Whenever I hear about how there wouldn’t be a problem with foreclosures if people just paid their mortgages on time, I’m reminded of Alan Grayson’s paraphrase of the Republican Health Care Plan: “Don’t Get Sick. If You Get Sick, Die Quickly.” Yes, the world would be an easier place if people never got sick, or credit risk didn’t exist, and people made payments perfectly all the time. But they don’t, and we need a system of rules and a process for collecting and presenting evidence in order to kick a family out of their home. And we need a system where this process sets the ground rules that in turn allow for lenders and borrowers coming together and negotiating a situation that is best for both of them.
Because the first rule of mortgage lending is that you don’t foreclose. And the second rule of mortgage lending is that you don’t foreclose. I’ll let Lewis Ranieri, who created the mortgage-backed security in the 1980s, tell you: “The cardinal principle in the mortgage crisis is a very old one. You are almost always better off restructuring a loan in a crisis with a borrower than going to a foreclosure. In the past that was never at issue because the loan was always in the hands of someone acting as a fudiciary. The bank, or someone like a bank owned them, and they always exercised their best judgement and their interest. The problem now with the size of securitization and so many loans are not in the hands of a portfolio lender but in a security where structurally nobody is acting as the fiduciary.”
In the past you had Jimmy Stewart banks. The mortgages were kept on the books of the bank. You had someone who you could go to and renegotiate your mortgage. With mortgage-backed securities, the handling of payments and working-out of troubles moved to servicers. If you are learning about this crisis for the first time, understanding what is broken here is very important.
This is Not a New Problem With Servicing
Let’s get some quotes from bankruptcy judges in here:
“Fairbanks, in a shocking display of corporate irresponsibility, repeatedly fabricated the amount of the Debtor’s obligation to it out of thin air.” 53 Maxwell v. Fairbanks Capital Corp. (In re Maxwell), 281 B.R. 101, 114 (Bankr. D. Mass. 2002).
“[t]he poor quality of papers filed by Fleet to support its claim is a sad commentary on the record keeping of a large financial institution. Unfortunately, it is typical of record-keeping products generated by lenders and loan servicers in court proceedings.” In re Wines, 239 B.R. 703, 709 (Bankr. D.N.J. 1999).
“Is it too much to ask a consumer mortgage lender to provide the debtor with a clear and unambiguous statement of the debtor’s default prior to foreclosing on the debtor’s house?” In re Thompson, 350 B.R. 842, 844–45 (Bankr. E.D. Wis. 2006).
(Source.) Notice that consumer rights groups were flagging this as a major problem back in 1999 and 2002 because judges were noticing it was a major problem in their bankruptcy courts. If the late 1990s to 2006 period is a Renaissance period of servicer fraud then we can contrast it with the period we live in now, the Baroque period of servicer fraud. Whatever unity there used to be between the forms and functions of the sloppy documentation and outright fraud in the art of servicing have become detached.
The forms of fraud have gone high art: serving documents on people who could never have been served, signing 10,000 affidavits a month, etc. They are all well covered, and we’ll list more later perhaps. Here are some of my favorites from last year, the reading list in Part One has even more. But what I want to focus on is the function of servicer fraud.
What Do Servicers Do? A Case Study in Bad Design and Worse Incentives
Servicers in a mortgage-backed security have two businesses. The first is transaction processing. This means taking in your mortgage money on one end and walking it over to the crazy tranches and payment waterfalls on the other end. This is clean, efficient, largely automated, requires little discretion and works very well, and implicit in it is that it is most profitable when you can harness economies of scale.
It’s considered a “passive entity” in fact, so there are no taxes applied in this passthrough mechanism. If servicers went “active”, say by looking for mortgage notes not in the trust 90 days after the fact or mortgage notes that are not in the trust that have defaulted, which is what they’d likely have to do to get out of this foreclosure fraud crisis, they’d face very severe tax penalties.
