Bank of America Foreclosure Shenanigans?

About a week ago, I got this message from a reader:

I heard a rumor from a very well placed source that BOFA will foreclose 500,000 houses over the next 10 months. They plan to move these houses very aggressively; they will go to auction 90 days from foreclosure if they are not sold by then. Someone else, very highly placed in Fanny Mae, confirmed this and said there are at least that many again in the rest of the banking system.

Now I will be honest, I have no idea whether this is true, and when I ran it by my investors buddies, the reaction I got was incredulity “Why would BofA want to shoot itself in the foot?” was typical.

But what does “BofA” mean in the message? Is it “BofA as lender who holds the mortgages on its books” or is it “BofA as servicer, who profits handsomely from foreclosures?” Remember, the rationale for buying Countrywide was to get hold of its servicing operation. And there has a good deal of evidence that regulators are tolerating some lax valuations on mortgages. Moreover, more aggressive liquidations might be seen, at least initially, as a plus by investors. Recall when banks first started taking subprime-related writedowns, the assumption was they were putting the losses behind them. And ironically, it seemed that with each quarter, the writeoffs kept getting bigger, yet the party line each time was, “Ah yes, they have really cleaned house, now haven’t they?”

Today, I got this message from a contact in Texas:

When I went to the bankruptcy / foreclosure auctions here a few weeks ago I found out that the whole thing is a charade. Bank of America (for instance) auctions off houses that have gone into foreclosure for the amount owed plus any carrying costs which usually makes the auction price higher than what was owed. A pre-bid was submitted by Bank of America Home Loan Servicing (the rename for Countrywide) in the exact amount of the auction minimum (mortgage owed plus carrying costs). No one else bids so the house is “sold” by Bank of America to Bank of America Home Loan Servicing. In essence, the property is simply transferred from one division to another so that clear title is established. But this is counted as an existing home sale which artificially inflates existing home sales numbers. This is what was happening for most of the 102 BAC mortgages and the 130 Wells Fargo mortgages. For the house I “rent” where the original mortgage was with Countrywide (and then transferred to B of A when B of A bought the property) this is simply a process for getting the house off of B of A’s books and back on Countrywide’s books (now BAC Home Loan Servicing). As I said, it is all charade or smoke-and-mirrors or a shell game.

Later Bank of America Home Loan Servicing will contact a realtor who will eventually put the house on the market for sale. Let’s say that the auction price was $200,000 but the house is now worth only $150,000. Of course when this house is sold by the realtor it is again counted as an existing home sale.

Note that the second strategy applies ONLY to homes already foreclosed upon; it does not establish an intent (or reason) to step up foreclosures. But the fact that the second process will artificially boost existing home sales is worth watching.

Update 11/18, 2:30 AM. Wish I had seen this reader message sooner, it explains this situation:

Intersting story on your blog today regarding BofA foreclosure pipeline. Makes sense that they would try and blow out the REO properties into the current bid, as servicer they’ve been advancing scheduled principal and interest on these dead mortgages into the REMIC trusts for prob 1-2 years now. Once they liquidate a property they are repaid those advances first, and any remaining monies goes back into the trust to pay down the notes. 2 years of P&I (remeber, the “I” they are advancing is very high, 7-9%) plus foreclosure costs could easily encompass the sale proceeds of an REO property (esp a SoCal subprime shitbox), so they are highly incentivized to recoup their money. The interesting part about this is that it causes subprime mortgage loss severities (from the point of view of the mortgage bond holders) to approach 100%. The only winners are the subordinate bonds, who got 1-2 years of credit IO flows and have yet to be written down. There has also been a lot of secured financing to servicers lately, where the securitiy for the loan is the P&I advances that are technically still owed to them. At some point I expect mass capitulation as these servicers will simply be forced to liquidate the REO properties in order to get their advances repaid (and in turn repay their financing). Principal modifications don’t work for servicers, as they need to generate cold hard cash. Distressed sale is their only option given the advances they are owed. I really feel bad for the folks that used the first-time homebuyer credit to try and “catch the falling knife”, they’ll prob be underwater this time next year.

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  1. Ina Pickle

    500,000 homes is a drop in the bucket. If you look at Dr. Housing Bubble’s estimates of shadow inventory, that won’t get that far into what is really hanging around on the books.

