The New York Times has a story tonight, “Judges’ Frustration Grows With Mortgage Servicers,” which narrowly speaking, is not bad, but illustrates a frustrating propensity of the budget and time constrained MSM to fail to dig into the meaty issues behind its articles.
The piece is yet another sighting in the Servicers Behaving Badly saga. Earlier installments included Servicers Show Up in Court With No Proof That They Really Own the Mortgage, Services Go Missing in Action When Customers Try to Straighten Out Errors, and Mods? You Must Be Joking.
Today we learn Judges Try to Shame Services:
Bobbi Giguere had no luck in securing a loan modification from her mortgage servicer, Wells Fargo. For months, she had sent the bank the financial documents it requested to process her modification. But each time she called to check on the request, she was told to send her paperwork again….
Judge Randolph J. Haines of the United States Bankruptcy Court [decided] to summon a senior executive from Wells Fargo to appear in Mrs. Giguere’s bankruptcy case….
Mr. Ohayon stated that Mrs. Giguere had repeatedly failed to provide a financial worksheet, a critical document in processing a loan modification.
Under cross-examination by Mrs. Giguere (who had a little assistance from Judge Haines), the bank’s defense withered. From her files, Mrs. Giguere produced a letter from Wells Fargo describing the paperwork that she needed to file for a loan modification. In the witness chair, Mr. Ohayon read the letter.
“Mrs. Giguere is right,” Mr. Ohayon concluded. “The letter did not ask for a financial worksheet.”
While this little tale makes for nice theater, the judge’s action was completely ineffective, and the Times does not score the point strongly enough. Servicers have proven impervious to bad PR and pressure from the Obama administration. A judge making an executive spend a few hours on a court visit he’d need some prep from his general counsel) is not going to make a jot of interest.
It would be much more helpful if the Times shed some light on why mods are not being made. The MSM, including the Times, has occasionally dug into this topic, but the findings of those articles tend not to be integrated into future storied.
Cynics like yours truly think the culprit is the bad incentives, that servicers make money on foreclosures, which the Team Obama payments for mods are grossly inadequate to change behavior. The servicers also appear to be hiding behind incompetence, as in “We can’t find your paperwork.” This is a very easy way to brush off customer and official requests, but begs the question of whether the servicers have serious shortcomings in their record keeping. That isn’t a defense, but would suggest that some of their sins are venal rather than mortal. And if the servicers are not as incompetent as they pretend to be, that suggests a creative lawyer might find a way to have a go at them, for instance, asserting violations of fundamental assumptions in contractual relations, like good faith and fair dealing.
I’d like to see the servicers leashed and collared, but range wars by judges will not have much impact.
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Meanwhile, somewhere better, Tanta is laughing her ass off:
“In practical real-world terms (not the pretty stuff you see in contracts), when recovery values in a foreclosure are high (in an RE boom), servicers can noodle along and rack up expenses you didn’t know existed—i.e., shove as much of your “overhead” into FC expenses as you can get away with, since someone else will eventually pay the tab.”
But mortgage servicers have always had bad incentives here. The real question is why investors and insurers are not fighting back, because they’re the ones who tend to pay the fees, which counts in a bad market. Tanta continues:
“When the liquidation value starts to approach or drop under the loan amount, on the other hand, investors and insurers start going over those expense reports with a fine-toothed comb, and it can end up in the same kind of “war” we’re seeing with repurchases.”
I suspect acute modification of investor and insurer behavior through interventions by the Treasury and Fed — like buying $1.4t of agency MBS, and pressuring them not to foreclose — is our biggest culprit.
Did someone say “moral hazard”? Because I thought I heard “moral hazard”.
Yves,
It is venial and not venal.
The death of morals and ethics in America is a mortal sin, IMO
As I read that article tonight, it _was_ veniality. The judge caught the exec effectively lying about the actions the servicer had taken: he claimed that she had repeatedly failed to follow requested documentation when she produced proof no such documentation had ever been solicited from her. Doesn’t matter if the exec was ill-advised; he should never have made such a statement without records that demonstrated it, while she produced records that showed the claim was bogus. —And still, no sanctions of any kind from the judge. Probably because the judge has no grounds to show genuine intent rather than ineptitude, and so little hope of making sanctions stick.