Their other business is to handle default situations. In addition to the fixed fee they get for servicing each individual mortgage they get paid from default fees like late charges. They get to retain most, if not all, of these fees.
So right away they have an incentive to not find ways to negotiate to get a mortgage to a good state. They also have a strong incentive to keep a steady stream of fees and charges going to their books rather than to investors. So anything that puts servicers in charge of negotiating mortgages, say the Obama’s administration’s HAMP program, is designed to fail.
Because even without bad incentives, doing good work on modification is costly, time consuming, requires individual expertise and experience and doesn’t benefit from automation or economies of scale. Which is to say it is the opposite structure of their normal business.
And there are additional worries. Many of the servicers work for the largest four banks – Wells Fargo, Bank of America, Citi, and JP Morgan – and these four banks have large exposures to junior liens. These are second or third mortgages or home equity lines of credit that would have to be wiped out before the first mortgage can be modified. The four banks have almost half a trillion dollars worth of these exposures and, from the stress test, are valuing them at something like 85 cents on the dollar. Keeping a homeowner struggling to pay the second lien would be more worthwhile to these middlemen banks than getting him or her into a solid first lien to the benefit of the bond investor.
So keep these in mind as you read about the servicers here. There have been worries that they, as a designed institution, were simply not qualified for this job going back a decade. They have massive conflicts with the investors they are supposed to be working for. They profit when homeowners collapse and lose money when they are brought up to a normal payment schedule (made current). And if the instruments don’t have the notes necessary to bring standing to carry out the foreclosures they have to take a massive tax hit in order to take the note into the trust. And regulation to handle this isn’t in place.
Because for all the talks of regulatory burden, there is no current federal government agency that regulates the servicers. Not the Federal Reserve. Not the Treasury. This is what happens when the financial industry writes the deregulation. Instead you have a patchwork of state regulators and attorney generals. Notice how President Obama has nobody to turn to and tell the press that “So and So is on the case.” In theory the OCC regulates servicers if they are part of a bank or a thrift. This must fall to the new regulatory counsel and the Consumer Financial Protection Bureau to investigate, where it will properly belong.
(The Fair Debt Collections Act, which applies to debt collectors, doesn’t apply to servicers. Here might be a fun idea for an enterprising staffer – if there is no note producible, are servicers still legally servicers and thus exempt from the Fair Debt Collections Act? Just a thought….)
Is it any wonder that servicers are rushing these foreclosures and making a mockery of the courts and producing systemic risk in the process? There needs to be an investigation of what is being done and why, because this problem is not taking care of itself.
(Special thanks to Katie Porter and Adam Levitin, who you can read at credit slips, as well as Tom Adams and Yves Smith, who you can read at naked capitalism, for in-depth discussions on this material.)
This is the third of a 5 part series from Mike Konczal, a former financial engineer, is a fellow with the Roosevelt Institute, who also blogs at New Deal 2.0, and is working on financial reform, the 21st century economy, structural unemployment, inequality, risk sharing, consumer access to financial services and more generally what it means to have a social contract in a financialized, post-industrial economy.
Category: Think Tank
In the financial markets, a lot rides on the word of a company’s top executives. If a CEO tells a lie, a lot of shareholders can get hurt.
Now, after studying thousands of corporate earnings calls, two researchers from Stanford University think they’ve come up with a way to tell when senior executives are fibbing.
It’s a question that people have been wrestling with for as long as humans have been interacting with each other.
“I think since the Garden of Eden we’ve been trying to figure this out — who’s lying and who’s not lying,” says David Larcker, a professor of accounting at Stanford’s Graduate School of Business.
How Can You Tell When A CEO Is Lying?
