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Proposed Bill on Foreclosure Fraud and Servicer Standards Shows Shortcomings of Attorney General and Federal Regulatory Responses

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It’s more than a tad ironic that Senator Carl Levin released a strongly-worded report on Wall Street’s role in the financial crisis, focusing on abuses and failures of oversight in the residential mortgage and CDO markets, when the officialdom is engaged in yet another whitewash of further crisis fallout, that of servicing and foreclosure related abuses.

One effort at pushback comes via a bill proposed today by Senator Sherrod Brown and Representative Brad Miller, the Foreclosure Fraud and Homeowner Abuse Prevention Act of 2011. While some provisions need further work, it’s an ambitious and badly needed effort that targets many servicer abuses.

Foreclosure Fraud and Homeowner Abuse Prevention Act Explanation

Unlike other efforts at servicing reform, this one considers the needs of investors as well as of borrower. That matters because investors are treated badly by servicers and currently face obstacles to disciplining them. Many of the bill’s requirements are sound, such as eliminating the exemption that MBS trustees now have from the Trust Indenture Act, limiting some of the banks’ avenues for “extend and pretend”, ending dual track, improving disclosure of fees and charges, and allowing borrowers to challenge foreclosures if the bank has not considered a loan modification, with an obligation to offer a principal mod when it makes sense for investors.

There are some efforts to improve servicer incentives that I am less certain will work. Servicers would be construed to have a fiduciary duty to investors. That could only be prospective. Servicers won’t work under those conditions; the business isn’t that profitable even in the best of times.

The bill also would have delinquent borrowers be serviced by special servicers. That makes sense since most servicing platforms were built around the idea of basic processing at a time when delinquency, foreclosures and losses were low.

Having an independent party manage all defaults (not just cherry picked ones) is a good idea. But the big question is who will these independent servicers be? They don’t really exist now and that’s because it is an expensive business with large liquidity demands via hedging.

Historically, in deals where the investors were worried about the strength or quality of the servicer (ie the bank wanted the deal to have a weak servicer, and the investors wanted a stronger one), the investors would require that a special servicer be appointed on day one and written directly into the pooling and servicing agreement. While the loans were performing, the special servicer would get a small “retainer” fee (3-5 basis points per annum) but would get to step up to the full fee when they took control of servicing of the loans in default. It was a structure that worked pretty well – it helped keep the basic servicer honest, knowing that they could have the entire servicing business taken away and given to a special servicer if the loans performed poorly.

However, offering new, real modifications is really like underwriting a new loan. If the special servicer is unaffiliated with a major bank, it would not have an underwriting department. Nor would it have the ability to fund refinances of performing loans. And it seems unrealistic to expect a special servicer to enter the new loan underwriting business.

It’s not clear how the fees provided for (100 basis points “untranched”) would actually be collected and held, and what the formula would be for paying them to the special servicer, and how and when they would be reversed back to the investors if the deal performed well and there wasn’t much need for special servicing.

The bill also prohibits servicers or their affiliates from owning seconds may not be workable. However, if the servicing is split out between basic collections and special servicing, the solution might be to permit parties who lend and perform basic servicing to own seconds, but bar the special servicers.

The bill intended to reduce conflicts and increase investor ability to discipline servicers but missed some key issues. It does have a provision that would limit so-called “tranche warfare” but the bigger barrier to investors taking action against trustees (who would then deal with the servicer) is that it has become the standard in the industry to require investors to waive their rights to sue unless 25% of the investors sign up. That clearly has to go.

Finally, many servicers are reluctant to allow deep principal modifications because they would mean that the servicer could not get reimbursed for their advances of principal and interest. This is a real source of conflict in the transactions. The bill seeks to limit the amount of principal and interest that the servicer advances, but that reduces the severity of the tension rather than eliminating it.

Overall this is a promising effort, but there are still some thorny issues that need to be resolved. I hope the sponsors can iron them out.

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13 comments

  1. jake chase

    Isn’t it obvious by now that securitization makes no economic sense? We used to have these funny banks called Savings & Loans, which did an excellent job providing mortgages until the idiocy of deregulation unleashed the Wall Street con men. You want reform? Restore 1960s bank regulation.

  2. stuhlmann

    I would hope that any bill that has the words “fraud” and “abuse” in its title would include appropriate punishments for those who commit fraud and abuse homeowners. Does the bill address help criminalize criminal behavior?

  3. Tom Crowl

    When the going gets weird, the weird turn pro.
    - Hunter S. Thompson

    Open Letter to Wells Fargo Board of Directors:
    ( BoardCommunications@wellsfargo.com )

    TO: Wells Fargo Board of Directors:
    (John D. Baker II, John S. Chen, Lloyd H. Dean, Susan E. Engel, Enrique Hernandez Jr., Donald M. James, Richard D. McCormick, Mackey J. MacDonald, Cynthia H. Milligan, Nicholas G. Moore, Phillip J. Quigley, Judith M. Runstad, Stephan W. Sanger, Susan G. Swenson and John Stumpf)

    cc: Offices of Congressman Brad Sherman and others

    Dear Mr. Stumpf et al,

    This is an offer for settlement with the hope of forestalling other action. Considering the egregious failure of Wells Fargo in upholding its responsibilities to its shareholders, counter-parties and customers (some of those responsibilities being fiduciary as well as simply good for reputation) as well as it failure to manage either its own assets or those for whom it may provide services*… I consider it a more than reasonable and generous solution.