    To me, the real scam is that there will be no loss to the bank on its balance sheet. It gets rid of the house, which has probably been not paying for months and months, without having to hold the REO with its attendant costs because all of that is moved to a sub’s books — AT BOOK. You can declare bankruptcy for the sub, big deal. It just looks like they finally figured out how to get out of the box by unloading real estate that is worth 50% of book without crashing the market or realizing the loss.

  2. r arnold

    Regarding the clear title, I do not see how that would work if the seller did not have a clear title to transfer. I do not know the condition of these titles, but if they have been sliced and diced, a single transfer will not clean them up..

  3. mort_fin

    I’d suggest that you get a better class of unnamed informants. Selling the property between divisions does not establish clear title, the foreclosure establishes clear title. And the sheriff’s sale to the lender does not count as an existing home sale, so the home sale figures are not “artificially inflated.” And an eventual REO sale does not ‘reduce the loss from $200,000 to $50,000″ since the loss is originally taken as the mortgage UPB minus the recovery value of the collateral, not the entire mortgage balance. The allegations in this post just don’t pass the basic smell test for anyone who knows this business.

    1. Yves Smith Post author

      I agree the “clear title” bit did not seem credible, and I will agree the writer is not at all buzzword compatible, since $200K of REO is not a “loss”. But I am not as certain re sale reporting, as there might be considerable variability as to how this data is captured (as there seems to be in just about every other aspect of real estate). Normally, you would not expect a sale to the lender to be counted, but in theory this is not the lender, it is a separate legal entity. That was the part that struck me as most interesting here.

      1. Moopheus

        It depends on who’s counting, I suppose. The NAR reports numbers based on sales reported by NAR members; this would generally not include auction sales. Some, like the Warren Group here in MA, count deed transfers recorded in the Registry of Deeds. But foreclosures are usually listed as such in the records, and it wouldn’t be hard to figure out if they weren’t true “arm’s length” sales, especially if you saw the same names over and over again.

      2. Siggy

        The Sheriff’s auction transfers title from the mortgagor to the buyer at auction. In the case described that is the subsidiary of BofA. The subsidiary will be the party that ultimately books the loss on the loan when the house is sold to third party.

        BofA benefits by hiding the loan loss in its consolidated statements of account. What may be going on here is that BofA is the servicer of the loan and the mortgage trustee. Servicers and trustees collect fees while incuring limited liability. Foreclosures earn more money for servicers than workouts.

  4. mort_fin

    Do you honestly think that the poor data schlub writing code or eyeballing transactions is going to say “oh – a sale from Bank of America to Bank of Americe Home Loan Servicing – that must be a sale between two different parties?” I don’t doubt that data collection leaves something to be desired, and I can imagine a sale between two affiliated parties with radically differnt names slipping through the net and getting counted, but from Bank of America to Bank of America Home Loan Servicing????

    1. Yves Smith Post author


      The data capture on foreclosures is VERY disaggrated, this is a very manual process. So the short answer is yes, I think it is not impossible.

      1. mort_fin

        You state that it might happen. All sorts of things “might” happen. Do you have any evidence that it is happening, other than the assertion of someone who doesn’t understand the legalities of title or loan loss accounting?

        as moopheus points out, the NAR data are based on listings and foreclosure sales aren’t listed.

        Tanta pretty much put this one to bed two years ago.

        “For purposes of quantifying the activity in a real estate market, foreclosures are sales, in any measure using “transfer of deed for consideration” (or words to that effect) as the definition of a sale. They are not, however, “listed sales”: they are public auctions. REO can be and is listed, because REO means the lender bought it at the foreclosure sale, and is now able to offer it for resale in a private transaction. But foreclosures involve forced sales of properties by auction as remedy for breach of contract. They have no “list price” and are not handled by real estate agents. So those of you worried about “non-counting” or “double-counting” in a given statistical report: check the methodology to see whether what is being reported is deed transfers or sales reported by listing agents. Foreclosure sales will be included in the former but not the latter; REO sales will always be in the former and usually in the latter. (Lenders are not required to use a listing agent any more than anyone else is. There are FSBO issues in any report of sales based on listings.)”

