will not put a dent in Wells Fargo’s armor.
This is truly is a scene out of an action movie: the evil Wells Fargo has borrowers running on a conveyor belt that is going faster than the borrowers can run. The foreclosure meat grinder at the end of the conveyor is getting closer and closer. The movie heros (the Attorneys General), pull hard on the frozen lever to stop the conveyor’s machinery. Are they in time . . can they stop the machine from turning the borrowers into foreclosure hamburger? Or will their efforts be too little, too late.
Tune in next week/month/year for the exciting conclusion!
Thursday, October 7, 2010
Tuesday, October 5, 2010
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??
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??
Monday, October 4, 2010
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.
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.
Saturday, October 2, 2010
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).
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).
Friday, October 1, 2010
“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.
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.
Wednesday, September 29, 2010
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.
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.
Monday, September 27, 2010
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.
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.
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