    Should the illegal foreclosure be followed by follow through with eviction scheduled for June 15 this offer is revoked and subsequent action should be expected.

    In brief outline only: I am entrepreneur/inventor. Bought home in ’91. I live in Granny-unit I personally designed, permitted and built over the garage (re-fi Adding value to this hard asset. NOT for consumption.) RENT FROM HOUSE MORE THAN COVERED MORTGAGE. Loss of tenants after 3 months lapse in paying rent in Fall of ’08 led to skipped payment to Wachovia and judgment in my favor for a bit over $8,000. Wachovia would not accept anything but full immediate catch up… I even opened a Wachovia checking account and placed money in there for payment but they wouldn’t take it. This left no possibility to find replacement full tenants as house quickly fell into default and eventual foreclosure.

    In the interim between Notice of Default and foreclosure… numerous attempts were made to inform both Wachovia and Wells Fargo that there were wiser solutions than confrontation and eventual legal entanglement. Further, since my essential goal has always been to simply live in the granny unit inexpensively for my otherwise unfunded retirement… I was more than happy to agree to a short-sale to investor willing to allow that. I remain agreeable to such a solution. There is much more to this story but this is simply with the hope that due process will finally be offered by Wells without prodding from exterior forces.

    I and millions of others are now aware that we are victims of collective justice and have been judged collectively guilty. I’m certainly not the only one. I’d be more than happy to assist you in maximizing the value on this asset. Allow me to remain in the unit I built under mutually agreeable terms and assist in search for suitable investor. I suggest that this will be a best method for moving forward,

    If note and mortgage are not held by Wells but by some other party or parties (Fannie? Freddie? MERS?) and should this Corporate/Government partnership in the butchering of due process and equitable, individualized adjudication be a part of a more co-ordinated policy decided by Treasury, the FED, OCC, Wall Street ‘friends’, etc… since fair treatment for citizens would be inconvenient and expensive… I’m convinced there will be a heavy political price to pay.

    Mr. Stumpf, holding simultaneously the positions of Chairman, President and CEO of Wells Fargo must surely be a heavy burden. I encourage you to share those burdens with your board. They may be too much for one man alone. I’d suggest that you allow the Board to share responsibility collectively and so I address this to you all.

    P.S. While this has been a terrible distraction, I’ve nevertheless been successful in obtaining patent. Its a simple financial innovation. (Sometimes the complicated ones end up just confusing people and are actually corrupt in their very intention. I know… Its hard to believe that could happen.) My little innovation is going to make it easier for regular people to petition their government and representatives (lobby). It actually is good for quite a bit more but I feel that’s a good start!

    So in addition to this request to literally help keep me off the streets, you’re certainly welcome to be helpful with advancement of this simple, neutral financial utility … (under certain conditions).

    *I remain uninformed as to who actually holds the note and mortgage. Are you acting for yourselves or on behalf of some other party?

    Regards,

    Tom Crowl
    (818) 363-0775
    http://CulturalEngineer.blogspot.com

    Reciprocal accountability—freeing individuals to hold each other accountable—is the only truly long term solution to predation.
    - David Brin

    1. Sam

      Tom,
      Your experience is not uncommon. We have documented literally thousands of cases where the financial institutions put you in touch with the Office of the President, or Executive Communicator…both are really just schleps who take phone calls and never solve a problem. In a case that just happened yesterday involving Wells Fargo and ASC, a subsidiary of Wells Fargo that is owned/operated by Wells Fargo to service its loans and those of Citi, an elderly grandmother was terrorized by an ASC representative who went to er son’s home (in foreclosure) kicked the door and said, “We are going to kick you out of this house.”

      Very much like Foreclosure Gestapo! The foreclosure storm trooper left a note with ASC’s toll free number. When the homeowner called ASC to confront the issue, he was told “We cant control what are field reps are doing to confirm you are still living in our house.” Simply no respect. That is why we must have national legislation to control predatory foreclosures by ASC, Wells Fargo, and CitiMortgage. They are the most aggressive and notorious for their Foreclosure Gestapo tactics.

    2. FatCat

      Tom,

      Prince FatCat here. Vacate MY unit before I call MY judge to send MY sheriff to kick you out immediately. I want that unit and the rest of your city to demolish in order to grow corn for biodiesel for China.

      And stop threatening ME with lawsuits, because I am really frightened now…LOL

      Listen up, you little peasant: I have 1000 lawyers to my command, I bribe every US and state-level senator, representative, and judge, I own the police force across this country, I own ALL private prisons in this nation, I get MY laws passed, I get MY orders carried out. This is MY country now! MY Feudal States of America.