        1. Yves Smith Post author


          You are really choosing to gloss over a very simple point.

          There is not good system for capturing data relative to the foreclosure process, including foreclosure sales. Any process for capturing that data is pretty manual in a lot of jurisdictions. This is hardly a controversial statement and your quote from Tanta does not disprove it.

          1. mort_fin

            Your inital post was not a generic assertion that the process is imperfect. If it were we wouldn’t be disagreeing.

            Your initial post had very specific points “102 BAC loans” ‘sale from one BAC division to another’ ‘smoke and mirrors, a shell game.’ Do you have any evidence, beyond the allegation of someone who clearly doesn’t understand much of the process, that these 102 BAC loans referenced in your post appear in NAR (Radarlogic, anyone’s?) sales statistics?

  5. Martin, the Netherlands

    I think this is an excellent way to make the housing market healthy again. Just have a number of banks sell lots of houses to each other at ever-increasing prices. This process, which is obviously to the benefit of everybody, is already explained by Milo Minderbinder in Cat-22. You buy and sell apples or eggs or whatever from and to yourself, under assumed names, at steadily rising prices. “I don’t get it. Why don’t you buy directly from you, and cut out the middleman?” “Because I’m the people I buy them from! Why can’t you let me make a litte profit?” If I recall correctly, a 1-cent egg (at the nest) is finally sold for 20 cents -to the U.S, Air Force. Given the extent of the involvement of the American government in the current mortgage market (Freddie, Fannie, Ginnie, FHA, ABS’s bought by the NY Fed), one just has to substitute eggs and tomatoes for mortgages.

  6. albrt

    It seems to me that the key points here are (1) whether the big servicers are going to get more aggressive about foreclosing and (2) whether the banks are going to get more aggressive about selling REO?

    Houses are selling pretty well right now in the first-time buyer price ranges. Any institution that foresees a double dip might decide to dump as much of the backlog as possible now. And any institution that foresees more political gridlock after 2010 might also foresee less bailout money available in the future to bankers who take losses.

    Unfortunately, it’s all speculation at this point.

  7. Mike Dillon

    If absolutely nothing else, an xfer such as this simply distances the former/foreclosed mortgagor from the property. This effectively extinguishes any claims to overage that the former mortgagor would have had if the property had sold for more than the amount the mortgagor purportedly owed.

    This, in turn, allows BAHLS to freely put the property on the market and, depending on the sale price of the property, recover not only the outstanding principle and any outstanding fees, but also any potential profit that may be realized. If I’m not mistaken, generally speaking, any overages realized at auction should be returned to the former/foreclosed mortgagor – at least in theory.

    This is SOP in the industry from what I can tell. Quite possibly one reason for the FL auction practice of informing the crowd of the note holder’s max bid before any auction begins. Bidders see how much the note holder is willing to purchase for and if no one else bids, the property becomes the note holders for $100.00 if I remember correctly. Not a bad profit for the note holder and a real final screwing for the former/foreclosed mortgagor.

  8. JosephH

    I’ve been directly involoved (as an investor), in the analysis of numerous bulk REO packages for months. B of A may indeed foreclose on 500k homes in 2010 because they will be forced to. B of A will then most likely list that REO with local market realtors for 90 days and then package the REO into an investor priced package. Changing FASB mark-to-market rules has enabled (and encouraged) banks to delay the process of both initial NOD and actual foreclosure on deliquencies. The unitended consequence to this whole delay/hope process is that all of those unrecognized deliquencies are also not paying their property taxes into escrow and will surely not pay those taxes in a lump sum. Municipal tax authorities have budgets dependent on those property tax revenues which will lead those counties to quickly process a tax lien foreclosure. Banks will be forced to acquire the REO either via the Sheriff’s auction or foreclose in advance. Either way, banks/servicers/securitization trusts will have an additional and substantial cash outflow requirement.

  9. Ultimate Janitor

    Move the bad things from your front pocket to your back pocket.

    Still gets the trash off of the “regulated” balance sheet.

    Angelo won’t mind. He is just worried about getting his tanning machine moved to the minimum security facility where he will spend some quality time.