Regarding those investors and insurers leaning on servicers to do mods . . . securitization was _designed_ to insulate sellers from consequences. Most of those in junior tranches have, effectively, no rights at all as I recall discussions of this from 12 and 18 months ago. Barring proved criminality, they are dead meat. And those senior tranche holders, I will wager that having gone back to the fine print on the 33rd codicile they have found that, oops, they too have very little leverage to pressure servicers. One thing that triggers their rights to intervene are, wait for it, foreclosure rates above set thresholds. Is it any surprise that servicers wish to hold _filed, official foreclosures_ below threshold triggers, regardless of the actual state of payments for many of the notes involved? If they don’t foreclose, they are largely insulated, I suspect. How did holders of these plutonium notes end up in such straights? Juniors were told they’d be wiped if loss rates went above x but that was impossible as housing only goes up. And seniors never expected to hold the notes long-term, but ended up red-handed when they couldn’t on-sell. . . . None of these blokes expected to ever _need_ to force mods, so they didn’t care.
And ndk, no but yes. One can’t lump the Agency MBSs directly into this discussion. Everybody keeps trying but their really a different beast. They are _already_ government securities de facto as the Guvmint has guaranteed them. We the people will take the loss one way or the other, now or later. The Treasury buying them is a misguided attempt to de-toxify ‘Frannie’ in a good bank-bad bank way that the latter can keep the US mortgage market from entirely collapsing.
But on the yes side, I think Guvmint buy-up is exactly what the servicers and MSB holders are holding out for; a Resolution Trust Co. scamfest where they offload their death notes for good money. So again, there is every incentive to suppress modifications now, for the losses of which they will be responsible, in favor of stringing this out until the Guvmint ‘does the right thing’ in their view. The actual house occupants behind these mortgages are less than the dust beneath their Ferrari wheels. And yes in that regard, the Treasury buying up Agency MBSs does lend credence to the notion that evetually the minions there will cave and buy privately held notes at near face, or at least on easy, easy terms. The end problem here, again, is that there is no strategy and no will inside the White House. Instead of saying “X will happen; Y will not happen,” they’ve bought into the zombie croon of “Tomorrow is another day.”
This all links into what Elizabeth Warren is saying about consumer protection (too be found in the links today). Lets not forget who finances those servicers and takes a cut of the profits.
Has anyone considered the possibility that “we can’t find the paperwork” is a symptom of accounting control fraud?
“That isn’t a defense, but would suggest that some of their sins are venal rather than mortal.”
The sins are venal. The mortgage servicers are so big that the left hand doesn’t know what the right hand is doing. Throw in creaky, legacy mortgage servicing software systems and the throughput time moves at a snail pace given the huge backlog of foreclosures.
I recently did a refi of my home loan. The lender, a ‘primary dealer’, took 120 days to close on a conventional loan. In the process I came to understand that the lender has a workforce that is incompetent as well as encumbered by a load of Federally required paper that serves very limited purpose.
Servicers have very little incentive to modify a loan, most importantly because they don’t own the paper, they merely serve as a collection agency. So, beating up on the servicer is a lot like chasing moon beams. The Judges should be calling in the owners of the loans, the Mortgagee’s into court and asking them why they are unwilling to modify the loan.
Now, in the larger scope of things I think we all might agree that liquidating bad loans will serve us better than attempting to bandaid a circumstance where the borrower can’t afford to honor the contract. There’s the rub! Honor the contract, foreclose, throw the debtor out, take the loss and restructure the lender’s balance sheet. If the lender’s losses are too large, shut him down and sell to third parties what ever can be salvaged.
Now I recognize that the evicted borrower is now a serious social problem as well as a financial loss. I know of no training device more effective than selectively administered pain. You didn’t know what you signed, shame upon you. Ignorance is not a valid defense. We need to reintroduce caveat emptor, we need to return to persoanl responsibility!
The faster we do this the sooner we will have an opportunity for some form of a recovery.
Personally I don’t see why the citizenry should be forced to carry the costs of caveat emptor when it comes to banking and insurance.
