Fitch Considering Downgrading Servicers Over Affidavits

Boy, if Fitch thinks servicer problems are limited to affidavits, it is gonna learn a lot more in the coming weeks and months. This report comes via BusinessWeek:

Fitch Ratings said Wednesday it’s asking mortgage servicers about their foreclosure practices in the wake of GMAC Mortgage LLC’s recent disclosure of procedural errors.

The agency believes that if more errors are found by other servicers, that could stall foreclosures in some states and increase losses related to residential mortgage-backed securities. That could prompt Fitch to downgrade ratings on servicers that are affected, the agency said.

“Any servicer with a significant portion of their portfolio in judicial foreclosure states will be either directly or indirectly impacted by the attention focused on this problem,” wrote Diane Pendley, managing director at Fitch.

The procedural errors involve affidavits verifying who owns the mortgage note. Fitch is reviewing each servicer’s internal process for executing foreclosure affidavits. If it finds the process is lacking, Fitch will consider lowering the servicer’s rating.

This looks reactive and appears to reflect an incomplete understanding of the problem. In judicial foreclosure states, certain affidavits were required as part of the documentation needed to proceed with a foreclosure. If the affidavits were improper, they are a fraud on the court.

In non-judicial states, the same problem arises when a foreclosure is challenged. A non-judicial process moves into the court system. Bankruptcy filings routinely lead to a motion for relief the bankruptcy stay (legalese for the servicer asking to grab the house now rather than let what happens to the homeowner borrowings be resolved by the judge). So you have similar issues in non-judicial states. not just as prevalent.

In addition, as we have indicated, the affidavit problem is only one of type of servicer/mortgage mill impropriety. There is increasing proof that foreclosure mills engaged in widespread document fabrication to show that trusts (the securitization entity) owned the note (the borrower IOU), when it fact it had not been properly conveyed to them, and retroactive fixes create problems under New York trust law and the provisions of the pooling and servicing agreement that governs the securitization.

But it isn’t clear what this means for bond ratings, since servicers are not stand alone entities with rated debt but live in larger entities. Servicing historically has been at best a low margin, often a breakeven business; of late, servicing has been a cash flow negative activity. Tom Adams comments:

Note that Fitch is talking about its “servicer ratings”, which are an operational assessment of the way servicers do their job, and have their own separate scale. In the past, the main purpose of the servicer ratings was to create an adjustment, up or down, based on the quality of the servicer’s operations [servicing entity], on new MBS credit enhancement requirements. Since very few MBS are being issued currently, I am not sure how Fitch uses the ratings now.

Of course this could be a preview (even if Fitch doesn’t realize it yet) – we may see the corporate bond ratings of the banks that own large servicing companies start to get downgraded as a result of these servicing problems.

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13 comments

  1. Michel Delving

    Amazing, FTC’s “trilogy” on mortgage servicing fraud had no impact on servicer ratings at all.
    Countrywide Home Loans Servicing – now owned by BoA – http://www.ftc.gov:80/opa/2010/06/countrywide.shtm
    EMC Mortgage Corp. – formerly Bear Stearns subsidiary, now JPMC – http://www.ftc.gov/opa/2008/09/emc.shtm
    Select Portfolio Servicing – Credit Suisse subsidiary http://www.ftc.gov/fairbanks
    Now some mullet headed robo signer comes along and Fitch is racing to cover their behind. All these robo signers are doing is rubber stamping over servicing fraud, putting their bogus Good Housekeeping seal of approval on it for a smoother ride through the courts. Where was Fitch when the FTC was going to town on servicers or do they pay no attention to Federal investigaions and settlements?
    Just boggles the mind, it does.

  2. mario

    Now that’s makes sense…

    “John Paulson scared the pants off of a packed audience at New York’s University Club recently as he warned them of huge changes in the economic environment in the years to come.

    Forbes’ Bob Lenzer reports Paulson’s saying:

    “If you don’t own a home buy one.”

    ”If you own one home, buy another one, and if you own two homes buy a third and lend your relatives the money to buy a home.”

    Read more: http://www.businessinsider.com/john-paulson-gold-at-4000-double-digit-inflation-real-estate-2010#ixzz10z3NSioY

    1. Yves Smith Post author

      Despite his fame for his subprime bet (which a subordinate figured out and did the heavy lifting on), Paulson’s previous record as an investor was pretty undistinguished. Now he may have better people in his stable than he did before, but still…he’s now playing macro, where you can deploy big dollars and therefore earn big fees, but this is a pretty crowded field.

      1. traderjoe

        One more investor talking his book as well – that way he can charge 2/20 for running essentially a large mutual fund (BAC, GLD, etc.). Of course, there’s nothing as much fun for the MSM to trot out then a former bear turned bull.

