By MBSGuy, a securitization expert
In comments to my post yesterday, “So Why Did the Mortgage Servicers Use ‘Robo Signers’?“, reader Justica pointed out another element of servicer misbehavior, namely, investor lack of confidence in the reports, and therefore the disbursements, that servicers are giving them. From “Investors Grumble Over Flawed Remittances” at Asset-Backed Alert:
Mortgage-bond buyers are losing faith in the accuracy of remittance reports, and some say the apprehension could soon factor into their investment strategies.
Remittance reports, distributed monthly by securitization trustees, are supposed to provide routine snapshots of the cashflow-collection and distribution activities of servicers. However, investors say there has been a rash of recent instances in which the reported data differed considerably from what actually happened – making it impossible to determine values for their holdings.
[…]
Why have the once-reliable reports been wrong? Investors point in part to increasing use this year of mortgage-modification programs that government agencies and lenders have implemented to aid troubled borrowers. They claim some servicers fail to verify when the changes take effect, resulting in mismatches between when a given loan’s cashflows actually shift and when those adjustments are reported.
Servicers argue the volume of recent modifications has become overwhelming in comparison to their staffing levels. They also have faced ongoing struggles in figuring out how to treat loans that are in the trial phases of modification programs. “It has made it nearly impossible for us to appropriately account for changes,” one servicing professional said.
Buysiders call that a red herring, saying servicers are equipped to account for modifications as they occur. “The servicers simply don’t pay enough attention to what’s happening to the underlying loans,” one source said.
On one level, this article looks like yet another lame servicer excuse not to do mortgage mods; “See, this is SOO hard, we can’t even account for it properly.”
The real causes little to do the difficulty of the task, and everything to do with management.
One of the reasons they don’t have the people to work all this complicated stuff out is because they fired all of the experienced people and kept the cheapest staff. As the market has modestly improved, anyone with any skills left the places that put such a low value on them, leaving behind the weakest workers (there has been a lot of turnover in the last 9 months or so).
Somehow, the big bosses are convinced this is not their fault.
By the way, over the years, I witnessed many instances of servicers or trustees screwing up far less complicated situations in investor reports, sometimes to the real detriment of certain bond holders. That is almost certainly going on now. If the adjustments from the modifications are not being properly accounted for, it probably means too much money is being distributed to the junior bond holders, who ought to be taking write downs, at the expense of the senior bond holders. As a result, interest that was due to the senior bond holders is being paid to the junior holders, and since there is only a finite amount of cash, the senior bond holders will end up with less money than they should have received.
In addition, it is very likely that the servicers are not properly accounting for the huge foreclosure expenses they are now incurring on contested foreclosures. If it costs, in some cases, more to defend the foreclosure than the balance of the loan (let alone the recoverable proceeds from the sale of the home), these costs should not be borne by the trust. The servicer should only reimburse themselves for the costs of a foreclosure, plus all of the accrued interest, from the proceeds of the foreclosure sale. The servicer should also stop advancing interest for the delinquent loan if the interest and expenses can no longer be recovered.
I suspect it is impossible to determine if this is actually being done right from the servicer reports.
A final area of incorrect accounting that would be significant to investors is repayment of servicer advances of principal and interest advances on delinquent borrowers. These are to be repaid solely from foreclosure proceeds. But given what a drain these advances represent (servicing now is a negative cash flow activity), it isn’t hard to imagine that services are also using proceeds from non-foreclosure principal repayments (sales and refis) to reimburse their advances, when those principal payments should go to investors.
A lawsuit on behalf of the investors against the trust and sellers should probably also include claims for improper servicing and trust administration against the servicer and trustee.
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Aren’t servicers generally divisions of the big banks on Wall Street which just paid themselves record bonuses of $140 billion? If so, what’s their excuse for not hiring more people? They obviously have the money.
And might this also affect loan buybacks? For example, if servicers have to buy back all loans that default within the first year of the loan, but instead of notifying the note holder of the default the servicer continues to advance payments, how would the note holder know which loans to put back to the servicer?