NPR , October 18, 2010
What is more important than survival? On planet Earth, nothing. The most basic rule of life is SURVIVE. The Biological imperative of living things is to perpetuate their existence — survive, procreate, further the species. It is hardwired in the DNA of every living organism. Those that do not succeed in satisfying these imperatives are…Read More
The Asian market response to the unexpected timing of the PBOC rate hike was mixed and interestingly, the Shanghai index closed a touch higher, up for a 9th trading day in the past 10 and the Yuan fell (China may be less inclined to accommodate a Yuan rise of substance if they’re raising rates at…Read More
In the comments of my recent Hey, Big Spender post, some readers took me to task because “Congress controls the purse strings” and it was therefore unfair to look at spending by President. Bruman: It may make more sense to break this down into rates of spending increases by congressional (2-year) intervals. Fortunately, these divide…Read More
Full Text of Letter to BofA from NY Fed (Maiden Lane), Freddie Mac, Pimco, Western Asset Mgmt, Neuberger Berman, Kore Advisors
“Although it has been specifically notified by MBIA, Ambac, FGIC, Assured Guaranty, and other mortgage and mono-line insurers of specific loans that violated the required representations and warranties, the Master Servicer has not notified any other parties of these breaches of representations and warranties;”
October 18, 2010
Facsimile No. 805 520 5623
Countrywide Home Loans Servicing LP
Attn. Mark Wong
400 Countrywide Way
Simi Valley, CA 93065
Facsimile No. 805 520 5623
Countrywide Home Loans Servicing LP
Attn. Mark Wong
7105 Corporate Drive
Plano, TX 75024
Facsimile No. 212 815 3986
The Bank of New York
101 Barclay Street
Attn: Mortgage Backed Securities Group
for Trusts Listed on Ex. A
New York, NY 10286
Facsimile No. 212 815 3986
The Bank of New York
101 Barclay Street
Attn: Corporate Trust MBS Administration for Trusts Listed on Ex. A
New York, NY 10286
Mr. Leo Crowley
Ms. Jeanne Naughton Carr
New York, NY 10036-4039
Re: HOLDERS’ NOTICE TO TRUSTEE AND MASTER SERVICER OF FAILURE OF MASTER SERVICER TO PERFORM GIVEN PURSUANT TO §7.01(ii) OF POOLING AND SERVICING AGREEMENTS PERTAINING TO THE RESIDENTIAL MORTGAGE BACKED SECURITIES LISTED ON THE ATTACHED EXHIBIT “A”
Dear Sir or Madam:
Unless otherwise indicated, all capitalized terms used in this letter have the meaning ascribed to them in those certain Pooling and Servicing Agreements (PSAs) governing
Residential Mortgage-Backed Securities (RMBS) evidenced by the Countrywide Mortgage Pass- Through Certificates (Certificates) listed on the attached Exhibit “A.”
The undersigned are the Holders of not less than 25% of the Voting Rights in Certificates issued by the Trusts listed on the enclosed Exhibit A.
Pursuant to Section 7.01(ii) of the applicable PSAs, the Trustee and the Master Servicer are hereby notified of the Master Servicer’s failure to observe and perform, in material respects, the covenants and agreements imposed on it by the PSAs. Specifically, the Master Servicer has failed and refused to do the following, which have materially affected the rights of Certificateholders:
1. Section 2.03(c) of the PSAs states that “Upon discovery by any of the parties hereto of a breach of a representation or warranty with respect to a Mortgage Loan made
pursuant to Section 2.03(a) … that materially and adversely affects the interests of the Certificateholders in that Mortgage Loan, the party discovering such breach shall give prompt notice thereof to the other parties.” The Master Servicer has failed to give notice to the other parties in the following respects:
a. Although it regularly modifies loans, and in the process of doing so has discovered that specific loans violated the required representations and warranties at the time the Seller sold them to the Trusts, the Master Servicer has not notified the other parties of this breach;
b. Although it has been specifically notified by MBIA, Ambac, FGIC, Assured Guaranty, and other mortgage and mono-line insurers of specific loans that violated the required representations and warranties, the Master Servicer has not notified any other parties of these breaches of representations and warranties;
c. Although aware of loans that specifically violate the required Seller representations and warranties, the Master Servicer has failed to enforce the Sellers’ repurchase obligations, as is required by Section 2.03; and,
d. Although there are tens of thousands of loans in the RMBS pools that secure the Certificates, the Trustee has advised the Holders that the Master Servicer has never notified it of the discovery of even one mortgage that violated applicable representations and warranties at the time it was purchased by the Trusts.