      Vacate the unit immediately! Is that clear?!!!

      FatCat

  4. Billy

    What are we discovering on the note never made it to the trust front? What sort of bill would have to be written so we could see which notes the trusts actually hold?

    We are beginning to require plaintiffs in foreclosure cases to prove they own the note again right?

    Would any global settlement with the banks adress the who is the note holder question? Where does a global settlement leave us the concerned homeowner?

  5. jacke

    As long as the banks have the legal right to foreclose “at will” without proof of cause, there will be corruption and unethical transfers of real property securing notes to connected insiders at the banks.
    A current scheme (regional bank that is now defunct)allows the bank who holds the note on a valuable property, such as a construction loan on a development, to deliberately slow or stop funding the loan, claim the borrower is in default, then proceed with foreclosure. Because the bank has no legal duty (only an ethical one) to act only with cause and in good faith, and because the bank is not bound to sell the note to bidders, or even solicit bids, such notes can be sold for pennies on the dollar to holding companies set up by related parties and insiders. The scheme lines the personal pockets of the bank officials involved, loots the bank, and destroys multiple businesses and jobs.
    Theoretically, the parties damaged have the right to go to court against the bank, but such schemes have a way of using attorney privilege,verbal fraud and special relationships in the foreclosure court by the bank’s attorneys to put the borrower into bankruptcy so that he/she cannot afford to sue. In addition, actually producing documentary evidence of the scheme is nearly impossible, again, due to the bank’s attorney-client privilege and the use of verbal rather than written actions by the bank and its legal team.
    A bank president or other highly-placed officer, teamed up with an unethical foreclosure attorney and an “investment” company, can amass hundreds of thousands of dollars in real property with the scheme. It also works very well when another person or unethical attorney in the mix wishes to block a particular development to stop competition or to control the real estate in a particular area for his own personal agenda.
    Finding a legal team to represent someone whose property has been stolen in this manner and their businesses destroyed, put into personal bankruptcy, is nearly impossible, particularly in the case where the bank has either been sold to another bank or put under and taken over by federal authorities. Since it can cost hundreds of thousands of dollars to pursue such a case, and even a win on principle is unlikely to produce a monetary settlement, few law firms will take it on.
    Cases like this damage, not only the primary borrower/property owner, but multiple tiers of businesses – contractors, subcontractors, suppliers, smaller banks that have related loans, insurance companies, bonding companies, and hundreds of workers who lose their jobs. Ultimately, we all lose, because our federal regulators have seen fit to naively “trust” the banks to act ethically and police their own.

  6. Sam

    Some of your readers may fand a soon to be constructed website interesting. http://www.PredatoryForeclosures.com will proivide information, form letters, media contacts, media templates, e-mail and phone contact numbers for banking/mortgage/servicing company executives, and other information. The goal is to provide those facing foreclosure with tools to help them fight predatory foreclosures. And, to make legislators more aware of what is happening to honest homeowners. You may also seek out a linkedin forum group called Predatory Foreclosures as well. Both the website and forum will seek input to stay current with this pending criminal scandal.

  7. pat the rat

    There are some people saying that many mortgages may have already been foreclosed on, by what is called a mirror loan. They take out 2 loans one identical to the other. Foreclose on one then keep the other one current. Now you don’t know who own the place?

  8. FatCat

    Prince FatCat here, so listen up, MY little peasants!

    Let ME make this clear. I am Prince FatCat. What I say goes. MY ongoing efforts to expand my land conquest for coast to coast through foreclosure shall not be impeded nor shall it be slowed down by minor inconveniences such as mortgage paperwork or proof of cause. I just fly over a town, I decide what properties I want, I issue my order to MY judges, I pay the bribes, and I get what I want. If any liberal judge stands in MY way, I call MY Obama, and he fires that poor slob. Or I call MY GOP senators and representatives and they swiftly pass MY laws. Got that, MY little insignificant people? Capiche?!

    Let me explain further. If I want something, I get it. Anything! Not just homes and land. Next I plan to conquer entire cities and then entire states. Detroit will be my first acquisition, complete with MY human subjects living there. Michigan, Ohio, Arizona, and Nevada will follow. This is MY country now. I am your ruler.

    I am Prince FatCat. Ruler of Washington, kingpin of Wall Street, shadow commander of U.S. armed forces. What I say goes. Got that?!!!

    All of you now live in the Feudal Sates of America. So bow down before me, you slobs!

    FatCat

  9. indio007

    When are you all going to figure it out. They only want the house….Keep saying it over and over again till you’ve burned it into your collective brains. They don’t want payments. They want the house.

    They don’t really who owns what. Why wait around for the life of the note for someone to mount a quiet title. This is a preemptive strike.

  10. Francisco Pina

    I believe that if this bill passes both Houses and become law it will help with job creation, as all this new services have to hire new people to run them. Also, this bill is a good effort of our lawmakers to tackle this situation. Every single business owner out there be small or big should learn about the Small Business Act. This is an excellent article that talks about that in detail: http://ow.ly/4E9NF

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