I agree with you completely.
Mortgage backed securities should be prohibited. Homeowners deserve local origination and servicing responsive to local economic conditions. read here: http://brighton-towne.blogspot.com/2010/10/why-we-should-outlaw-mortgage-backed.html
“Going Dillinger”
http://www.practicalstate.com/?p=2891
Cheers
Good article, love the title. However, I’m really tired of reading this spurious bit of nonsense about the mortgage mess:
“The creation by Banks of Mortgage Backed Securities (MBS) coupled with intense political pressure from politicians Like Barney Frank and Chris Dodd to loosen restrictions on the lending of money to unqualified buyers of homes …”
While Barney and Dodd certainly deserve their share of blame in this disaster, they are NOT the chief culprits by any means. They didn’t make the banks buy the crap mortgages that Mozilo’s fraud mill and others were churning out. They didn’t make the rating agencies stamp these piles of crap with investment grade ratings. And they didn’t make the banksters defraud the bond buyers or use MERS to screw up the land title recording system in this country.
Thanks, MBSGuy. That article triggered my BS detector. Nice to have confirmation from someone close to the industry.
What should have we expected from Barney when Fannie Mae “went for it” and almost Ben Bernanke like, he wasn’t really aware of any problems? Fannie should be taking considerable blame, and should die. Also, I believe Dodd successfully defended banks while designing the financial reform bill this summer, as well as his notoriously sleazy interaction with Countrywide during the heady days of the looting.
Great article. I’d like to recommend avoiding Capital One Bank, NA for any future financial needs. Let the customers feet do the walking, away from TBTF banks.
Once again corner cutting in the name of reducing expenses bites back. Just like robo-signing and the like and the follies during the boom, its all about reducing expenses, driven by top managements obsession about reducing costs at almost and perhaps all costs. You put a cost reduction objective in the yearly performance review of the managers of units, and make it the number 1 objective and are surprised at what happens. Duh!
You say:
“A final area of incorrect accounting that would be significant to investors is repayment of servicer advances of principal and interest advances on delinquent borrowers. These are to be repaid solely from foreclosure proceeds. But given what a drain these advances represent (servicing now is a negative cash flow activity), it isn’t hard to imagine that services are also using proceeds from non-foreclosure principal repayments (sales and refis) to reimburse their advances, when those principal payments should go to investors.”
I could never understand why this obligation to maintain cash flow was ever “imposed” on the servicers. The servicers were not responsible in the first instance for the inclusion in the pool of lousy loans and loan documentation which were destined to default. This was the responsibility of the sponsor of the pool.
Yet, the servicers were generally alter egos of the sponsors and forced to assume these obligations. Before MBS’s evolved, servicers basically serviced the mortgage – collecting payments and handling escrows for insurance and taxes to assure that those would be paid. This was basically a mechanical operation with no risk at all for the servicer related to faulty loans.
But, then the pooling and servicing agreements basically placed them in the position of guaranteeing cash flows to the investors, since the brainy MBA would to turn mortgage pools into corporate bond like instruments.
But, it seems that most servicers now are not independent entities, but profit (or perhaps loss) centers of the owning banks. When a servicer “buys” servicing these day, do they also assume all of the obligations related to pooling and assuring cash flow? I do not know.
Behind the curtains various MBS holders/hedge funds/Pension funds/individual investors have been wanting their money back but the large banks have had the political wind at their backs but now these groups see the homeowner as the Trojan Horse getting the media attention they never could and forcing State AG’s and even Team Obama to do what they never could and that is force the big banks into the open laying out the paper work trail. The legal assault will be open ended no prisoners taken approach by the vast army of investors world wide that were screwed by the various banks.
“The primary reasons for repurchase demands relate to documents missing from the loan file.” i.e., the more alert customers aren’t waiting for the foreclosure. Very important if true.
That’s from a JPM filing with the SEC, as quoted by Ed Reardon of JPM on Page 8 of a report dated October 15th, titled “Putbacks and Foreclosures: Fact vs. Fiction”.