2. In violation of its prudent servicing obligations under Section 3.01 of the applicable PSAs, the Master Servicer has:
a. Failed to maintain accurate and adequate loan and collateral files in a manner consistent with prudent mortgage servicing standards;
b. Failed to demand that sellers cure deficiencies in mortgage records when deficient loan files and lien records are discovered;
c. Exacerbated losses experienced by the Trusts;
d. Incurred wholly avoidable and unnecessary servicing fees and servicing advances to maintain mortgaged property, all as a direct result of the Master Servicer’s deficient record-keeping; and,
e. Prejudiced the interests of the Trusts and the Certificateholders in the mortgages by fostering uncertainty as to the timely recovery of collateral.
3. Section 3.11 (a) states that the Master Servicer “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.” Despite these covenants, the Master Servicer has continued to keep defaulted mortgages on its books, rather than foreclose or liquidate them, in order to wrongfully maximize its Servicing Fee, at the expense of the Certificateholders’ best interests, including rights to recover from pool or financial guaranty insurance policies. In addition, the applicable provisions of the PSAs contemplate that foreclosures and liquidations of defaulted mortgages will proceed forthwith and in accordance with applicable law, provided the documentation is in order, as a matter of fairness to all parties. The Servicers’ failure to proceed appropriately and their failure to maintain records in an accurate, appropriate, and adequate manner has impeded this process and caused wholly avoidable delays that have injured investors, borrowers, neighborhoods, and communities. To make matters worse, these delays have also enriched the Servicers, as they have continued to charge unearned and unwarranted servicing fees on mortgages which would have been liquidated but for the Servicers’ breach of their duties;
4. Section 3.11 of the PSAs provides that “Countrywide may agree to a modification of any Mortgage Loan” in certain specified circumstances. The Holders do not seek to halt bona fide modifications of troubled loans for borrowers who need them. When, however, modifications are required to remedy predatory lending violations, Section 2.03(c) of the PSAs requires that the offending seller of the mortgage bear the costs to “cure such breach in all material respects….” Nowhere do the PSAs permit the costs of curing predatory loans to be imposed on the Trusts or the Certificateholders. Despite these provisions, the Master Servicer has breached the PSAs by agreeing to modify loans held in the Trusts for the purpose of settling predatory lending claims made by various Attorneys’ General against its parent company while breaching its obligation to demand that the offending mortgage seller (its parent company) bear the costs of curing the violation, as well as the expenses reasonably incurred in enforcement of the mortgage seller’s obligation to cure predatory mortgages. Id. At §2.03(c). The Master Servicer has also unjustly enriched its parent company by using Trust collateral to settle claims that are not, and could never be, made against the Trusts, in a manner that has “materially and adversely affected the interest of the Certificateholders…” Id. The Master Servicer has therefore:
a. Failed to perform its obligation to demand that Countrywide comply with the requirement that it cure or repurchase predatory and ineligible loans it has agreed to modify in the Attorney General settlement;
b. Failed to track or notify the Trustee concerning which specific loans the Master Servicer has modified pursuant to these provisions, even though the PSAs require that “the Modified Mortgage Loan shall be automatically be deemed transferred and assigned to Countrywide…”; and,
c. Failed to perform its obligation to “deliver to the Trustee a certification of a Servicing Officer to the effect that all requirements of this paragraph have
been satisfied with respect to the Modified Mortgage Loan.”