I’m not sure if this applies to residential but in CRE/CMBS the special servicers are the purchasers of the entire B piece/equity piece of a given CMBS trust. This purchase, done at syndication, gets them the special servicing gig. Immediately after purchasing those junior CMBS bonds, they would turn right back around and spin off those cash flows by Re-REMIC into a CDO that had significant AAA tranches in it. So these CDOs made up of all B piece and equity would get sold at AAA prices. Having done so, the special servicer would recoup their entire investment and then some.
So, the people in the driver’s seat with respect to the disposition of defaulting assets are playing with house money and have very little incentive to do modifications. Why? Because while they get 25bps on all of the assets being specially serviced, they get 100bps on dispositions. Dispositions include workouts, note sales, and REO sales. Tell me, how are they going to max out their 100bps? Not by doing mods. They make their money on REO, and therefore are incentivized to foreclose and resell.
Furthermore, even though they are the junior bondholders, they could care less about the loss of income because they sold that income stream to some suckers in 2006 or whenever. They’re cashed out.
I thought Tanta dealt with the issue of servicers a long time ago. Just as mortgage originations were stream-lined and automated, so were servicing operations. Further, with securitizations, servicing rights were auctioned off separately, to the lowest bidder, i.e. the most stream-lined, lowest overhead operations. To make effective mortgage modification decisions requires experienced underwriters, precisely the sort of expensive personel like Tanta, who were driven out as unneeded overhead during the housing bubble, when cost-reduction for “competitiveness” was all. Thus mortgage modifications would require re-underwriting loans that were never properly underwritten in the first place, and costs of that aside, there are simply not nearly enough qualified personel left to do the job. Any serious attempt at mortgage modifications, (involving principal reductions to sustainable market prices), would have to be done en masse, rather than on a case by case basis, and no mere tweeking of poorly understood, but clearly under-provisioned servicer incentives could possibly be effective. Once again Team Obama places a band-aid qua fig-leaf over a massive problem they don’t want to face up to, as much for functional as ideological reasons.
Thank you Froggy.
Now I know why there is so much trouble with the CDO space. What those special servicers have done is concentrate default risk rather than disperse it. Given your insight, were I presented an opportunity to buy CDO, I wouldn’t in that the entire set of tranches in the CDO are predicated on the cash flows that are the first to evaporate.
Whoever bot the CDO’s has a big problem in that they are holding paper that is worthless.
Yves,
With all due respect, “servicers leashed and collared” ? That sounds a bit weak for now over 2 decades of epidemic mortgage servicing fraud. When all is said and done servicers will be revealed as having been at the epicenter of this debacle, complicit in following orders from higher ups at parent companies, the investment banks that own them. Who fabricated all the bogus defaults i-banks profited on with their rigged credit default swap bets? Did you know servicers also place bets in the CDS casino? Defaults and default servicing are just far more profitable than normal, honest business plans.
Of the 80 reference entities in ABX indices some 26 different mortgage servicers are involved, all of which face lawsuits from homeowners and advocates claiming they charged illegally high fees, prematurely foreclosed on homes and engaged in illegal collection practices. 3 of these companies settled federal predatory collection allegations by pledging to correct their behavior.
They have since been sued hundreds of times by homeowners who allege the same illegal practices. These 3 are:
Select Portfolio Servicing – http://www.ftc.gov/fairbanks
EMC Mortgage Corp. – http://www.ftc.gov/opa/2008/09/emc.shtm
Ocwen Federal Bank – http://files.ots.treas.gov/93606.pdf
I urge you to read these settlements and supervisory agreement.
As of today servicers including SPS, EMC and Ocwen have received $ 22,126,100,000 in TARP funds toward mortgage modification in the HAMP program but that isn’t enough incentive for them to do the right thing because their masters don’t want them to do the right thing. You see, Yves, servicers have long been collared and leashed by their owners. What we need now is for all of these egregious criminals and their owners to be rounded up and sent to the ‘people pound’.
This is serious criminality and fraud on a massive scale that is intrinsic to the largest insider trading scheme of all time. As Harry Markopolos recently said CDS Fraud Will Make Madoff Look “Small-Time”. Servicers, i-bank traders and their “masters” are at the heart of this and nobody
wants the music to stop. So it will have to be forceably stopped and prosecuted to full extent of the law.