Lots of good stuff in there for mortgage mavens to chew on.
The report is up on Scribd, and linked by zero hedge. Here’s the link:
http://www.zerohedge.com/article/jpms-first-official-spin-fraudclosure-manageable-55-billion-risks
An excellent article at oftwominds ..
http://charleshughsmith.blogspot.com/2010/10/loss-of-trust-and-great-unraveling-to.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+google%2FRzFQ+%28oftwominds%29
Fed TARP is worse than Treasury TARP.
If America wants to get back on its tracks it needs to get out of the yolk of FED.
End the Fed before Fed ends America!!
A string got pulled and the whole garment is coming unravelled. Every day brings a new issue and new facets to previously discovered issues. Lots of people seem to have very strong opinions or reactions to each development but personally, I’m just increasingly perplexed.
If you starve a cost center, eventually the work doesn’t get done. The fallout from that takes different forms. Put the operation under even a little pressure and you get a blowup.
It’s kind of funny to focus on a failure of reporting, as in this post. If you don’t know what you’re doing in the first place, and you’re only doing an half-assed job of it, who in the world should expect clear, unambiguous routine monthly operating and cash flow reporting.
Looks like there’s going to be lots of action in the shark tank. I’m not going to back any particular shark, but I’ll bet on enough blood in the water that by the end of the fight the sharks will be devouring their own guts.
The irony is the Banks are undermining the very laws they rely on to protect their rights. Undermining the rule of law is not good for business. The reverse Robin Hood tactics is tantamount to asserting two wrongs do make a right. Perhaps almost every loan that has been foreclosed upon “deserved it.” That does not sufficiently explain, justify or excuse why the Banks believe they can act outside the scope of the law.
It is the continued demonstration of the breakdown of moral ethos that has brought this country to its knees. If Banks do not honor the rule of law, why should anyone else?
There used to be a social contract between borrowers and lenders. To honor and repay a debt was a moral obligation. There was also a legal framework to deal with contract disputes include lack of repayment. So accepted was this social norm that analysts used to cite a higher composition of lower and middle-lower income borrowers as being “safer” investments because those borrowers had pride of ownership and you could count on them to pay back the loan.
The Banks may think they are acting for the benefit of all, but somehow it always seems to come back to what is best for them. I implore them to rethink their strategy. If they will not abide by the rule of law, why should anyone else?
Perhaps they argue they are not responsible for civil order. Fine, then let’s use the very laws they flaunt and demand accountability and penalty. When the pendulum swings back (and it will), they may wish they were more generous when making decisions that affect all of us.
Markets are inefficient and free capitalism does not work.
Citigroup claims its home repossession process is ‘sound’, more damage control.
The mortgage mess seems to have turned into another blink in the 24 hour news cycle. Bank stocks are recovering. There is no mention of any morgage problems in the mainstream media. The problem must be solved. On to the next disaster.
It’s an IT systems problem. The servicers’ legacy systems are obsolete and incapable of handling the volume of loan mods and foreclosures. It’s impossible to be precise when part of the process requires manual intervention.
The MSM is scurrying to pin this on borrowers and ‘paper’ over the problem.
Massive fraud aside, there are 2 simple facts:
1. No one would be foreclosed if the market value of the house was greater than the debt. They would simply sell the house.
2. The finance industry crashed the housing values and caused massive unemployment.
Therefore the responsibility is on the finance industry, not the ‘deadbeat’ borrowers. They would simply sell if it weren’t for the crashed market and unemployment.
This account of the problem sounds like a ‘dog ate my homework’ apologia for the banks. It’s no better than blaming robo-signers.