5. Section 3.14 of the PSAs provides that the Master Servicer shall be entitled to recover Servicing Advances that are “customary, reasonable and necessary ‘out of pocket’ costs and expenses incurred in the performance by the Master Servicer of its Servicing Obligations including but not limited to the cost of (i) the preservation, restoration, and protection of a Mortgaged Property…” Despite the requirement that Servicing Advances were to be incurred only for reasonable and necessary out of pocket costs, the Master Servicer instead utilized affiliated vendors–who marked up their services to a level 100% or more above the market price–to provide services related to the preservation, restoration, and protection of” Mortgaged Property, in a fraudulent, unauthorized, and deceptive effort to supplement its Servicing income. See ¶ 3(a) and (b), above.
6. Section 3.01 of the PSAs requires that the Master Servicer “shall service and administer the Mortgage Loans in accordance with the terms of this Agreement and customary and usual standards of practice of prudent mortgage servicers.” Despite this requirement, the Master Servicer has repeatedly and deliberately failed to perform this covenant by:
a. Creating Countrywide-affiliated vendors to provide maintenance, inspection, and other services with regard to defaulted mortgages that should have been
undertaken only if they were in the Certificateholders’ best interest. The Federal Trade Commission, however, found that Countrywide repeatedly and deliberately overcharged for these services by as much as 100% or more in order to increase its profits from default-related service fees; and,1
b. As a result of these wrongful practices, Countrywide has increased the losses to the Trusts. Each of these failures to perform the Master Servicer’s covenants and agreements violated the prudent servicing obligations imposed on the Master Servicer by PSA §3.01. Each of these failures to perform the Master Servicer’s covenants and agreements also materially affected the rights of the Certificateholders.
Each of these failures to perform is continuing. If they continue for an additional sixty days from the date of this letter, each of them—independently—will constitute an Event of Default.
The undersigned Holders therefore demand that the Master Servicer immediately cure these endemic and grievous defaults in its obligations under the PSAs. By this letter, the Holders further notify the Trustee of the Master Servicer’s failure to perform its covenants and agreements.
The undersigned Holders also reserve all other rights and remedies they may have, individually and under the PSAs, as a result of the matters described in this letter. We invite you to communicate with our counsel, Ms. Kathy Patrick of Gibbs & Bruns LLP, should you wish to discuss this matter further.
1 The specific details of the Master Servicers’ wrongful conduct are available in a press release issued by the Federal
Trade Commission, which is accessible at the following website:
[INTENTIONALLY LEFT BLANK]
Very truly yours,
Blackrock Financial Management Inc., and its advisory affiliates
John Vibert, Managing Director
Freddie Mac Corporation
Ray Romano, EVP Chief Credit Officer
Kore Advisors, LP
Gary J. Kosinski, Principal
Maiden Lane, LLC; Maiden Lane II, LLC; and Maiden Lane III, LLC
Federal Reserve Bank of New York, Managing Member
Zachary Taylor, Assistant Vice President