  10. Mike Dillon

    You just reminded me UJ… BOA now owns Countrywide… Countrywide owns Balboa Insurance… Two things I feel I should point out regarding alleged kickbacks:

    1.) Alston v. Countrywide Financial Corporation, et al., No. 08-4334, 2009 U.S. App. LEXIS 23822 (3rd Cir., October 28, 2009)

    2.) Fairbanks/Select Portfolio Servicing, Countrywide/Balboa and Southwest Business Corporation

    “Exhibit T” … Bottom of page 1.

  11. dfb

    I am pretty certain BofA is overwhelmed and trying its darndest to slow down the inevitable, perhaps until the next fiscal year. For example, my own mother walked away from her home in July. Countrywide was the lender. BofA has not acted on a short sale offer that came in before she walked away. It did not assign a negotiator until the past couple of weeks. Moreover, the home has twice gone up for sheriff’s sale since July but BofA stopped the auction each time just a day or two before the auction. The realtor working on the short sale does not get his calls returned. Unfortunately, I know a few others who are dealing with BofA with short sales or foreclosures and have similar experiences.

    Whatever its strategy, BofA is in a lot of hurt and will have huge write downs to make.

  12. propinvestor007

    As we look at this foreclosure mess that is out there has anyone been active in Distressed debit investing such as buying mortgage securities pre-foreclosure from banks, mortgage holders, investment funds, etc…seeking information related to this investment vehicle.

  13. rzj

    Could anyone here shed some light on BoA transferring its mortgages to BAC? I’m terribly confused. I have a mortgage in good standing and have never refinanced or borrowed against the equity. Late last summer BoA encouraged me to refinance the house. I ignored them. Suddenly I’m now transferred to BAC and given murky directions regarding future mortgage payments. The mortgage is 16 years old. Currently the house is worth about 3 times the amount remaining on the mortgage. I’m very nervous that now that the interest is basically paid on the loan that the mortgage is worth far more to BoA in foreclosure. I’ve read horror stories about mortgage servicers neglecting to forward the payments to the bank and people losing their homes to foreclosure while being current in their payments. So…. should I be concerned? Does anyone know why suddenly some BoA mortgages were moved to BAC?

  14. Mike Dillon

    You have very right to be concerned RZJ. Not necessarily because BAC is now servicing your loan but simply because SOMEone is servicing your loan. Hit your county registry/recorder of deeds and pull your chain of title to see if you can determine who actually OWNS your note at this point. The only time a borrower needs to be notified of any change with their loan is when the **servicing rights** are sold, assigned or transferred. One thing you should determine is whether your entire loan (note/mortgage/servicing rights) was sold to BAC or is only the servicing rights were shuffled.

    I include the mortgage in this process b/c apparently the fine Commonwealth of Pennsylvania has determined that it is all fine, well and good to allow a servicer and/or note holder – EMC Mortgage for example – to foreclose on the MORTGAGE as opposed to the note. How they can extinguish Article III of UCC I’m not sure, but I know that they ARE allowing the note and mortgage to be bifurcated and, if somehow owned separately, either the note or the mortgage can be foreclosed thereby completely and totally ignoring constitutional and/or prudential standing. Of course, PA is also apparently allowing chains of title to be completely re-written as well so I would venture to say that absolutely NO homeowner is safe in PA – or any other state that allows this incredibly stupid and dangerous practice.

    If you want to try to protect yourself, call BAC and ask them for a physical address to which you can send your monthly payments directly, one that will accept certified return receipt requested mail. Start sending your payments CRR. That way you have indisputable proof that your payment was received and the name of the individual that received it.

    Additionally, if you want to make things easier to track on a spread sheet, in case it becomes necessary, start rounding your payment up every month and coordinate the cents to the month in which the payment is made i.e. if your regular payment is $1234.23 – round that number up to $1235.12 for December, $1235.01 for January ’10, $1235.02 for Feb ’10, etc. At least that way you’ll be able to tell at a glance which month a particular payment is SUPPOSED to be applied.

    As far as “why” they were moved – that depends on whether your note was securitized or not. And to answer THAT question, you’ve got to look to your registry/recorder and see if any assignments have been filed formally documenting the change.

    Good luck – and feel free to drop me a line directly through GetDShirtz if you have any Qs you think I might be able to answer.

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