Left out of MBSGuy’s analysis is the fee structure resulting in the servicers paying themselves upfront for bogus fees, which reduces the cash flow to the MBS: the servicers first credit payment of the fees, their major source of income, and what’s left over goes to the MBS and/or tax escrow account. This is because the servicers are set up as the banks’ ‘countercyclical diversification strategy.’ See Katie Porter’s article, linked below. The servicers’ first duty is to enrich the banks at both borrowers’ and MBS shareholders’ expense. The point is to strip equity at both ends. Lousy accounting by incompetent, low-paid employees is just a dodge and a cover-up.
http://www.creditslips.org/creditslips/2008/05/piling-on-fees.html
The borrowers and MBS shareholders are both victims in a scam that eventually ends in the banks, hedge funds and private equity taking title to homes forced into foreclosure by the servicers’ strategy of tacking on bogus fees and lawyer charges that pile up so fast that it becomes impossible to catch up. Average added fees are $6.000. One wonders if the servicers also intentionally fail to pay taxes on these properties, thus clearing the way for the banks, through multiple subsidiaries created expressly for this purpose, to acquire the homes (and clear title) at tax lien sales. See HuffPo’s investigative report:
http://www.huffingtonpost.com/2010/10/18/the-new-tax-man-big-banks_n_766169.html?view=print
BS of A News Service
November 3, 2010
Today President Obama announced that he has mandated a solution to the Robo-signer glitch that has been holding up the process of transferring mortgages from deadbeat buyers to the rightful owners. Starting on January 1, 2011 the only verification of title to real estate that will be recognized will be the modern and highly efficient computerized documentation system MERS. It will replace the existing archaic and inaccurate recording system which required paper documents susceptible to fire and rodent damage be stored at county courthouses. All county court recorders are instructed to immediately mail all title documents in their possession to MERS or its agent for incorporation into the updated data base.
Due to the diligent budget-balancing efforts of the Obama administration MERS has only four current employees, so the administration has subcontracted the data transfer process to the highly respected firm of Goldman & Sacks. County recorders are instructed to endorse all mortgage documents in their possession in favor of Goldman Sacks in order to facilitate their incorporation into the national data bank.
As a footnote, President Obama announced that an agreement has been reached to preserve the two party political system. Intense top level negotiations have led to a merger of the remaining elements of Mr. Obama’s political party (formerly known as The Party Of Hope) with the remnants of the old Republican Party with which it shares a total commitment to the sanctity of executive bonuses and maintaining the illusion of a free market. The issue which proved so intractable was one of principle: 50% of the negotiators insisted that the new party be called the Republicrats, while the other half held firm to the traditions embodied in the Demorepugnant name. The issue was finally resolved by agreeing to call the merged organization the Do Nothing Party in recognition that the public already knew it by that name.
Meanwhile the new majority party (formerly known as the Tea Party) is having pitched battles of it’s own over their leader Barbie’s insistence that the party change its name to the Grizzly Party. But that’s next week’s story folks!
Thank you for your up-to-the-minute unsnarling of ugly developments on this fraud, Yves.
Although it’s been evident to me that much of Corporate or Political America is either in denial or complicit in this ongoing real estate fraud meat grinder, I’ve been trying to figure out why for the past year, many condo short sales in South Florida have been transacted well below the genuine bid, with the seller coerced into signing a promissory note for the difference…Countrywide is usually the originator & servicer and everybody keeps their mouths shut. The bewildered buyer is happy, the servicer takes a big haircut on the outstanding mortgage, but recoups the equivalent as a private uncollateralized loan (!?)
Could be the investors take the hit, not Countrywide. N’est-ce pas? I think I finally get it!
There are loads of tricks going on screwing both the borrower and the investor – most of these gimmicks aren’t even known yet. What can one expect – garbage in, garbage out.
If the Gov wants to do something why not force the mortgage servicing sector to at least lower interrest rates to whatever the rate is today. Their are a few of us who actually can afford our homes. Even put down MORE than the required 10 percent. But it makes it tough to stick it out when your home is underwater by nearly 150K, and the home on either side of you and the one accross the street were resold for half what you paid. Not to mention you will never see any equity in your home. Makes you feel alittle stupid to tell the nieghbors what you owe on your home…much less what your payment is. At the very least the 2.5 percent drop would save 3 or 4 hun. a month. Concolation prize I guess.