Metropolitan Life Insurance Company
Charles S. Scully, Managing Director
Neuberger Berman Europe, Ltd. as investment manager to a managed account client
Ope Agbaje, Executive Director
PIMCO Investment Management Company LLC
Daniel J. Ivaseyn, Managing Director
Western Asset Management Company, for its clients and managed accounts
C.A. Ruyi de Perez, General Counsel
|Deal Name||Deal Name||Deal Name|
|CWALT 2004-32CB||CWHL 2004-22||CWL 2006-15|
|CWALT 2004-6CB||CWHL 2004-25||CWL 2006-16|
|CWALT 2004-J1||CWHL 2004-29||CWL 2006-19|
|CWALT 2005-14||CWHL 2004-HYB9||CWL 2006-2|
|CWALT 2005-21CB||CWHL 2005-11||CWL 2006-20|
|CWALT 2005-24||CWHL 2005-14||CWL 2006-22|
|CWALT 2005-32T1||CWHL 2005-18||CWL 2006-24|
|CWALT 2005-35CB||CWHL 2005-19||CWL 2006-25|
|CWALT 2005-36||CWHL 2005-2||CWL 2006-26|
|CWALT 2005-44||CWHL 2005-3||CWL 2006-3|
|CWALT 2005-45||CWHL 2005-30||CWL 2006-5|
|CWALT 2005-56||CWHL 2005-9||CWL 2006-7|
|CWALT 2005-57||CB CWHL 2005-HYB3||CWL 2006-9|
|CWALT 2005-64||CB CWHL 2005-HYB9||CWL 2006-BC2|
|CWALT 2005-72||CWHL 2005-R3||CWL 2006-BC3|
|CWALT 2005-73CB||CWHL 2006-9||CWL 2006-BC4|
|CWALT 2005-74T1||CWHL 2006-HYB2||CWL 2006-BC5|
|CWALT 2005-81||CWHL 2006-HYB5||CWL 2006-SD1|
|CWALT 2005-AR1||CWHL 2006-J2||CWL 2006-SD3|
|CWALT 2005-J5||CWHL 2006-OA5||CWL 2006-SD4|
|CWALT 2005-J9||CWHL 2006-R2||CWL 2006-SPS2|
|CWALT 2006-14CB||CWHL 2007-12||CWL 2007-2|
|CWALT 2006-20CB||CWHL 2007-16||CWL 2007-5|
|CWALT 2006-37R||CWHL 2008-3R||CWL 2007-6|
|CWALT 2006-41CB||CWL 2005-10||CWL 2007-7|
|CWALT 2006-HY12||CWL 2005-11||CWL 2007-9|
|CWALT 2006-OA11||CWL 2005-13||CWL 2007-BC1|
|CWALT 2006-OA16||CWL 2005-16||CWL 2007-BC2|
|CWALT 2006-OA17||CWL 2005-2||CWL 2007-BC3|
|CWALT 2006-OA6||CWL 2005-4||CWL 2007-QH1|
|CWALT 2006-OA9||CWL 2005-5||CWL 2007-S3|
|CWALT 2006-OC10||CWL 2005-6|
|CWALT 2006-OC2||CWL 2005-7|
|CWALT 2006-OC4||CWL 2005-8|
|CWALT 2006-OC5||CWL 2005-9|
|CWALT 2006-OC6||CWL 2005-AB2|
|CWALT 2006-OC7||CWL 2005-AB3|
|CWALT 2007-17CB||CWL 2005-AB4|
|CWALT 2007-23CB||CWL 2005-BC5|
|CWALT 2007-24||CWL 2005-IM1|
|CWALT 2007-OA7||CWL 2006-10|
|CWALT 2008-2R||CWL 2006-12|
PDF after the jump
Many crazy things in the hopper today: • Task force probing whether banks broke federal laws during home seizures: Federal law enforcement officials are investigating possible criminal violations in connection with the national foreclosure crisis, examining whether financial firms broke federal laws when they filed fraudulent court documents to seize people’s homes, according to people…Read More
Category: Financial Press
As discussed previously, this is no longer about deadbeat borrowers: Mortgage giant PIMCO has just issued a giant F$%@ You to Bof A’s Countrywide division. Participating in the FU is the NY Fed. And in case you forgot, PIMCO is an advisor to Uncle Sam. There are two issues (Reps & Warranties) that could be…Read More
Do underwater homeowners have a zero cost option on future movement of home prices? That seems to be the conclusion of the SF Fed, who note that for the upside-down borrower, there is merit in staying put. “Given the importance of falling house prices as a factor in defaults, it is natural to ask how…Read More
Be sure to see the second part of Mike Konczal’s series explaining the basics of the current foreclosure fraud crisis Foreclosure Fraud For Dummies, 2: What is a Note, and Why is it So Important? This is Part Two; you should also read Part One . . .