        I don’t think his theory holds water either. A rise in interest rates will lead to lower home prices, as ‘affordability’ goes down. I personally think he timed the sub-prime bomb well, and bought some financial stocks cheap. But he didn’t get out in time, and now like Bill Miller, he needs to try to drum up enough interest in order for someone else to buy his positions from him.

      2. Deus-DJ

        Isn’t it amazing how he and others like him in the past(thinking chiefly of Soros) get all the credit for subordinates having found the gold? I particularly despise Soros for this because he uses it to tout himself to the public as an “expert” when in fact is nothing more than an avid reader who picks up material from various sources. Though, I will say that at least he is on the right side of the debate(right meaning correct hehe). Here’s to hoping Paulson doesn’t become the media darling Soros is.

  3. Charlie

    When these financial service companies made these loans to unqualified borrowers they never had any intention of sevicing these loans long term, these devices were not primarily ment to earn money from interest on the loans. They bundled these bad loans together put a phony AAA rating on them and sold them as investments then sold insurance on them. When the housing bubble collapsed these insurance companies, financial services companies and banks went to the government for help. Where did all the profit go? Why are there no stories about the individuals who engineered and profited from this? How is it these companies talk bad about government then run to it for help after they screw things up? When are we going to see some arrests? When exactly will these companies be held accountable? Why are we as Americans allowing these greedy coporations to destroy America? I am a welder close to the bottom of the socioeconomic ladder in this country and I am certain that there is not one banker on earth that works harder then me yet these dishonest pieces of anti-American crap make millions cheating the citizens of this country. Every politician in America will happily accept money from the corporations to look the other way or to help them steal. When exactly are the people who run this country going to put the citizenry and national interests before profit? America cannot survive when the wealthiest most powerful top two percent of our citizens control the government and use that control for their personal enrichment. Sorry for going off topic but everyday its another story about the criminality of the conservative ruling elite and I just want to know when we or more importantly our leaders going to get in and do something productive about these issues.

    1. Anonymous Jones

      It’s a great speech, but unfortunately, this problem is likely to get worse before it gets better. If you let the elites continue to accumulate more and more wealth, they become more and more powerful. Then they use that power to accumulate more and more wealth. It’s a vicious cycle…until it’s arrested by revolution.

      But by all means, let’s extend the tax cuts to these people. Let’s also eliminate their estate taxes. What could possibly go wrong?

      Let me make this clear. If you *ever* vote for *anyone* who *ever* expresses *any* sympathy for cutting taxes on the top 2%, you deserve everything you’re going to get.

  4. lawgrace

    QUESTIONABLE commercial and residential real estate foreclosures via deceptive and fraudulent proceedings enable lenders to repeatedly, illegally flip properties, and enables falsified IRS form 1099-A’s. Foreclosure fraud is the best means by which unscrupulous foreclosure mill lawyers deceptively auction and bid (or insiders bid) and acquire those properties; and some neighborhoods blighted.

    Foreclosure fraud deliberately utilizes defunct mortgage lenders companies or companies which no longer own promissory notes; huge ransom “fees makes it even harder for property owners to regain properties. Two particular companies “which benefit from fraudulent foreclosures are Wells Fargo and Freddie Mac.

    Representations about Freddie Mac billion dollar losses should be weighed against the needless money that Freddie –as well as other lenders– PAY foreclosure mills and debt collectors who utilize courtrooms to outmaneuver and persecute property owners who oppose fraudulent foreclosures. Further, when justified lawsuits for fraud –as well as for OUTRAGEOUS “Unfair Debt Collection Practices,” become filed against lenders and mills, those same lawyers make additional $$$$ from litigating and concealing their own wrongdoing!

    Further, THE SHOCKING fabricated pleadings filed in Bankruptcy courts for FRAUDULENT REPOSSESSION of commercial and residential real estate res ipsa loquitur is demonstration of intentional foreclosure fraud. Foreclosure fraud has many far reaching effects for people; for example: UNJUSTIFIABLE HOMELESSNESS, UNFAIRLY answerable for IRS tax bills, and undue “deficiency judgments.” **MORE: http://open.salon.com/blog/wwwlawgraceorg/2010/08/18/case_in_point_foreclosure_mills_judicial_fraud_consumer

  5. lucinda

    why is it that select portfolio servicing aka fairbanks capital gets to stay in bussness and comit fraud,countywide went under for less fraud sps has done illagl thing wrose then other servicers,sps is only a collection co. they cant forclose on your home,yet they tack our money and not apply our payments charge illegal fees and get away with it,ITS FRAUD and they should put out of bussness for good?

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